What happened?
Shares of Travelers Companies (TRV 0.93%), a provider of property and casualty insurance, rose 8.1% in the first six months of 2022, according to data from S&P Global Market Intelligence.
The insurer performed well during a time that the S&P 500 declined 20.6% -- its worst start in 52 years.
So what
Insurance is one of a handful of industries that put up a positive first half in 2022. Insurance will always be in demand due to legal requirements and people's desire to shield themselves from risk. For this reason, insurers have pricing power or the ability to raise prices without impacting demand, making them excellent investments when inflation is high.
Travelers writes policies for businesses, such as workers' compensation, general liability insurance, commercial property, bond insurance, and policies for individuals such as automotive and homeowners insurance.
In the first quarter of this year, Travelers grew its premiums written by 11%, while its diluted earnings per share increased by 45%. Premium growth was solid across segments, with bond and specialty insurance premiums up 22% and personal insurance premiums up 12% from last year.
The insurer has done an excellent job managing risk as measured by the combined ratio. This is a critical metric for judging insurers because it shows the total expenses plus claims divided by premiums. A ratio under 100% is desirable because it means the insurer's policies are generating a profit.
Travelers' strong underwriting ability has withstood the test of time. Over the last 20 years, its combined ratio was 95.7% on average, beating the industry average of 100% during that time. In the first quarter, Travelers' combined ratio was a solid 91.3%, an improvement from its 96.6% ratio in the same quarter last year.
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Now what
Travelers is in a robust financial position with a debt-to-equity ratio of 0.29, meaning it uses more equity to fund the business than debt. The business is also a cash flow machine and, in the past 12 months, brought in $7.35 billion in free cash flow -- cash it can use to pay dividends, buy back stocks, or reinvest into the business. Travelers has rewarded its investors by increasing its dividend for 18 consecutive years and currently yields investors 2.14%.
Given its pricing power and ability to price risks, Travelers should continue to do well in this inflationary environment and could continue to be a solid source of stability as part of a diversified portfolio.
