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Dow 30 Earnings: The Travelers Companies – Fourth Quarter 2010
Travelers (TRV – Free Travelers Stock Report), a property/casualty (P/C) insurance company, reported good results for the December quarter of 2010. More specifically, the insurer reported operating earnings per share of $1.89, which although comparing unfavorably with 2009’s tally of $2.12, was significantly above our $1.68 expectation. The share-net figure excludes capital gains from the company’s investment portfolio that amounted to $0.06 a share during the December interim. TRV stock traded moderately higher this morning, reaching a new 52-week high in the process, as investors reacted favorably to the news, despite pressure on the broader market averages.
Net Premiums earned increased slightly from the prior year’s tally, as the company benefited from decent pricing conditions, along with new business garnered. What’s more, net investment income was relatively flat compared to 2009, which is quite impressive. Travelers benefited from solid cash flow, which helped boost the base of invested assets. This helped to counteract reduced yields on bonds, resulting from historically low interest rates. (Insurers tend to keep the lion’s share of their assets in fixed-income instruments, due to their conservative bent). On the other hand, the combined ratio increased to 90.6%, a 7.2% boost from the prior year’s period. This means that the company generated about $9.50 in pretax income for every $100 in policies that it insured. Indeed, this was a solid showing relative to historical levels (anytime the combined ratio is under 100% it implies underwriting profitability). The combined ratio for the December quarter of 2009, it should be noted, was very strong, and thus made for a very difficult comparison. Indeed, catastrophes in the December, 2010 quarter increased to “more normalized” levels, which accounts for the bulk of the combined ratio increase.
As a result of the generally good news, we have boosted our share-net estimate for 2011 by $0.20, to $6.20 a share. This is a slight decrease from 2010’s figure of $6.31 a share on an operating basis. This ought to be expected, however, given the current conditions in the broader P/C industry; namely intense competition that has made rate increases difficult to come by. We anticipate a modest rise in the top line this year, owing primarily to slight rate increases across some product lines. Management notes that the operating environment is better than it had thought. Also, investment income is poised to trend higher, thanks to increased interest rates, which should help boost bond yields. On the other hand, we look for the combined ratio to trend higher next year, as 2010’s low level of catastrophes (relative to historical levels) may be difficult to match. Share buybacks may continue to be part of the equation, though management will likely be less aggressive on this front. (Travelers repurchased 95.7 million shares last year for $5.0 billion.)
Travelers stock has decent total return potential on a risk-adjusted basis for the pull to 2013-2015. We believe that further dividend increases and share repurchases will add to shareholder’s value over the long run. The company’s large size also will likely keep it solidly in the competitive mix moving forward. Earnings Predictability is healthy (60 out of 100) relative to other P/C insurers under our coverage. Conservative investors seeking exposure to the P/C insurance industry may wish to consider these shares.
About The Company: The Travelers Companies, Inc. (formerly St. Paul Travelers) is a leading provider of commercial property/casualty insurance and asset management services. Following the April 1, 2004 acquisition of Travelers, the company is now a leading underwriter of homeowners insurance and automobile insurance through independent agents. USF&G was another notable acquisition which was purchased in April of 1998. Travelers has approximately 32,000 employees.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.