Travelers Companies (TRV) has been able to avoid the fallout of the financial crisis by not losing investor's money in any of the past 10 fiscal years. The company has been well-managed and expands its business by being thorough about managing its risk exposure while continuing to write policies. The company should be able to generate additional profits for shareholders over the long term as the economy has stabilized and insurances practices have become more conservative.
Travelers Companies has been able to manage its profitability more effectively by being aggressive about managing its costs to become more sustainable. The underwriting expense ratio has increased from 39.4% to 41.3%. On the bright side, the expense ratio for losses on insurance contracts has declined from 46.4% to 41.3%. The expense ratio declined by 3.2%, which helped to boost the company's profitability for the full fiscal year.
This assumption can be further backed by the sudden improvement in the company's net profit margin. The company's net profit margin improved from 5.56% to 9.53% between 2011 and 2012. This improvement in the company's profit margin can be sustained so as long as TRV prices its insurance products effectively, and natural disaster events occur further down the road rather than in the immediate future.
TRV's profit margin is currently 9.53%. TRV's profit margin can be compared to Homeowners Choice (HCI) at 18%, Chubb (CB) at 11.36%, Universal Insurance (UVE) at 11.12%, Allstate (ALL) at 6.92% American International Group (AIG) at 5.24%. TRV's profitability is slightly above average and is in the top 33 percentile. Other companies in the property and casualty space do a better job of managing expenses. That being the case, TRV's profitability can be improved, based on the comparisons to its peers. Historical data also implies that TRV's profitability can be improved to a range of 12-18%.
The company has consistently accumulated assets onto its balance sheet. The margin of safety is somewhat reasonable as the price to tangible book ratio is 0.79. Meaning that 80% of the market price is backed by assets. Value oriented investors will appreciate the over abundance of assets on its balance sheet.
Cash from operations is $3.23B. The company has not grown its cash from operations over the 10-year period analyzed, meaning that the cash generated from its principal business activities has declined. However, on the bright side, the company has been able to escape the financial crisis with a slight decline in cash flows. The improving economic conditions should increase the gross written premiums in future years. Households will continue to increase its consumption of new housing units and cars, meaning that the company is well-positioned to grow going forward.
Investors have a reasonable investment opportunity in Travelers Companies. The company has a reasonable margin of safety. The favorable economic environment should lead to growth in its principal business activities. Furthermore, I anticipate further efficiencies in the operations, which should lead to higher profit margins going forward.
The stock is in a multi-year up-trend as it continues to move in a range bound pattern between the two diagonal trend lines. The stock is over-extended as the stock is piercing the upper trend line.
Source: Chart from freestockcharts.com
The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock could be due for a minor pullback due to the multi-year trend line. A minor correction in price should be followed by price appreciation. The stock remains in a multi-year uptrend.
Notable support is $68.20, $77.20 and $81.00 per share. Notable resistance is $84.30, $88.48 and $98.68 per share.
Analysts on a consensus basis have reasonable expectations for the company going forward.
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
Source: Table and data from Yahoo Finance
Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 10.05% (based on the above table). This growth rate is below the industry average for next 5 years (11.61%).
Source: Table and data from Yahoo Finance
The average surprise percentage is 119% above analyst forecast earnings over the past four quarters (based on the above table).
Forecast and History
Source: Data from YCharts
The EPS figure shows that throughout, the 2003-2007 period the company earnings have increased. In 2008, earnings declined due to the instability of the financial sector. Following 2008 the company was able to generate somewhat consistent EPS growth.
Source: Data from YCharts
By observing the chart, we can conclude that the business is somewhat cyclical and can be negatively affected by macroeconomics. Therefore, one of the largest risk factors to TRV is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.
By 2018, I anticipate the company to generate $12.32 in earnings per share. This is because of product growth, improving global outlook, cost management, share buybacks, and continued development overseas.
The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.
Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31, of each year.
TRV currently trades at $84.19. I have a price forecast of $79.33 for December 31, 2013. The stock is currently trading above fair valuation. The stock should be bought at pullbacks as a part of a longer-term accumulation strategy.
The company is a good investment for the long term. I anticipate TRV to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). TRV's primary upside catalyst is international expansion, product development, share buy-backs, organic growth and cost management. I anticipate the company to deliver upon my forecasted price target of $136.91 by 2018. This implies a return of 80.98% (including dividends) by 2018. This is a reasonable return for an insurance company.
Dividend Yield @ $84.19 per share
Travelers has a market capitalization of $31.8 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity. The risk is low (0.7 beta).
Travelers Companies is a compelling investment opportunity for those who want exposure to the financials. The investment is a low-hanging fruit for long-term investors but should be avoided by short-term speculators. The company should do well in a strong economic environment.
The conclusion is clear: buy TRV.