The Travelers Company (TRV – Free Travelers Stock Report) is a leading provider of commercial property/casualty insurance and asset management services. It is also a leading underwriter of homeowners and automobile insurance through independent agents. Its latest configuration resulted from the merger of the St. Paul and Travelers insurance companies in 2004.
At first, the combined entity took the name St. Paul Travelers, but changed it to just Travelers in 2007. The company has offices in all fifty states, and operations in the United Kingdom, Ireland, Singapore, China, and Canada. The company has about 14,000 independent agents and brokers that provide service to its clients. Its Personal Insurance segment offers home, auto, and other insurance products for individuals; the Business Insurance unit provides a broad array of property and casualty insurance and related services; and the Financial, Professional & International insurance unit includes the surety, crime, and financial liability businesses.
To suggest that this $23 billion market cap (found in the Capital Structure box) insurer is a big player in the markets it serves is an understatement. Add to its sheer size the company’s enviable financial strength (it earns a solid Value Line Financial Strength rating of A, found in the Ratings box) and Travelers looks compelling as an insurance provider, but it is also an interesting investment option.
Since the merger in 2004, Travelers has been the model of consistency. Examining the historical portion of the Statistical Array provides a telling story of how the merger transformed the company. Prior to 2004, the data presented are for just the St. Paul Company, with the key insurance metrics proving volatile, at best. The combined entity, however, has largely been consistent. For example, underwriting income per share was positive in just one year shown on the Value Line report prior to 2005. Since that same date, losses have been incurred in just two years (to be fair, 2005 was likely something of a transition year for the company, so it could be argued that only one full year showed an underwriting income per share loss).
Underwriting income is the difference between the revenues generated by premiums and the costs of settling claims. In years with significant claims, an insurance company can lose money on the policies it underwrites. Material catastrophes can result in short-term underwriting income losses, which is understandable. Losing money on policies on a regular basis is not a good thing over the long term. Analyst Alan House expects these losses to abate next year, as he notes in the Analyst Commentary.
Premiums earned per share have also been in a solid up-trend since 2004, after a somewhat bumpy ride prior to the merger. Premiums earned per share is the actual dollar amount that an insurer receives from its policyholders. In other words, it’s the premium the insurer receives from its customers in order to compensate it for the risk undertaken (the insurance provided). Increases in net premiums earned are based on many factors including rate increases, new business wins, and more favorable terms and conditions. Generally speaking, it shows if the company is growing its business. Travelers’ results show that it has been disciplined in its sales efforts.
The before merger and after merger comparisons could be continued, but suffice it to say Travelers has been a model of consistency since the merger. That said, 2011 wasn’t the best year for the company. Claims were heavy and resulted in earnings falling from $6.31 per share in 2010 to just $3.25. Despite this bottom line result, the board continued to increase the dividend; the second quarter distribution was recently increased to $0.46 per share from the first quarter’s $0.41 (found in the Quarterly Dividend box). The increase leaves Travelers’ yielding around 3%. That’s the high end of its historical range since the merger.
Looking out over the longer-term, Alan House expects good things. He is projecting earnings to increase by about 9% per year on an annualized basis over the next three to five years. Dividends are expected to increase around 7% on an annualized bases over the same period. Supporting this is solid growth in premiums earned. All of these figures can be found in the Annual Rates box.
These numbers backstop House’s projected share price range of $80 to $100 per share over the coming three to five year time period. Including the relatively generous dividend, that price range translates to 10% to 15% annualized total returns. While this may not be as exciting as the market’s expectations for the next Tech IPO, it’s certainly better than the ill-defined outlook for an over-hyped company like Facebook (FB).
It is important to remember that insurance company results can get colored by newsworthy catastrophes. Basically, at the time that everyone is watching, insurance companies tend to take their biggest hits. Traveler’s ability to withstand such blows appears both good and durable. For investors seeking a stable insurance company, Travelers is a good choice.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.