Travelers Has Growth Covered

12/1/2014


  Recent Price
$103
  Dividend
$2.20
  Yield
2.1%
  P/E Ratio
10
  Shares (millions)
339
  Long-Term Debt as % of Capital
20%
  52-Week Price Range
$104.46 - $79.89

You may have seen one of the TV spots featuring a bright red umbrella that protects anything from a traveling circus to a soapbox car to a dog's bone. The umbrella seems the perfect logo for Travelers ($103; TRV), the second-largest U.S. property-and-casualty insurer by stock-market value.

Fifty years ago, a Travelers executive said the bright red umbrella "illustrates the concept of protection. It is friendly, it is warm and it is very merchandisable." That last bit is important, because insurance can be a boring and complex business, and the umbrella helps distinguish Travelers from a sea of insurers that look much alike from many angles.

A Nielsen study published in June found that in the financial-services industry, strong brands generate nearly three times the market share of moderate brands, as well as greater customer loyalty. Consultant Millward Brown's BrandZ report valued the Travelers brand at $3 billion, up 24% from 2013, ranking it the No. 4 insurance brand in the U.S. and 10th in the world.

In the 12 months ended September, sales rose 5%, per-share profits 35%, and operating cash flow 22%. Travelers earns a Quadrix Value score of 95 and trades at 10 times trailing earnings, a 32% discount to its peer group and 16% below its own three-year average. The stock, yielding 2.1%, is a Buy and a Long-Term Buy.

Yesterday and tomorrow

Travelers, founded in 1864 to insure passengers traveling by railroad or steamboat, gave us the world's first insurance policies for an automobile, a commercial airline flight, and space travel. The company has changed greatly over the years and now generates just 30% of its net written premiums and 21% of its insurance-related income from personal lines such as auto and homeowners. Business & international (61% of net written premiums, 61% of insurance income) and bond & specialty (9%, 18%) round out Travelers' insurance product line.

In the nine months ended September, premiums accounted for 84% of revenue, augmented by 13% from investment income and 3% from fees.

We see several reasons for optimism about Travelers' prospects over the next year:

• Since posting better-than-expected results for the September quarter, consensus per-share-profit estimates for the December quarter and full-year 2015 have risen. Analysts still expect per-share profits to fall 6% next year, which seems too conservative, even assuming catastrophic losses rise from 2014's unusually low level.

• Insurance retention rates — bolstered by Travelers' strong brand — have been trending higher.

• Travelers has raised its premium prices steadily over the last two years, including at least 4.6% year-over-year increases in each of its three business units in the September quarter.

In the first nine months of 2014, Travelers returned nearly $3 billion to shareholders via buybacks ($2.33 billion) and dividends ($553 million). The share count has fallen 6.3% so far this year. We expect Travelers, which generates cash flow far in excess of its operational needs, to continue its aggressive buybacks.

An annual report for The Travelers Cos. Inc. can be obtained at 485 Lexington Ave., New York City, NY 10017, (917) 778-6000, www.travelers.com.

TRAVELERS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '14
2.61
vs.
2.35
7%
96.03
-
88.81
10 - 9
Jun '14
1.93
vs.
2.13
3%
96.18
-
84.16
10 - 8
Mar '14
2.95
vs.
2.31
6%
90.65
-
79.89
10 - 8
Dec '13
2.68
vs.
0.72
4%
91.68
-
82.24
12 - 11
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
26.08
9.46
1.96
91.68
-
72.50
10 - 8
2012
25.74
6.21
1.79
74.70
-
55.86
12 - 9
2011
25.45
3.28
1.64
64.17
-
45.97
20 - 14
2010
25.11
6.26
1.44
57.55
-
47.35
9 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
78
95
76
78
86
80

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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