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We have reaffirmed our Outperform recommendation on The Travelers Companies Inc. (TRV - Analyst Report) following strong first-quarter results. The property and casualty insurer carries a Zacks Rank #2 (Buy).

Why reiterate?

On Apr 23, Travelers reported first-quarter earnings per share of $2.31, surpassing the Zacks Consensus Estimate by 14.9% and year-ago earnings by 15%. Higher underwriting margins and lower catastrophe losses more-than-offset lower net investment income and lower net favorable prior-year reserve development.

The quarter marked the highest quarterly operating income per share since Travelers’ initial public offering in 2002.

Travelers has been witnessing rising earnings estimates. Over the last 60 days, most of the estimates moved north, pushing the Zacks Consensus Estimate for 2013 by 6.5% to $7.54. The same for 2014 rose 3.5% to $7.69 over the same period.

As the second-largest writer of auto and homeowners’ insurance through independent agents and the sixth-largest writer of commercial U.S. property-casualty insurance, we believe that Travelers will continue to benefit from its strong market position and reap economies of scale. Over the last eight years, the company has continuously registered better returns on equity (ROE) than its peers. Travelers is striving for a ROE in the band of 14%–16% over the long term.

Travelers maintains a conservative balance sheet among its peers, which has helped it survive during the financial market downturn relatively well. Over the last 5 years, the compound annual growth rate in book value per share has been 9.4%.

Based on the strength of its financial position, recently the board of directors approved a 9% hike in quarterly dividend. Its current dividend yield is 2.3%. The company also aggressively buys back shares to enhance shareholder value.

However, exposure to cat losses and low interest rate environment dwarf the positives.

Other Stocks to Consider

Besides Travelers, Homeowners Choice, Inc. (HCI - Snapshot Report), AXIS Capital Holdings Ltd. (AXS - Analyst Report) and Montpelier Re Holdings Ltd. (MRH - Analyst Report) carry favorable Zacks Rank #1 (Strong Buy) look impressive.
 

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