Why Travelers Insurance Rallied Today

Shares of The Travelers Companies (NYSE: TRV) had rallied by 7.6% on Thursday as of 2:09 p.m. ET, after the insurance giant reported third-quarter results before the opening bell that blew away estimates.

Travelers' profits soar

In the third quarter, Travelers' net written premiums rose by 10% to $10.7 billion. That led to earnings rising by an incredible 102% to $5.24 per share, which handily beat the consensus estimate of just $3.59 per share.

That massive beat was fueled by Travelers' strong quarter of underwriting, with a combined ratio of 93.2%, along with a net favorable development of $126 million. The combined ratio was 7.8 percentage points better than in Q3 2023 -- a huge improvement in underwriting results over the course of just one year. Net investment income also rose 17.6% on higher bond yields. Core return on equity was a solid 15.9% over the past 12 months.

The insurance industry continues to benefit from a hard market

The insurance industry has largely been able to improve its profitability in recent years, as rising catastrophes and inflation led some insurers to reduce their underwriting capacity and exit some markets, which positioned the remaining players to raise their prices. Additionally, insurance companies have broadly benefited from increased bond yields over the past two years, as older bonds matured and were replaced with higher-yielding instruments. It seems Travelers is seeing all those benefits flow through to its bottom line now. After the excellent results and Thursday's gains, the stock is now up 56.4% on the year.

Travelers now trades at 16.6 times trailing earnings and about 2 times its adjusted book value per share. That's not very expensive for an insurance stock, but neither is it overly cheap. However, given Travelers' premium business insurance brand and the favorable conditions for the industry, the stock may still be worth a look.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.