Travelers Reports A 26% Increase In Earnings, But Is It A Buy?

| About: The Travelers (TRV)

Summary

Revenue and earnings were up dramatically.

The dividend was increased 10% for the coming quarter.

Earnings estimates from analysts are expected to decrease in 2015 and make me wary.

The last time I wrote about The Travelers Companies, Inc. (NYSE:TRV), I stated:

"Due to the slightly bullish momentum, inexpensive valuation on next years earnings, and increased financial efficiencies, I'm only going to be buying a very small position at this price." Since that article was published the stock is up 5.41% while the S&P 500 (NYSEARCA:SPY) is down 0.17%. Travelers is engaged in providing a range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals.

The company reported earnings before the market opened on 22Apr14 and on the surface the results were mixed with the company reporting earnings of $2.95 per share (beating estimates by $0.80) on revenue of $5.87 billion (missing estimates by $40 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Net Written Premiums (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Business Insurance

$ 3,304

$ 2,873

$ 3,260

15%

1%

Financial, Professional & International Insurance

$ 950

$ 1,043

$ 647

-9%

47%

Personal Insurance

$ 1,619

$ 1,717

$ 1,690

-6%

-4%

Net Written Premiums

$ 5,873

$ 5,633

$ 5,597

4%

5%

The 47% growth from last year in Financial, Professional & International Insurance was primarily due to the acquisition of Dominion as well as strong performance in both the management liability and surety businesses and accounts for 16% of total company revenues. This segment of the company includes surety, crime, and financial liability businesses which primarily use credit-based underwriting processes, as well as property and casualty products that are predominately marketed on an international basis. The rest of the business was ho-hum, but overall Net Written Premiums increased 5% from last year.

Income Statement

Revenues

1Q14

4Q13

1Q13

Q/Q

Y/Y

Premiums

$ 5,823

$ 5,851

$ 5,517

0%

6%

Net Investment income

$ 736

$ 702

$ 670

5%

10%

Fee income

$ 107

$ 109

$ 97

-2%

10%

Net realized investment gains (losses)

$ 1

$ 11

$ 10

-91%

-90%

Other revenues

$ 41

$ 64

$ 34

-36%

21%

Total Revenues

$ 6,708

$ 6,737

$ 6,328

0%

6%

Claims and expenses

         

Claims and claim adjustment expenses

$ 3,315

$ 3,327

$ 3,153

0%

5%

Amortization of deferred acquisition costs

$ 950

$ 970

$ 948

-2%

0%

General and Administrative expenses

$ 881

$ 977

$ 915

-10%

-4%

Interest expense

$ 92

$ 92

$ 92

0%

0%

Total Costs and Expenses

$ 5,238

$ 5,366

$ 5,108

-2%

3%

Income before income taxes

$ 1,470

$ 1,371

$ 1,220

7%

20%

Income tax expense

$ 418

$ 383

$ 324

9%

29%

Net Earnings

$ 1,052

$ 988

$ 896

6%

17%

Diluted Shares

354.6

363.4

381.9

-2%

-7%

Operating earnings - diluted earnings per share

$ 2.97

$ 2.72

$ 2.35

9%

26%

Net investment income increased 10% primarily due to strong returns in the non-fixed income portfolio. Fee income also increased 10% from last year. Net realized investment gains decreased 90% from last year which isn't too bad because the actual number for this line item is small anyway. Other revenues which are larger than realized investments increased by 21%. Overall total revenues increased 6%. Total costs and expenses increased a minute 3% and didn't really dent income before taxes which made progress of 20% from last year. Income tax expense increased 29% but that is to be expected as income increases dramatically. Net earnings attributable to the company increased a whopping 17% and operating earnings per share increased 26% thanks in large part to a 7% reduction in share count.

Balance Sheet

Assets

1Q14

4Q13

Fixed maturities, available for sale, at fair value

$ 64,271

$ 63,956

Equity securities, available for sale, at fair value

$ 938

$ 943

Real estate investments

$ 936

$ 938

Short term securities

$ 4,034

$ 3,882

Other investments

$ 3,539

$ 3,441

Total Investments

$ 73,718

$ 73,160

Cash

$ 260

$ 294

Investment income accrued

$ 686

$ 734

Premiums receivable

$ 6,302

$ 6,125

Reinsurance recoverables

$ 9,590

$ 9,713

Ceded unearned premiums

$ 851

$ 801

Deferred acquisition costs

$ 1,836

$ 1,804

Deferred taxes

$ -

$ 303

Contractholder receivables

$ 4,361

$ 4,328

Goodwill

$ 3,624

$ 3,634

Other intangible assets

$ 339

$ 351

Other assets

$ 2,567

$ 2,565

Total Assets

$ 104,134

$ 103,812

Liabilities

   

Claims and claim adjustment expense reserves

$ 50,588

$ 50,895

Unearned premium reserves

$ 11,917

$ 11,850

Contractholder payables

$ 4,361

$ 4,328

Payables for reinsurance premiums

$ 370

$ 298

Deferred taxes

$ 54

$ -

Debt

$ 6,347

$ 6,346

Other liabilities

$ 5,110

$ 5,299

Total liabilities

$ 78,747

$ 79,016

On the asset side of the balance sheet there wasn't much movement with total investments increasing 1% from last quarter. Cash however decreased 12% and deferred taxes were completely eliminated. Total assets in general increased by a miniscule amount, 0.3%.

On the liability side of the equation payables for reinsurance premiums has increased 24% but total liabilities didn't budget at all really only decreasing 0.3%.

Conclusion

The company reported earnings which were 26% higher than a year ago on 5% higher revenue while the share price was up 7.32% since the last earnings call excluding dividends. Revenues increased, earnings increased, and the balance sheet didn't budge. The share count has decreased 7% from the prior year. The company increased the dividend 10% while on the conference call as well. Operating income was $2.95 per share compared to $2.31 from a year ago after adjustments. Return on equity increased 14.1% from last year as well. The results were great to me and investors seem to think they were too as the stock added 0.57% after reporting while the S&P500 was up 0.41%. That being said, I think the stock is inexpensively valued but expectations decreased 2015 earnings are being forecasted by analysts. If it weren't for the earnings contraction expectations this team would be in the starting lineup, but I am contemplating putting it on the trading block.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long TRV, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.