Travelers: Is There Anything Better?

| About: The Travelers (TRV)

Summary

I have long held Travelers.

Q2 results are out and I discuss the key metrics that you need to be aware of.

Despite earnings being down year-over-year, critical metrics support staying behind this name.

Wait for a pullback to add.

Travelers Cos. Inc. (NYSE:TRV) has long been a stock that I have held. It continues to be a solid, core position in my portfolio. It is a winner. It is solid. Is there anything better than a reliable name like this? Recall in mid-2015 I told you that I was waiting for a pullback to enter the name and I pulled the trigger in September. In early 2016 you had an opportunity to add to holdings as the stock was just over $100 following the market meltdown we saw in January. Now the stock is just a few points off of a 52 week high. Despite this reality I think this is one of the best plays in the insurance sector. It pays a 2.3% yield and trades at just 11 times earnings. There is room for growth here, as it trades below the insurance sector average which is around 13 times earnings. Travelers has long been successful and its Q2 2016 was not an exception. It was a nice rebound from Q1 which left something to be desired.

The quarter wasn't spectacular, but it was solid and enough to keep the momentum going in the name. This is because the company's fundamentals are intact for the long-term. That said in the quarter Travelers reported net income of $664 million, or $2.20 per share. This is actually down pretty noticeably from the $812 million or $2.53 in income last year. The net income was down from 11% from last year. Operating income in the current quarter was $649 million, or $2.20 per share, also down from $806 million or $2.52 last year. These earnings surpassed expectations by $0.12.

What about the customer base? Net written premiums were about $6.35 billion in the quarter. This continues prior record setting quarters. With total 2015 premiums coming in at $24.121 billion, it is my opinion that coupled with the Q1 and Q2 2016 result, the company is on a path to potentially break this record. This is a very favorable metric. The metric, of course, saw a benefit from a strong retention and positive renewal premium changes in each business segment, as well as a lot of new business revenue on the personal insurance side. In fact, total growth was 3% compared to last year's $6.16 billion in net written premiums.

On top of these positives, the quarter benefited from a strong underlying combined ratio. The combined ratio was up 2.3 points to 93.1% year-over-year. Why the rise? Well it was due primarily to higher catastrophe losses (1.8 points) and a higher underlying combined ratio (1.7 points). It was hit for 1.2 points thanks to prior year developments. Still, I was very pleased with the underlying combined ratio improving to 92.3%, from 90.6%. This is a key metric to watch for in insurance companies and one you should examine when trying to decide which to invest in, along with other key indicators like trading multiples, earnings figures and growth potential.

Ok so what does this all mean? Simply put, the company had another incredibly strong underwriting performance and a record base of customers. The stock is still "cheap." It is trading at just 11 times earnings and so it is "cheaper" than the sector. Revenues and earnings, while year-over-year there has been some pain, continue to surpass analyst expectations. Finally, I want to add that the company is also very shareholder friendly. Travelers has paid shareholders billions over the years. The company has also recently raised its dividend to $0.67 per quarter, which brings the yield to a respectable 2.3%. It also repurchased 4.9 million shares of stock in the quarter, spending $550 million. That is impressive, and will help grow per share earnings over time. With the stock at current levels, even though I see continued momentum, I am holding here. I will let the stock come down to around the $105 mark and if it gets there do some more buying.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I am/we are long TRV.

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.