Insurance stocks were generally down last year, and that slump has continued into 2021. This should come as no surprise, as the industry has been hampered by historically low interest rates and a pandemic that led to an increased number of claims.
Travelers (TRV 0.75%) has bucked the trend, outperforming its big rivals by gaining approximately 6% from the end of 2019 through Feb. 10. By comparison, the average stock in the insurance industry was down 5% for that same period. Let's take a look at why Travelers has done so well and why it's still a great value.
Travelers posts a strong fourth quarter
Travelers, one of the largest property and casualty insurers in the U.S., is coming off a strong fourth quarter, in which revenue increased 4% year over year to $8.4 billion and net income shot up 50% to $1.3 billion, or $5.10 per share. The gains were driven by a 3% increase in net premiums -- the sum total of net premiums written -- to $7.3 billion. Competitors like Allstate and Progressive both saw declines in net premiums.
This led to $955 million in underwriting gain, which is the profit earned after all claims are paid. That represents a 116% increase over the fourth quarter of 2019. This strong performance comes despite 0% interest rates and a record number of claims from catastrophic events.
The combined ratio, a key metric that insurance companies use to measure profitability, was an outstanding 86.7%, which is down from 92.4% a year ago. That decline is good -- the combined ratio measures losses and expenses divided by earned premiums, so anything under 100% indicates profitability, and the lower the better.
Travelers has enjoyed sustained underwriting excellence. The company uses proprietary data and analytics to select the risks it takes with return in mind. That shows in a return on equity of 18.5% in the fourth quarter, a metric that has increased each of the past three years.
Travelers also boasts sound expense management. It had an underwriting expense ratio of 29.4% for the fourth quarter and 29.9% for the full year, both well below the 36.5% industry average.
The expense ratio is another measure of profitability and expense management, as it measures the total cost of servicing premiums against net premiums earned. Travelers Chairman and CEO Alan Schnitzer said the low expense ratio is due to investments the company has made to improve productivity and efficiency. On the fourth-quarter earnings call, Schnitzer said: "Through our ongoing and relentless focus on optimizing productivity and efficiency, we've also improved our expense ratio by about 2 points compared to the run rate from earlier in the decade."
Travelers is a great value right now. It has a solid history of quarterly revenue gains over the last five years, with only one quarter since 2015 with a decrease in revenue year over year. That's through one of the worst economic environments in recent history. The book value per share is up 14% from the end of 2019, but its price-to-book ratio is still just 1.25. Among its major competitors, only Allstate had a lower P/B ratio at 1.14.
Also, Travelers is a good dividend stock. It currently pays out a quarterly dividend of $0.85 per share, with a dividend yield of about 2.3%. It has increased its dividend every year for the past 16 straight years.
With its strong revenue performance and excellent efficiency, in an improving economy, Travelers is a good buy right now. Value investors, in particular, should give it a look.