Is Travelers a Good Investment Right Now?

The Travelers Companies Inc (TRV)In an era of “Too Big To Fail”, Credit Default Swaps and “Synthetic” financial products, a financial services company with a “good housekeeping” seal on its balance sheet is rare. The Travelers Companies, Inc. (NYSE:TRV), provides property and casualty insurance products and services to businesses, government entities and individuals. The largest segment is their commercial property and casualty insurance business. In the last two years, severe weather and wildfires have exposed them to significant catastrophic losses throughout Colorado, the Mid-West and the East Coast. Fortunately for Travelers shareholders, the aftermath of these events has led to rate increases and additional demand for insurance protection. Check out all hedge funds owning Travelers here.

Improved Underwriting Results

Thanks to the absence of major catastrophic losses, Travelers’ third quarter profit soared to $864 million or $2.21 a share, beating estimates. This more than doubles profits of $333 million or $0.79 a share for the same time last year and is a 73% increase over this year’s second quarter net income of $499 million. Also, compared to the second quarter’s catastrophic losses of $357 million, third quarter catastrophic losses were just $59 million.  After a number of severe weather events over the last few years, the weather in the third quarter provided insurers welcome relieve.

According to Jay Fishman, Travelers CEO, premiums for business clients increased by 7.7% during the third quarter, compared to a 7.2% increase in the second quarter and a 7.5% increase in the first quarter. This is a positive trend for the company and one which will give comfort to investors concerned that rate increases would be difficult to achieve. These rate increases have, recently, had a negative impact on new business when looking at year-over-year volume for all business segments. When looking at the commercial segment, however, it still showed modest volume improvement. Going forward, with interest rates expected to stay at historically low levels, the ability to increase rates becomes more important, and should be watched closely.

Looking ahead to the fourth quarter, it is worthwhile to look at Travelers from a seasonality perspective. When looking at average fourth quarter returns of individual sectors relative to all other sectors, financial stocks tend to be good bets. Travelers has been especially strong in this regard, having posted fourth quarter gains in each of the last ten years. The continuation of this ten-year trend will likely be helped by the pattern discussed of recent large catastrophic losses leading to higher demand for coverage and increases in rates.

Return of Equity

Third quarter ROE came in at 13.6% and net investment income rose to $578 million. It is worth noting that Travelers shareholders benefit significantly from the company’s high-quality long term fixed income portfolio. From January 1995 to June 2012, ROE has averaged 12.9% with over 8.3% coming from this source of revenue. The annual contribution to ROE from the long term fixed income portfolio has been very consistent, ranging from a high of 8.9% to a low of 7.9%. Taking into consideration the interest rate environment, these results are certainly very impressive. Also, with underwriting results varying greatly due to unpredictable weather patterns, this steady stream of income makes Travelers attractive at current valuations. A trailing P/E of 10.47 and a forward P/E of 10.77 looks attractive, especially when taking into account the consistent source of the majority of its earnings. The Chubb Corporation (NYSE:CB), also attractive from a valuation perspective, sports a 13.54 trailing P/E and 13.20 forward P/E.

As noted above, Travelers shareholders are essentially owners of a high-quality bond portfolio. A contrast to this approach would be Hartford Financial Services Group Inc (NYSE:HIG), which in recent years invested their fixed income portfolio much more aggressively, but with disastrous results. Additionally, since 2009 Hartford has increased its use of derivatives including credit default swaps. MetLife Inc (NYSE:MET) is doing this as well but to a lesser extent. Credit default swaps, of course, are what led to the bailout of American International Group, Inc. (NYSE:AIG), and for Hartford, changes may be coming with respect to these risk management techniques, as they have recently shed several business lines in order to focus on their property and casualty businesses.

The challenge ahead for Travelers is if rates stay level, net investment income will steadily decline. It is estimated that net income will drop by $95 million next year, $125 million in 2014 and $145 million in 2015. Mr. Fishman spoke about this recently at a Barclay insurance conference, adding that the company will maintain its current asset class mix rather than reach for yield, which would increase the risk of default in its fixed income portfolio.

Managing Natural Disasters

Natural disasters present unique challenges that are difficult to price. Katrina was a huge financial blow to The Allstate Corporation (NYSE:ALL) due to a lack of reinsurance. From July 2012 to June 2013, Travelers will use reinsurance to cover 53.3% of losses that fall between $1.5 billion and $2.25 billion. In addition, certain losses within this range will be covered by catastrophe bonds, unique instruments that pay a high interest rate, but those in which the investor forfeits principal if the “defined risk” occurs. They will retain losses below $1.5 billion, except for those caused by an earthquake. Above $2.25 billion, the company will retain losses except for those covered by catastrophe bonds and the Northeast Catastrophe Treaty; details on this can be found in the company’s June 2012 quarterly report on its 10-Q form.

Price Targets

Short term price targets for Travelers can be tricky as analysts attempt to predict weather patterns. JPMorgan Chase recently raised its estimate to $75.00 based on an increase in estimated 2012 EPS by $.37 to $6.35. This was partly due to anticipation of the improvement in underwriting results that Travelers achieved in the third quarter. In July, S&P cut Travelers 2012 EPS estimate by $0.53 to $6.30. S&P also puts a price target of $75 on the stock assuming it will trade at 10.4X the 2013 earnings estimate of $7.18.


The most recent quarterly dividend of $.46 paid on September 28th is the same as the first quarter, and a $.05 increase over the fourth quarter of 2011. Based on a closing price of $73.99 on October 22nd, the yield comes in at 2.50%. Since the dividend was cut in 2004, outlays have been increased by an average of 10% per year, making Travelers a very worthwhile stock to consider for rising dividend investors. For those believing that the stock has appreciation potential, getting paid in excess of a 10-year treasury while waiting for that appreciation to occur is not a bad idea. Another stock to consider would be Chubb, also a consistent dividend bull and currently generating a yield of 2.00%.

As a side note, but worth mentioning, Travelers is currently trying to avoid being included in a landmark fight between the National Football League and thousands of former players. The players are claiming that the NFL is responsible for debilitating brain injuries so severe they have led to several former players committing suicide. In August, subsidiaries of Travelers filed suit against the National Football League and other insurers to avoid sharing in the cost to defend the League.  They claim that they had not provided coverage to NFL, but instead to NFL Properties, the merchandising arm of the league.

Looking ahead, although the stock has surged by nearly 40% over the past year, it still looks attractive based on many factors. The company’s P/E ratio of 10.47 is in line with peers and well below the S&P 500′s P/E ratio of 17.7. The current interest rate environment will certainly impact earnings going forward, but if management keeps its commitment to maintaining a high-quality balance sheet, Travelers is a very worthwhile financial services stock to consider. Check out the stock’s profile page on Insider Monkey here.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!


The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See


Enter your email:

Delivered by FeedBurner


Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!