Travelers Dodges Most Financial Fallout

11/23/2009


  Recent Price
$53
  Dividend
$1.32
  Yield

2.5%

  P/E Ratio
9
  Shares (millions)
564
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$54.47 - $33.07

In 2007, Travelers ($53; TRV) took back from Citigroup ($4; C) a prized red umbrella logo, tied to the property-casualty insurer since the 1870s but temporarily lost in an ill-fated merger of the companies. In June, Travelers took Citigroup’s place in the Dow Jones Industrial Average. Travelers also took market share throughout the recession while avoiding the risky investments that contributed to the credit crisis and crippled many of its peers.

Travelers owes its soft landing to a conservative investment portfolio. The $76 billion portfolio dipped only 5% in 2008 and has now rebounded above levels seen at the end of 2007. About 97% of fixed-income holdings qualify as investment grade. The insurer has also raised its cash position 24% to $6.85 billion, or $12.14 per share, in the past year. Travelers, a conservative choice for investors creeping back into financial stocks, is a Buy and a Long-Term Buy.

Business breakdown

Travelers is a leading provider of property-casualty insurance for automobiles, homes, and business. Net written premiums fell 1% in the first nine months of 2009, but operating income rose 8%. The company does business in three segments.

Business insurance (54% of revenue, 68% of operating income in the nine months ended September) offers coverage for commercial multiperil, workers’ compensation, commercial automotive, commercial property, and general liability.

Personal lines (31%, 15%) cover individuals, including automobile and homeowners insurance.

The financial, professional, and international unit (15%, 17%) conducts business in the U.S., U.K., Canada, and Ireland. It operates in the sphere of surety bonds and the construction industry, and also covers some types of professional and managerial liability.

Travelers topped the per-share-profit consensus by $0.30 in the September quarter. Some credit goes to a mild storm season relative to the year-earlier period, when Travelers was pummeled by $1 billion in catastrophe claims from hurricanes Dolly, Gustav, and Ike. Also, Travelers impressed Wall Street by stretching profit margins in business insurance and posting higher net income from investments. New business was flat, and retention rates fell but remain near all-time highs.

Conclusion

While Travelers has kept itself pretty dry amid the financial-market storm, it still faces some risks. Citing pervasive economic weakness, the company says it may have trouble pushing through rate increases in the near term. More obviously, Travelers’ operating results depend heavily on the capricious nature of wildfires, hurricanes, and other natural disasters. So far, 2009 has been a good year for Travelers, with its combined ratio for the nine months ended September falling to 91.2% from 94.0% a year earlier. The combined ratio represents the percentage of premiums paid out in claims and expenses.

Wall Street profit estimates are rising and currently project Travelers will earn $5.67 per share this year, implying 8% growth despite 13% lower revenue. For 2010, the consensus projects roughly flat revenue and per-share earnings. An annual report for The Travelers Companies Inc. is available at 485 Lexington Ave., New York, NY 10017; (860) 277-0779; www.travelers.com.

TRAVELERS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $1.61 vs. $0.55 + 3% $50.77 -

$38.25

11 - 8
Jun '09 1.25 vs. 1.50 - 2% 45.11 - 37.22 9 - 7
Mar '09 1.34 vs. 1.61 - 8% 45.91 - 33.07 9 - 6
Dec '08 1.58 vs.

1.63

- 11% 45.69 - 28.91 9 - 5
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $24.48 $5.24 $1.19 $58.57
-
$28.91 11 - 6
2007 $26.06 $6.72 $1.13 56.99
-
47.26 8 - 7
2006 $25.05 $5.88 $1.01 55.00
-
40.23 9 - 7
2005 $24.37 $2.90 $0.91 46.97
-
33.70 16 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
97 94 88 78 85 83 62

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


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