Here's The Thing About Travelers

| About: The Travelers (TRV)

Summary

I have held it for years and bought more in September 2015, but the stock is almost back to those levels.

Q4 earnings are out and I cover the key metrics.

Bottom line is that Travelers is an absolutely solid company and one I will continue to own for years.

Travelers Cos. Inc. (NYSE:TRV) has long been a stock that I have held. It is a fantastic name to count on in your portfolio. You may recall that in mid 2015 I told you that I was waiting for a pullback to enter the name and got that chance in September, thanks to the market weakness. Of course with the market here in 2016, it has become an opportunity to add once again as the stock at $102.25 is just a few points over where I bought it. I believe this is a cheap stock and a quality name to own. This is because not all insurance companies are created equal. It's all about value, perception and expectations, and I think this is one of the best plays in the sector. It pays a 2.37% yield and trades at just nine times earnings. There is room for growth here, as it trades below the insurance sector average which is around 13 times earnings.

Travelers makes money by bringing in premiums and paying out as little as possible. That's the model. You pay a 'protection fee' as if they are the modern day mafia. In many places you can't drive or own a home without said insurance. The model here is to offer debt protection in a crowd-sourced way. This is how it works. The company evaluates risk and sets premiums accordingly based on its prior performances in different areas. Travelers has long been successful and its Q4 2015 was rather strong despite energy concerns, and this is why I want to stay in the name.

The quarter was certainly not the best for Travelers but it was very solid and I think the momentum can continue going forward. That said the company reported net income of $866 million, or $2.83 per share. This is actually down pretty noticeably from the $1.038 billion or $3.11 in income last year. 1% from last year. Operating income in the current quarter was $886 million, or $2.90 per share, also down from $1.023 billion or $3.07 last year. While the earnings were down, it was expected. In fact, the company beat earnings by a solid $0.25 per share.

What about the customer base? Well, net written premiums were about $5.864 billion in the quarter. For the year 2015, the company saw records net written premiums of $24.121 billion. 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. Net written premiums were impacted negatively by foreign exchange currencies but not enough to offset the growth from being positive year-over-year.

On top of these positives, the quarter benefited from a strong underlying combined ratio. The combined ratio was up 1.6 points to 86.6%. This was mostly due to a lower net favorable prior year reserve development and a higher underlying combined ratio. The underlying combined ratio was up 0.5 points to 90.7%. This is a key metric to watch for in insurance companies and one you should examine when trying to pick one, in addition to trading multiples, earnings figures and growth potential. This metric benefited mostly from lower non-catastrophes claim losses in its business and international insurance segments.

So let's be clear. The company has record underwriting and a record base of customers. It is trading at just 9 times earnings, "cheaper" than where I bought it. It is also very shareholder friendly. Travelers has paid shareholders billions over the years. The company pays a $0.61 dividend for each quarter. On top of that, Travelers repurchased $3.224 billion of stock in 2015. That is impressive. At the end of the day, Travelers is an absolutely solid company and one I will continue to own for years.

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.

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