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Alex Morris
Alex Morris

Travelers Companies, First Quarter 2011 Highlights

April 22, 2011 | About:

The Travelers Companies (TRV) reported Q1 2011 earnings on Thursday morning, and came out with some strong numbers for investors.

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.

About the author:

Alex Morris
I am a recent graduate from the University of Florida; I received a finance degree as well as a real estate minor during my time at UF. I will be sitting for Level 1 of the CFA Exam in December 2011, as well as for my series 65 exam. I am a value investor, plain and simple.

Rating: 4.0/5 (10 votes)


Alex Morris
Alex Morris - 6 years ago    Report SPAM
An important side note from the 10-Q:

The Company’s invested assets at March 31, 2011 totaled $72.39 billion, of which 94% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate and 4% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

The carrying value of the Company’s fixed maturity portfolio at March 31, 2011 totaled $62.28 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both March 31, 2011 and December 31, 2010. Below investment grade securities represented 3.0% of the total fixed maturity investment portfolio at March 31, 2011 and December 31, 2010. The average effective duration of fixed maturities and short-term securities was 3.6 (3.9 excluding short-term securities) at both March 31, 2011 and December 31, 2010.

Obligations of States, Municipalities and Political Subdivisions

The Company’s fixed maturity investment portfolio at March 31, 2011 and December 31, 2010 included $38.95 billion and $39.54 billion, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at March 31, 2011 and December 31, 2010 were $7.17 billion and $7.29 billion, respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as pre-refunded bonds), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. Such escrow accounts are verified as to their sufficiency by an external auditor and are almost exclusively comprised of U.S. Treasury securities. Moody’s Investors Service has assigned a negative outlook to municipal securities issued by local governments within the United States.

The Company bases its investment decision on the credit characteristics of the municipal security; however, its municipal bond portfolio includes a number of securities that were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default. The downgrade during 2008 and 2009 of credit ratings of insurers of these securities resulted in a corresponding downgrade in the ratings of many such securities to the underlying rating of the respective security. Of the insured municipal securities in the Company’s investment portfolio at March 31, 2011, approximately 98% were rated at A3 or above, and approximately 90% were rated at Aa3 or above, without the benefit of insurance. The Company believes that a loss of the benefit of insurance would not result in a material adverse impact on the Company’s results of operations, financial position or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the Company’s ability and intent to hold the securities. The average credit rating of the underlying issuers of these securities was “Aa2” at March 31, 2011. The average credit rating of the entire municipal bond portfolio was “Aa1” at March 31, 2011 with and without the enhancement provided by third-party insurance.

Alex Morris
Alex Morris - 6 years ago    Report SPAM
The Muni default concerns look to have been overestimated (at least Meredith Whitney's):


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