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1 Value Stock That's Using Tough Times to Its Advantage

Travelers (NYSE: TRV) posted solid growth in the second quarter despite a tough insurance backdrop and inflationary effects on both wages and materials, which have impacted both auto and homeowners insurance claims in the period. The insurer also saw an uptick as claims returned to near pre-pandemic levels. Despite inflationary effects and rising claims putting pressure margins, CEO Alan Schnitzer isn't worried about a thing. Let's dig in.

Strong revenue growth continues

In the second quarter, Travelers saw written premiums increase 11% from the same quarter last year to $8.1 billion. Its total revenue came in at $8.7 billion, up 17% from last year thanks to premium growth and solid investment income growth driven by its equity investments. As a result, net income came in at $934 million, a dramatic improvement from its $40 million loss in the same quarter last year.

During the quarter, the property and casualty insurer saw its combined ratio come in at 95.3%, an improvement from 103.7% in same quarter last year. Combined ratio is a measure of profitability in insurance, with a ratio of 100% and lower meaning the insurer is underwriting profitable polices. In the first half of the year, its combined ratio is 95.9%, versus 99.5% last year.

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The insurer benefited from a lower level of catastrophe losses with strong growth across its different reporting segments. Travelers saw its business insurance segment grow 5%, bond and specialty insurance grow 16%, and personal insurance grow 16%, or 8% when adjusting for auto premium refunds, compared to the same quarter last year.

Rising premium costs had no impact on customer retention

Travelers saw strong retention across its products despite rate increases to 84% of accounts that renewed business insurance in the quarter. Meanwhile, policies in force for its personal lines of coverage -- such as auto and homeowners insurance -- were at record levels in the quarter.

The insurer has seen good retention rates despite increasing customers' premiums, an indicator that the broader insurance industry is also seeing rate increases and a sign of a "hardening" insurance market. A hardening insurance market happens when claims paid out by insurers are rising, which is caused by increased occurrences claims or increased costs to repair claims.

For example, its auto insurance coverage saw increased costs to resolve claims, driven by higher costs of used vehicles and parts. Travelers still showed good profitability, with a combined ratio of 91.6% in the auto segment, but that's not stopping the company from increasing its auto insurance rates across the country.

Its homeowner insurance coverage saw increased costs of resolving claims as well, posting a combined ratio of 108.3% -- still not as bad as its 114.6% combined ratio last year. According to Michael Klein, president of personal insurance, one-third of the increase was due to non-catastrophe weather losses, which was in line with expectations. However, the remainder was due to an increase in claims frequency and cost to repair as labor and material costs become more expensive.

Why management isn't worried about inflation

Schnitzer isn't too concerned about these inflationary effects, saying they only impact short-tail lines -- or insurance coverage where claims are settled over a short time period. Because of this, the company is able to react as claims data rolls in and make pricing adjustments quickly.

When it comes to inflation, CFO Dan Frey says that Travelers' business has natural hedges that help minimize the impact from inflation. For one, higher inflation is generally associated with strong economic activity, which leads to the need for higher insurance exposure, ultimately leading to higher margins for the company. That, and the insurer would benefit from higher returns on its investment portfolio as interest rates tend to rise as inflation stays elevated.

Travelers is a solid company that has done a good job of improving profitability in recent years. Its stock sports a cheaper valuation than fellow property and casualty insurers Progressive and Chubb. Not only that, but the insurer has increased its dividend for 17 years straight and delivers a solid yield of 2.4% at Monday's prices, making it a great income stock for retirees as well.

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Courtney Carlsen owns shares of Progressive. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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