The Travelers Companies (NYSE:TRV), a provider of a wide range of commercial and personal P&C insurance products, presented at the Barclays Capital Global Financial Services Conference last week. I wrote an article about TRV on Tuesday in response to an analyst upgrade, and touched on the attractive dividend (3.3%), valuation (20% below book), historical performance (BV increase of more than 10% per annum over the past five years, 9% plus over the past ten), and buyback program (12% of outstanding shares in past 12 months, more than 1/3 since the start of 2008). However, I didn’t go into much detail about the actual business, and where they are looking to drive shareholder value in the coming years; as such, I’m planning on writing about the two conferences that the company has presented at since September 1st, in addition to the in-depth investor day meeting held back in June, over the next couple of weeks. Here are some notes from the Barclay’s conference:
As of June 30, 2011, book value per share was $59.62. Adjusted book value per share, which excludes net unrealized investment gains net of tax, was equal to $54.28. Tangible book value per common share, which also excludes goodwill and other intangible assets, was equal to $45.27 per share.
The company currently has $73 billion in invested assets, with more than 90% in fixed income; the remainder is split between private equity, hedge funds, real estate, and equity securities. In the words of CFO Jay Benet, “the investment portfolio is managed to support the insurance operations, not the other way around”. He stressed the fact that they try to match cash flows of assets and liabilities, and position their asset allocation to achieve appropriate returns; currently, they think high quality and short-term duration (current average is 3.6 years) is the way to go.
The company is financially strong, and was recently upgraded by Standard & Poor’s to AA at the end of July; among their peer group, which includes companies such as Allstate, XL Capital, and CNA, Travelers is “best in class” financially (according to the credit rating agencies) along with Chubb and Progressive. With that being said, Travelers doesn’t hoard cash unnecessarily: at the end of the day, their capital management strategy specifies that any unneeded capital is returned to owners, a commitment that they have stuck to; Since 2006, they have paid roughly $700 million in dividends per annum (up 8.7% per year on a per share basis), and have consistently paid a dividend for 139 years. On the buyback side, they have repurchased $1.1 billion, $3 billion, $2.1 billion, $3.3 billion, and $5 billion worth of common stock since 2006, respectively. To put that in perspective, the 2010 return to shareholders of $5.7 billion (total of dividends and buybacks) is equal to more than 28% of the current market cap.
Management’s objective to create shareholder value is to generate mid-teens return on equity over time. As was indicated in a chart during the presentation, management shows the breakdown of operating ROE in four components:
1. Long term fixed investment portfolio income less holding company interest expense
2. Short term fixed investment portfolio investment income
3. Non-fixed investment portfolio investment income/loss
4. Underwriting gain/loss and other
Essentially, the fourth one is the result of the insurance business, while the first three are driven by the investment of float. Since 2006, the breakdown has been as such:
2006 operating ROE = 6.8% underwriting gain, 11.1% investment gain = 17.9%
2007 operating ROE = 6.7% underwriting gain, 11% investment gain = 17.7%
2008 operating ROE = 4.3% underwriting gain, 8.1% investment gain = 12.4%
2009 operating ROE = 5.8% underwriting gain, 8.2% investment gain = 14%
2010 operating ROE = 3.2% underwriting gain, 9.3% investment gain = 12.5%
2011 YTD operating ROE = 5.5% underwriting loss, 9.4% investment gain = 3.9%, with the weather catastrophes in the first half of the year (the company equated their cat losses in the first half to the equivalent of a 1-in-100 hurricane loss) driving the underwriting loss.
As I mentioned above, the company has more than 90% of their investments in fixed income, the majority of which are short duration. In regards to the current interest rate environment, a flight to safety has driven down high quality fixed income yields, with 10 year U.S. treasuries dipping below 2%. From prior years, management expects roughly $6 billion (10% of TRV’s fixed income investments) to mature annually through 2014, with a tax equivalent yield of approximately 5%, which will have to be reinvested at a lower rate (expectation is 200 basis points lower); if interest rates stay where they are for a long period of time, management will not be able to drive the high-single digit investment returns noted above (with 90% in high quality fixed income anyways).
On the insurance side, the business insurance segment is improving, with the company picking up rate gains (an increase in the average premium on renewal policies) starting with the first quarter of this year and accelerating in recent periods. In personal (auto and homeowners), the picture is a bit better, with the company having consistently achieved (since 2005) positive renewal premium change.
In regards to the Irene, the storm caused a “considerable amount of damage”, but will not create losses that would be expected if it had landed as a category 1 hurricane. “The amount of wind damage is a lot less than what we would normally see in a hurricane, but what we are seeing is… a lot of tree damage… and flooding associated with it”. While they couldn’t quantity the potential damage (still only two weeks out), management wanted to say that the bottom line is that it could have been “a lot worse considering that the path that this thing followed”.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.