Travelers: What Happened?

| About: The Travelers (TRV)

Summary

TRV has long been a stock that I have held.

The stock is getting hit today following Q1 results.

I discuss the results and highlight the key metrics you should be paying attention to.

Travelers Cos. Inc. (NYSE:TRV) has long been a stock that I have held. It's a core position in my portfolio. In very plain language I believe that 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. In early 2016 you had an opportunity to add to holdings as the stock was just over $100. Now the stock is well over $110, but it pulling back a bit. Look, this is a quality name to own in the insurance sector. As you know 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 10 times earnings. There is room for growth here, as it trades below the insurance sector average which is around 13 times earnings. 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 but its Q1 2016 left a little to be desired, though was not really weak per se. The issue is that we have been accustomed to solid reports, and this was so-so.

The quarter was certainly not the best for Travelers and may temporarily stall the momentum. But I suspect after a few sellers finish the stock will continue going higher. This is because the company's fundamentals are intact for the long-term. That said in the quarter Travelers reported net income of $691 million, or $2.30 per share. This is actually down pretty noticeably from the $827 million or $2.53 in income last year. The net income was down from 17% from last year. Operating income in the current quarter was $698 million, or $2.33 per share, also down from $827 million or $2.53 last year. These earnings disappointed the Street, sending shares lower but also missed expectations by $0.22.

What about the customer base? This is absolutely critical to look for. Well, net written premiums were about $6.166 billion in the quarter. This follows a record 2015 where annual net written premiums were $24.121 billion. The Q1 2016 result puts the company 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. Net written premiums were impacted negatively by foreign exchange currencies but not enough to offset the growth from being positive year-over-year. In fact, growth was 5% compared to last year's $5.897 billion in net written premiums.

On top of these positives, the quarter benefited from a strong underlying combined ratio. The combined ratio was up 3.4 points to 92.3%. Why the rise? Well it was due primarily to higher catastrophe losses (2.6 points) and lower net favorable prior year reserve development (1.1 points), partially offset by a lower underlying combined ratio (0.3 points). The underlying combined ratio improved 90.0%. 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.

So let's be clear. The company had another incredibly strong underwriting performance and a record base of customers. It is trading at just 10 times earnings and "cheaper" than the sector. Yes the company suffered high catastrophe losses due to wind and hail storms in Texas and severe winter weather in the northeast. But still, this is the model. There are going to be some quarters that hit earnings. That's the risk, but the company still managed to deliver strong revenues. It is also very shareholder friendly. Travelers has paid shareholders billions over the years. The company had been paying a $0.61 dividend for each quarter. On top of that, Travelers just announced the dividend has been hiked to $0.67 per quarter for the June disbursement. It also repurchased $5.6 million shares of stock in the quarter. That is impressive. I am holding here. 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.

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