The Travelers Companies Inc. (TRV, Financial) is an insurance company, even more undervalued in the past few days, as it experiences collatoral damage from the Brexit vote. But behind the currently weak share price we find a solid company with promise.
If you’ve bought stock in Travelers in the past year, you might wish you’d have insured your holding in this insurance company (which you can do with protective puts). The stock price has had a rocky ride as we see in this three-month GuruFocus chart:
The Travelers builds on technological advances and intellectual property, as well as disciplined shareholder focus, to go forward profitably.
History
1853: Founding of a predecessor company, St. Paul Fire & Marine Insurance Company, in St. Paul, Minnesota.
1865: The Travelers Insurance Company founded “for the purpose of insuring travelers against loss of life or personal injury while journeying by railway or steamboat.”
1870: First appearance of what would become its iconic brand image, the red umbrella.
1969: Issues the first accident policy for space flight and lunar exploration, providing coverage for the Apollo astronauts.
1995: Travelers sets up in Ireland.
2004: The St. Paul and Travelers merge to form The St. Paul Travelers Companies Inc.
2007: Name changed to The Travelers Companies Inc. and buys back rights to the red umbrella.
2009: Becomes a component of the Dow Jones Industrial Average.
History based on information from the company’s website and Wikipedia.
The Travelers’ business model
Travelers is a property and casualty (P&C) insurance company that operates in the U.S. and to a limited degree in Canada, Ireland and other countries. Domestic sales account for more than 93% of its total revenue. It also does some business in other countries as a corporate member of Lloyd’s. Unless otherwise noted, all information in this profile comes from the company’s 10-K for 2015.
It distributes its products through independent agents (including local agents who sell the policies for several companies), exclusive agents (selling only The Travelers’ policies) and direct marketing and/or salaried employees.
The company operates through three segments:
- Business and International Insurance.
- Bond & Specialty Insurance.
- Personal Insurance.
As the 10-K notes, The Travelers also “reinsures a portion of the risks it underwrites in order to manage its exposure to losses and to protect its capital.” Essentially, this means the company buys insurance to protect its insurance business; catastrophes might otherwise drain all its resources and force it out of business.
Revenues
While the company operates in three segments, the Business and International segment brings in the lion’s share of revenue:
Insurance companies also earn revenue — investment income — from prepaid premiums. Traditionally, that’s been a solid source of income, as Warren Buffett (Trades, Portfolio) has often proclaimed (his Berkshire Hathaway [BRK.A] [BRK.B] owns Geico and other insurance companies). However, since the financial crisis of 2008 and with continuing low interest rates, that part of the business has not been so lucrative for insurance companies. You can see what it’s done to The Travelers, beginning in 2008 (table from GuruFocus' 15-Year financials):
Competition
As an insurance company, The Travelers operates in a crowded and highly competitive market. GuruFocus lists its main competitors as Tokio Marine Holdings Inc. (TSE:8766), PICC Property and Casualty Co Ltd. (HKSE:02328) and Allstate Corp. (ALL, Financial), all bigger by capitalization, as well as Progressive Corp. (PGR, Financial) and Chubb Ltd. (CB, Financial), both smaller by capitalization.
As one indicator of the type and depth of competition, The Travelers provides this note about Personal lines in its 10-K: “In recent years, most independent personal insurance agents have begun utilizing price comparison rating technology, sometimes referred to as 'comparative raters,' as a cost-efficient means of obtaining quotes from multiple companies.”
In its Business segment, the company notes, “A company's success in the competitive commercial insurance landscape is largely measured by its ability to profitably provide insurance and services, including claims handling and risk control, at prices and terms that retain existing customers and attract new customers.”
Moat
How then does a company like The Travelers survive and continue to generate returns for shareholders? Well, like many companies in many industries these days, it invests in what it calls Data, Analytics and Science. It offered the following two examples in a presentation at 2015 Investor Day (subtitled, "A Deeper Dive into Data & Analytics").
The first example shows how it has been able to significantly reduce the time needed to diagnose chronic pain, using Predictive Analytics:
The second example is Geospatial Analytics:
Both types of Analytics provide competitive advantages of various kinds, including reduction of costs, more efficient pricing of underwriting and understanding risk.
Growth
While the share price has ticked fairly steadily upward, The Travelers’ EBITDA numbers have had a bumpy ride, again, from 2008 onward, as this GuruFocus chart shows:
In numbers, GuruFocus gives us this data for EBITDA.
- Twelve months (trailing): -5.20% per year.
- Five years: 10.4% per year.
- Ten years: 0.50% per year.
As to future earnings, the analysts followed by Yahoo! (YHOO, Financial) Finance estimate average earnings of $9.55 per share for this year and $9.92 for next year (as compared with $9.55 for 2015).
In its 2015 Annual Report, the company has a decidedly upbeat perspective: “Delivering superior returns has been our North Star, and the results are clear. Over the last decade, we produced an industry-leading return on equity, returned over $35 billion of excess capital to our shareholders, grew dividends per share at an average annual rate of 10%, more than doubled our book value per share and delivered a total return of approximately 225% to our shareholders.”
Notably, the company references allocation of capital at an operating level: “One critical component of our ability to deliver exceptional returns over time is our granular approach to underwriting. In our commercial businesses, that means execution, including the allocation of capital, on an account-by-account or class-by-class basis.”
Also in the Annual Report, CEO Alan Schnitzer looks forward as well and expects that “We’ll leverage our lead in data and analytics and solidify our leadership in risk selection and pricing. We’ll keep innovating across our products and throughout our world-class Claim and Risk Control organizations to keep our agents, brokers and customers on the cutting edge. And we’ll maintain our distribution partner advantage to make sure we remain a partner of choice.”
Comments: The Travelers is essentially a business and international insurer with a long and storied history. It operates in a highly competitive industry and maintains its leading position through investments in innovative technology and underwriting expertise, or as it’s also known, analytics and data. I would expect it to continue to grow and reward shareholders.
Ownership
Fifteen gurus followed by GuruFocus own shares in The Travelers, foremost among them is Jeremy Grantham (Trades, Portfolio) with 1,478,793 shares. Second and third are Pioneer Investments (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Institutional investors own much of the company with 85.21% of shares outstanding. Shorts don’t expect much trouble ahead; they’re down at 2.38% of ownership. Insiders come in at just under 1% (data from GuruFocus).
Comments: Overwhelmingly owned by institutional investors and only a small holding by skeptics. This means prices should be relatively stable since the institutionals tend to trade less.
By the numbers
Comments: Note first that the share price is at the close on Friday, June 24, just after the market as a whole dropped some 3% in response to the Brexit vote in the United Kingdom. Otherwise, it has a solid return on equity, it pays a decent dividend and bought back a significant number of shares last year.
Financial strength
The GuruFocus system gives The Travelers a mediocre 5 for financial strength and a solid 8 for profitability and growth.
Scanning the columns for financial strength, we see the current cash-to-debt ratio compares poorly with its performance in the past, and hence the red coloring. Just below it is the equity-to-asset ratio, which, on average, is a bit weaker than its peers. GuruFocus reports, “Equity to asset is ranked lower than 62% of the 133 companies in the Global Insurance - Property & Casualty industry.”
Here’s a chart showing that The Travelers’ long-term debt mushroomed in 2004 and has remained relatively flat since then:
Turning to its earning power, this GuruFocus chart of EBITDA shows a bumpy ride since the end of 2007:
As for its cash flow, the following chart shows what it has received from operations (green line), others (blue line) and investments (red line):
GuruFocus issues two medium warning signals,Ă‚ one for price nearing the 52-week high and one because its P/S ratio is nearing a 52-week high.
Comments: The charts above tell us a story about the impact of the 2008 financial crisis on this insurance company. Nevertheless, The Travelers seems strong; as we saw above, it bought back more than 8% of its shares last year, pays a better than 2% dividend and has a payout ratio below 23%.
Valuation
The Travelers Companies Inc. earns a 4-Star rating (out of 5) from GuruFocus, a solid but not top-rated position. Behind the rating is the assumption that consistent earnings generate stronger share prices over time.
As for its intrinsic value, the system at GuruFocus arrives at this figure: “As of today, The Travelers Companies Inc.'s intrinsic value calculated from the Discounted Earnings model is 150.82.”
The price targets at Yahoo! Finance are closer to the company’s current (June 27) price of $110.42.
On June 16, Sean Williams of the Motley Fool wrote of what he calls “The 3 Cheapest Dow Stocks Based on Cash Flow Per Share” (that’s also the title of his article). The cheapest of the cheapest three is The Travelers, and he writes:“Based on annual cash flow per share forecasting for 2016, property and casualty insurer Travelers Companies is by far the cheapest, although I'm going to throw a little asterisk next to this figure. You see, neither Travelers nor Wall Street can predict the future when it comes to catastrophes. Thus, while the current cash flow estimates look appealing for Travelers, my guess is the current forecast could prove overzealous if a single act of God were to occur, such as a hurricane or tornado.”
About a week earlier, James Li noted in a GuruFocus article that companies in credit services and insurance, including The Travelers, were among the top buys, based on the Buffett-Munger screener.
Since then, of course, shares of The Travelers have suffered some more, most recently in response to the Brexit vote in Great Britain (and as this article is being written, the fallout still may not be over). This three-month chart captures the recent prices:
Despite the recent declines, The Travelers' P/E ratio remains close to its 13-year average, and GuruFocus notes: “NYSE:TRV's P/E Ratio(ttm) is ranked higher than 75% of the 120 Companies in the Global Insurance - Property & Casualty industry. (Industry Median: 13.57 vs. NYSE:TRV: 10.41)."
The PEG ratio (P/E divided by 5-year EBITDA growth) comes in at 0.53. A ratio of less than 1.0 suggests a company is undervalued; 1 to 2 suggests fair valued, and above 2 suggests overvalued.
Comments: We appear to have a consensus that The Travelers Companies is undervalued, based on several different metrics and screens. The recent, Brexit-driven declines have only helped solidify that opinion.
Conclusion
Despite the weak rating for Financial Strength (5 out of 10), there’s a great deal to like about The Travelers.
Yes, it does carry some debt, but it has a lengthy history of underwriting and handling claims; its EBITDA may have been bumpy over the past decade, but it has grown, and it has posted good ROE numbers.
And I can’t help but consider the 225% total return over the past decade (a decade that included the 2008 financial crisis and brought on record low bond returns). That, of course, averages out to 22.5% per year, not unreasonable when dividends and buybacks are solid.
All things considered, The Travelers is a good company, well managed and currently under-valued. It may deserve a place on your short list of long positions.
Disclosure: I do not currently own, nor do I expect to buy shares of this company in the foreseeable future.
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