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The Science of Hitting
The Science of Hitting
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Travelers Companies – Q3 2011 Earnings

October 19, 2011 | About:

On Wednesday morning, The Travelers Companies (TRV), a provider of a wide range of commercial and personal P&C insurance products, reported third quarter 2011 earnings. I wrote an article about the company last month when they presented at the Barclays Capital Global Financial Services Conference (link); here are some of the key takeaways from that event:

“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.

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.

Since 2006, the breakdown in operating ROE 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.”

In the third quarter, the company reported an increase in total net written premiums of 4%, reflecting continued renewal price gains; for example, in Business Insurance, which experienced its third consecutive quarter of positive rate change, commercial account renewal rates changed 3.6%, 3.9%, and 6.0% in July, August, and September, respectively, improving and accelerating successively throughout the quarter.

Operating income in the quarter was $332 million (operating ROE = 5.9%), down 61% from Q3 2010 ($858 million; 14.3% operating ROE); on a per diluted share basis, operating income declined 56% to $0.79 per share in the quarter. The change was due to a $487 million after-tax decrease in underwriting results (combined ratio of 105.4% in Q3), largely attributable to significantly higher catastrophe losses from Hurricane Irene ($253 million after-tax) and Tropical Storm Lee ($74 million after tax).

Net investment income was $561 million in the quarter, down from $597 million in Q3 2010; in addition, overall after-tax yield fell from 3.4% to 3.2%, due to a mix of lower long and short term yields (ST yielded a princely 0.1%, compared to 1.7% in 2008). As noted in the slides, net investment income from the long-term fixed portfolio declined due to lower reinvestment rates.

As I’ve noted previously, the company is dead focused on returning capital to shareholders via dividends and buybacks; here are some of the key comments in regards to those topics from the call:

“Consistent with our ongoing capital management strategy, we continue to return excess capital to our shareholders. During the quarter, we repurchased $375 million of common stock and paid $173 million in dividends, bringing year-to-date common stock repurchases to $1.7 billion and year-to-date dividends of $503 million. Based upon our current liquidity position and our expectations for fourth quarter operating income… we are targeting fourth quarter common stock repurchases at approximately $1 billion”. To put that number in perspective, the current market cap is less than $23 billion; at that rate, the company will repurchase roughly 4.4% of their outstanding shares over the next 90 days.”

Despite the significant cat losses since the start of 2011, book value per share came in at $60.98, an increase of 4% year to date; adjusted book value was $54.63 per share, an increase of 3.8% compared to third quarter 2010.

On the day, the stock was up 5.69% and closed just below adjusted book value per share.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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