I wrote about and purchased Travelers on January 24 of this year after Marvin Schwartz laid out the value proposition at that time (see article here); as he noted, anybody who would listen to management knew that the muni bond concerns were overheated (at least for their portfolio), and the downward pressure that had pushed the stock price below book value was unwarranted. For those who followed Mr. Schwartz and started a position in Travelers, their investment has appreciated by a little more than 11% in three short months, compared to 4% and 5% for the S&P and DJIA, respectively.
Here are some notable highlights from the quarter and for the conference call (caution: this is certainly not a substitute for reading the 10-Q):
For the quarter, the company produced operating income of $826 million and diluted EPS of $1.92, up 31% and 55%, respectively, from Q1 2010; these increases were driven by a $190 million decrease in catastrophe losses ($122 million vs. $312 million) for the comparable periods. Book value increased 2% in the quarter and 12% YOY to $59.91, partly due to continued common stock share repurchases, to the tune of $1.1 billion in the first three months of the year (18.9 million shares at an average cost of $58.23).
Just to clarify the extent of the buyback program, Travelers had 693 million shares outstanding at the end of 2005; based on the 10-Q, they have 420 million shares outstanding today. In addition, the company paid $155 million in dividends in Q1, and announced a 14% increase in the quarterly dividend ($0.36 to $0.41). Management, as promised, is committed to returning money to shareholders through buybacks and dividends.
As previously discussed, management is moving forward with the J. Malucelli joint venture in Brazil (they acquired 43% of the company’s stock in November 2010, along with the option to increase their interest to 49.9% in 18 months), and plans for the transaction to close in the second quarter. In the end, Travelers will pay roughly $400 million in the deal to partner with the market leader in surety in Brazil (based on market share). As noted by president and COO Brian MacLean, “We remain excited about the opportunity this arrangement gives us to leverage our leading U.S. Surety franchise to enter the growing Brazilian market and to expand more broadly into P&C and to do so with the benefit of a local market leader.”
As management noted in Q4, they have known the management team at J. Malucelli’s for a number of years, and believe their business philosophies and strategies are aligned. Prior to this JV, management was looking at one in India, but backed out because they did not believe business interests and philosophies were compatible. For me, it feels fantastic to know that management is not simply pounding through growth blindly; they have a preliminary focus on quality, not quantity.
As a closing note, I would just like to give kudos to management; they are rational, transparent, and clearly in control of their business. Investors should be happy to have managers that aren’t chasing profit at all costs in order to drive the short-term share price and the value of their stock options.
Management is acting in long-term shareholders' interests, and is not concerned with being different from the crowd. As with any business and executive team, it is your responsibility to make sure they are doing what is best for you as a shareholder; with that being said, your due diligence can only take you so far, and you must be able to trust in management to the extent that you can never know as much about the business as they do (usually for competitive reasons). Based on what I have seen, I am more than happy with Jay Fishman as CEO, along with the other top executives and their respective positions.