This installment of Using the Value Line Report will offer some insight into the Dow Jones’ resident insurers, UnitedHealth Group (UNH – Free UnitedHealth Stock Report) and The Travelers Companies (TRV – Free Travelers Stock Report). An analysis of these two companies may well enlighten potential investors to some of the more important factors to consider when seeking exposure to the insurance sector and how their respectively differing business models and end markets influence their individual investment appeal.
First, we will look at UnitedHealth Group. Starting with the Blurb, which is located at the center of the Value Line page, an investor can learn some information about the specific line of business in which the company is engaged. In this case, the information there reveals that UNH is a “diversified health and well-being company” that “offers products and services to individuals through four segments: UnitedHealthcare (network-based health care benefits), OptumHealth, Optuminsight, and OptumRx (information- and technology-based health services, consulting and PBM).” More specifically, the company is the largest domestic single healthcare carrier that provides insurance benefits to individuals through a variety of mediums.
Like most insurance companies, UnitedHealth generates the lion’s share of its revenues from the premiums it charges, which depends entirely on membership enrollment and the various rates and types of coverage customers choose. The company’s costs are mostly related to medical expenses, or the amount it pays out to healthcare providers (doctors, hospitals, etc.) on behalf of its insured.
Based on the historical financial data in the Statistical Array, it is apparent that UnitedHealth has been enjoying solid revenue and earnings growth over the past 10 years. Indeed, a glance over to the lower left quadrant of the page, where the Annual Rates Box resides, confirms that the company’s operating growth rates have been in the double digits over the past decade, as well as the shorter five-year span. Perhaps the most impressive of these figures, however, is the dividend growth rate, which has risen a whopping 58.5% over the past 10 years and an even more striking 94% in the past five years. The notable increases in income distributions, coupled with the aggressive share-repurchases since 2005 (Statistical Array) demonstrates UNH’s commitment to enhancing shareholder value. As a result, it would appear investors have responded favorably, catapulting the stock from a mid-recession trough of $14.50 in late 2008 to an all-time peak of $83.32 in April of 2014.
Now, we advert our attention to its Dow peer, The Travelers Companies. The Blurb on TRV’s page informs us that it is a “leading provider of commercial property/casualty insurance and asset management services”. The Blurb goes on to highlight some of the company’s notable acquisitions, including its namesake “Travelers”. Although this may appear a bit confusing, the present-day TRV was formed through a series of acquisitions and spinoffs, which culminated with the merger of the St. Paul Companies and Travelers Property Casualty Corporation in 2004.
That said, compared to UNH, this company is involved in a highly contrasted style of insurance coverage, as well as a somewhat more complex business model. Indeed, the Statistical Array confirms this, as the historical financial data that lives in this field is quite different. Luckily, even investors who lack familiarity with the more pertinent performance indicators of property/casualty insurance companies can find helpful guidance in the Analyst Commentary. Mr. Alan G. House sheds light on some of the factors investors should be paying attention to when analyzing TRV. He states that “Especially notable was a historically low level of catastrophes (in 2013), which resulted in a very profitable (and unsustainable from our viewpoint) combined ratio. Hence our expectation for a higher loss ratio this year (2014) is the primary reason behind our estimate for an earnings decrease.” This statement reflects the importance of the measures of profitability here, as the combined ratio refers to how much underwriting profit is being generated (figure below 100%) or, conversely, how much more the company is paying in claims than it is receiving in premiums (figure above 100%). Furthermore, it becomes clear that acts of nature or other types of “catastrophes” can have a considerable and inherently unpredictable impact on these ratios.
This offers some insight into why there are several other measures that an investor must take into account when considering this type of equity. Hence, Mr. House goes on to mention that “Otherwise, things appear to be pointing in the company’s favor. Management notes that the rate increases have exceeded cost inflation across the board, which, along with new business wins, should prop up premiums earned. Also, we think bond yields will increase in the months ahead, which, along with an increased level of invested assets, should boost net investment income.” This points to other performance metrics that are worthy of note here. Analyzing the page, TRV’s pertinent historical financial data and annual rates figures seem a bit unstable and inconsistent. Moreover, while TRV shares weathered the recession more favorably than UNH, its ensuing rally was somewhat less compelling, albeit coming off of a higher base.
Thus, at first blush, the average investor may be inclined to presume UNH to be the more appealing investment choice. However, further comparative analysis of each company’s prospects going forward may reveal a different story.
In fact, comparing the data located in their respective Ranks boxes, we see that TRV is ranked 2 (Above Average) for Timeliness, while UNH is ranked 3 (Average). This suggests that over the next six to 12 months, the price performance of TRV shares is expected to outperform the broader market averages, while UNH is more likely to mirror those averages. This should make TRV the more attractive option for momentum-based accounts. In addition, although TRV’s seemingly more erratic operational performance would suggest a riskier play, the Safety rank: 1 (Highest), versus UNH: 2 (Above Average) and Beta score: .75 (below the market average), versus UNH: 1.00 (market neutral), suggest that Travelers stock is a slightly more stable and less volatile investment. Moreover, shifting diagonally across the page to the bottom right-hand corner, we find the Ratings box, which displays that TRV earns superior marks for Price Stability and Price Growth Persistence.
The last two factors worthy of consideration between these two insurers are valuation ratios and dividends. The price to earnings ratios (P/E) and dividend yields can be found in the Top Label . Here we see that TRV is trading at a slightly more appealing multiple of roughly 11x share earnings (based on the closing price of $94.10 on 5/29/14) versus UNH’s approximately 14x share net ($79.37). (Note: Although price-to-book value is often a better valuation tool for property/casualty insurers, this is not the case for healthcare carriers.) In the matter of dividends, however, although TRV’s yield is presently more generous than UNH, their respective annual rates projections indicate that the latter’s dividend growth estimate over the next 3 to 5 years is almost double that of the former’s.
All told, although these stocks have similar 3- to 5-year total return potential (based on 5/29/14 closing prices), it would appear that Travelers is a moderately more attractive investment choice at present, based on near-term momentum and income, as well as overall risk and P/E valuation. Still, those willing to employ a buy-and-hold approach should note that UnitedHealth’s operating growth prospects are compelling over the long haul. This is just another example of how Using the Value Line Report offers a wealth of information to help investors make the conscientious choice among a plethora of options in the marketplace.
At the time that this article was written, the author held no positions in any of the companies mentioned.