The Travelers Companies: Should Investors Buy It?

In this article, let's take a look at The Travelers Companies, Inc. (TRV, Financial), a $34.4 billion market cap company, which is a leading commercial and personal lines property-casualty insurer that recently expanded its presence in Canada by acquiring Toronto-based Dominion of Canada.

Higher Interest Rates

On November 2013, the company acquired The Dominion of Canada General Insurance Company for more than $1 billion. With the deal, the firm expanded its presence in Canada.

Although we expect a scenario of higher interest rates, this could be offset by lower pricing due to the fierce competition from its peers. The impact is uncertain but we are confident that it will continue to outperform peers as a result of its competitive advantage from its data analytics.

Cost Savings

The Travelers Companies targets a $140 million of cost savings in its personal lines business. Although this segment seems to be experiencing high competition, we believe this is a strategic move in order to balance results.

Key Ratio

The combined ratio is a key ratio to measure the performance and it combines the loss ratio (equal to loss and loss adjustment expenses divided by earned premiums); the expense ratio (underwriting expenses divided by written premiums) and the dividend ratio (policyholder dividends divided by earned premiums), are metrics that help to evaluate the profit trend. It declined last year to 89.85% when compared to the 97.1% reached in 2012. Year-to-date through September 30, 2014, the combined ratio was 90.3%.

Revenues, Margins and Profitability

Looking at profitability, revenues increased by 7.05% and led earnings per share to decrease in the most recent quarter compared to the same quarter a year ago ($2.69 vs $2.30). During the past fiscal year, the company increased its bottom line. It earned $9.74 versus $6.27 in the previous year. This year, Wall Street expects an improvement in earnings ($9.90 versus $9.74).

Finally, let's compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 14.47% which is higher than the industry median and the ones exhibited by XL Group (XL, Financial), ACE Ltd. (ACE, Financial) and Chubb Corp. (CB, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 10.1x, trading at a discount compared to an average of 12.1x for the industry. To use another metric, its price-to-book ratio of 1.36x indicates a premium versus the industry average of 1.32x while the price-to-sales ratio of 1.34x is above the industry average of 1.19x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $21,916, which represents a 17% compound annual growth rate (CAGR).

Final Comment

The company survived the financial crisis and its strength were determinant to outperform its peers. Further, the quality of its balance sheet is better than most of the companies in the industry.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Seven Cohen, Ruane Cunniff (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Tom Gayner (Trades, Portfolio) and John Buckingham (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned