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Using a Value Line Report: Travelers Benefiting from a Fairly Quiet Hurricane Season
What a difference a year can make. Hurricane Sandy undoubtedly took a toll on many property/casualty insurers, sparing just a few. Here, we revisit Dow-30 member The Travelers Companies (TRV - Free Travelers Stock Report) to see how well the insurance heavyweight has done over the past 12 months since the Superstorm hit, and what makes it a standout among the blue chips.
Things certainly look a lot different in the property/casualty insurance industry than they did a year ago, when Hurricane Sandy slammed into the northeastern United States, packing a heavy punch with ferocious winds and a powerful ocean surge. The storm left behind billions of dollars worth of property damage, not to mention some loss of life. That spelled trouble for many P/C insurers. Fortunately, Travelers managed to emerge from the catastrophe relatively unscathed, despite incurring Sandy related losses in 2012’s final quarter. And a fairly quiet storm season this year is surely bringing about a sigh of relief. Wall Street has certainly applauded this, as evidenced by the rising stock price in the Price Chart.
For the most part, TRV’s fundamentals have remained solid. For example, Premiums Earned, found in the Statistical Array in the middle of the Value Line page and in the quarterly box on the lower left-hand side, seems set to change little in 2013, versus last year. The number refers to the amount of money (or “premiums”) an insurer receives from policyholders to compensate it for the risk it assumes, and is influenced by new business wins, rate increases, and adjustments to terms and conditions. Although pricing has risen across the industry, post Sandy, we note that pressure of late at Travelers has stemmed from the personal auto segment, as analyst Alan G. House points out in the Commentary.
Bottom-line performance, though, should be strong overall, as seen in the Earnings Per Share box and Array. Also, within the Array, we find three of what are among the most significant figures for an insurer, all expressed as a percentage. The Loss to Premiums Earned (or “loss ratio”) represents the losses incurred by the insurer, or the portion of earned premiums that are paid out to customers when claims are filed. Major catastrophes can inflate this figure, although an insurer’s degree of exposure to risk plays a role, too. The lower the percentage, the more favorably it is viewed.
The Expense to Premiums Written (or “expense ratio”) reflects the operating costs, including actuarial expenses and employee salaries, associated with the writing of policies (or premiums written). Although a rising expense ratio would seem to suggest business growth, an increase could mean the insurer is not retaining or renewing accounts, which would be a negative.
The “combined ratio”, which is the sum of the two ratios mentioned above, is an especially important figure in the insurance business. It is used to derive what is known as the Underwriting Margin, a key metric that indicates how profitable a company’s insurance operations are, excluding other corporate activities. It is essentially the difference between 100% and the sum of the loss and expense ratios. A positive number connotes an underwriting profit, while a negative figure indicates an underwriting loss.
For Travelers, the underwriting margin seems poised to improve from 2012’s level. With a catastrophe of Sandy’s magnitude, it is hardly surprising insurers have sought to hike rates and trim exposure to riskier business. That should positively affect the Underwriting Margin over time.
Another item worth looking at in the Array is Investment Income per share. Investment income is essentially what an insurer receives on its investment holdings. Further down in the Array is Investment Income/Total Investments, which represents the rate of return from its total investments. Generally, an insurer invests in a variety of securities, with the purpose of generating sufficient returns to be able to pay out claims if and when they arise. For this reason, an insurer’s portfolio is typically composed of conservative, fixed-rate securities, like bonds, that offer a good yield. Equities can also be included in a portfolio. The figure will likely recede in 2013, but pick up thereafter, assuming the interest-rate environment improves.
The Financial Position box on the left-side of the page provides a glimpse of an insurer’s portfolio makeup. For Travelers, Fixed Maturities is an overwhelmingly larger portion than Stocks. Reserves, meantime, act as a cushion, or money set aside, in the event a catastrophe occurs and claims have to be paid out.
Meanwhile, Book Value (expressed as a per share number in the Array), which represents the total value of an insurer’s assets, is often taken into account relative to the stock’s price. While the Price-to-Book ratio should not be the only decisive factor in picking an insurance stock, it helps give some guidance. A percentage of less than 100% means the stock is trading below its book value, and is thus considered to be undervalued. If the percentage is above 100%, the stock is overvalued. TRV stock has been undervalued since 2009.
Although the equity is only ranked 3 (Average) for Timeliness, or year-ahead relative price performance, as exhibited in the Ranks box at the top left corner. Alan G. House concludes in the Commentary that TRV shares offer good risk-adjusted total return potential 3 to 5 years out, which factors in expected price appreciation and prospective dividend increases. That’s displayed in the Projections box at the top left.
Other features make TRV shares enticing, too. Note the Safety rank (in the Ranks box) is 1, Highest, suggesting Travelers is among the least risky of stocks to own. That’s supported by a top-notch Financial Strength rating of A++ (in the Ratings box in the lower right corner), reflecting a healthy balance sheet. High scores for Price Stability and Price Growth Persistence add even more appeal. All told, Travelers would make a fine blue-chip selection for most diversified portfolios.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.