Travelers Priced To Move In 2011

12/27/2010


  Recent Price
$56
  Dividend
$1.44
  Yield
2.6%
  P/E Ratio
9
  Shares (millions)
472
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$57.55 - $47.35

Travelers ($56; TRV) shares delivered a total return of 18% in the past year, lagging the average of 20% for property-and-casualty insurers. Viewed as a safer play, Travelers tends to underperform in periods when investors are piling into risky stocks. But while speculative stocks led the market's rally in 2010, safer stocks like Travelers look like the better bet for 2011. Travelers, yielding 2.6%, is a Focus List Buy and a Long-Term Buy.

The business

Operating income fell 11% in the nine months ended September. Yet per-share profits rose 16%, the result of higher realized investment gains and 16% fewer outstanding shares. Catastrophe losses more than tripled in the six months ended June, though they eased in the September quarter. Making the year-over-year comparison even more challenging, 2009 featured unusually mild weather.

However, Travelers has improved the profitability of operations within its control. After stripping out catastrophes and accounting changes, the combined ratio fell to 93.2% in the nine months ended September from 93.6% a year earlier. The combined ratio represents losses and expenses as a percentage of premiums.

Operating income for the business-insurance segment (70% of operating income in the nine months ended September) slipped 6% for the nine months on a 1% decline in net premiums written. Income from financial, professional and international insurance (20%) advanced 5%.

Beset by the hefty casualty losses, Travelers' personal-insurance business (10%) saw its operating income plunge 37%. However, the business seems poised for future strength, with rising retention rates and premiums.

The investments

Investors worry about municipal bonds as local and state governments face a record $18.5 billion budget deficit this year. Travelers owns municipal bonds with a fair value of $41.43 billion, accounting for more than half of the insurer's invested assets, well above the industry average of 27%. But Travelers' municipal-bond holdings earn an average rating of Aa1, higher than the nationwide average of Aa2.

Yields on 10-year Treasury bonds dipped to a 21-month low in October, and Travelers warned at that time that if bond yields did not rise, its investment income could fall in 2011 and 2012. Yields have jumped since Travelers' announcement, though they remain well below levels common over most of the last 10 years. Investments generated more than 80% of operating income in the nine months ended September, so a continued upward move in bond yields could lift per-share profits over time. The consensus projects Travelers' earnings will fall 19% in the December quarter and 2% in 2011, and we see upside to those estimates.

The value

At less than nine times trailing earnings, Travelers trades 10% below its five-year average P/E ratio. Compared to the average property-and-casualty insurer in the S&P 1500 Index, the stock trades at a 24% discount. An annual report for The Travelers Cos. is available at 385 Washington St., St. Paul, MN 55102; (651) 310-7911, www.travelers.com.

TRAVELERS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '10
1.81
vs.
1.61
+ 2%
53.67
-
48.17
8 - 8
Jun '10
1.39
vs.
1.25
+ 0%
54.33
-
47.69
9 - 8
Mar '10
1.22
vs.
1.34
+ 7%
54.83
-
47.35
9 - 7
Dec '09
2.12
vs.
1.58
+ 11%
54.47
-
46.55
9 - 8
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2009
24.68
6.32
1.26
54.47
-
33.07
9 - 5
2008
24.48
5.24
1.17
58.57
-
28.91
11 - 6
2007
26.06
6.72
1.13
56.99
-
47.26
8 -7
2006
25.05
5.88
1.10
55.00
-
40.23
9 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
76
94
69
79
23
36

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


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