Travelers: Long-Term Value Outweighs Short-Term Volatility

Oct.10.11 | About: The Travelers (TRV)

Despite the exposure to catastrophic events, which has often led to substantial losses and volatile results, Travelers (NYSE:TRV) has paid cash dividends without interruption for 139 years. During 2010 alone, Travelers paid approximately $670 million in common share dividends and returned nearly $5 billion to shareholders through share repurchases, the total result of which was an effective cash yield of approximately 22 percent. Travelers has also avoided the devastating financial mistakes of its peers, namely American International Group (NYSE:AIG), which helped fuel the continuing economic crisis. All together, Travelers’ book value per share has compounded annually at over 10 percent since year-end 2001.

The Travelers Companies is a leading provider of property and casualty insurance for both personal and business exposures. Travelers is organized into the following business segments: Business Insurance; Financial, Professional & International; and Personal Insurance. 2010 net written premiums exceeded $21 billion for the fourth year in row, with their Business Insurance segment taking the lead with $10.9 billion followed by Personal Insurance and Financial, Professional, & International Insurance with $7.6 and $3.2 billion, respectively.

Jay Fishman, chairman and CEO, clearly outlines Travelers long-term goal in his 2010 annual letter to shareholders:

Our financial goal is to achieve a mid-teens return on equity over time. This goal motivates us to deliver industry-leading results over the long-term by thoughtfully managing the risks we take and only assuming risks for which we believe we are appropriately compensated.

2010

2009

2008

2007

2006

Return on Equity

12.1%

13.5%

11.4%

18.0%

17.9%

Book Value per Share

$58.47

$52.54

$43.12

$42.22

$36.86

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Personal Insurance Goes Direct

Travelers broke down barriers in 2009 when it decided to begin marketing its personal insurance products directly over the internet. Although independent agents and brokers still make up most of their sales, adding this new distribution channel will continue to gain popularity as consumers continue to purchase more insurance products online without the use of an agent. Even though Travelers’ direct business is still unprofitable, the company feels they need to be a player in that marketplace considering future trends. Altogether, this initiative should benefit Travelers in the long run as consumer buying trends continue to shift towards the internet.

Long-Term Approach

GAAP combined ratios were 93.2%, 89.2%, and 91.9% for the years ended 2010, 2009, and 2008, respectively. However, fiscal 2011 earnings per share will be substantially reduced as a result of catastrophic loss experience from the Midwest and Southeast United States with total claims so far exceeding $1.7 billion. In addition, the current low-interest-rate environment and the soft property and casualty market have continued to negatively affect margins. This combination has resulted in a stock price plagued to the downside, coupled with near-term volatility.

Nonetheless, Travelers’ underwriting margin should return to profitability, assuming normalized catastrophe levels, beginning in 2012. Moreover, Standard & Poor’s and AM Best continue to affirm their financial strength ratings of AA and A+, respectively. Although poised for better underwriting profits and future success, the investor should take a long-term approach when considering this stock as near-term volatility might dampen any positive short-term expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.