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Published: May 10, 2010
The ramifications of the credit crisis in
the insurance industry are still being determined as regulators
throughout the globe are scrambling to settle on the appropriate
capital levels and financial cushions these firms must satisfy
to stave off a future calamity. But despite the worries,
conditions are quickly returning to normal, with clients
starting to spend again on obtaining insurance coverage.
Investment portfolios are also benefitting as liquidity returns
to equity and fixed income markets.
Despite the improving business fundamentals, insurance industry
valuations are lagging recovery prospects and are stuck at
multi-year lows. A primary industry measure is the price to book
ratio, with many industry leaders sporting stock prices that are
trading below
book value, or total shareholders' equity on firm's balance
sheets. Better yet, many of these same firms are trading at
single digit earnings multiples.
One such firm is The Travelers Companies (NYSE: TRV).
Travelers morphed into its current form in 2004 when
Citigroup (NYSE: C) jettisoned Travelers Property Insurance,
officially throwing in the towel on the financial supermarket
ambitions of the headstrong and former company helmsman Sandy
Weill. Travelers joined forces with Saint Paul during 2004, but
its famous red umbrella logo didn't follow until the new
Travelers was able to reacquire the ubiquitous trademark from
Citi a few years later.
Travelers is currently the third largest property and casualty
(P&C) insurer in the country and is an esteemed member of the
Dow Jones Industrial Average. Its business segments serve both
businesses and individuals, insuring property, automobiles,
general liability and workers' compensation. It closed out 2009
with $110 billion in total assets and book value in excess of
$27 billion, or $48.21 per diluted share.
Book value at Travelers has been somewhat steady given the vast
majority of its assets are held in fixed income securities,
including U.S. Treasuries and municipal bonds. A benign
environment for catastrophes like hurricanes and earthquakes has
also reduced claims and subsequent hits to earnings and its
capital base. Earthquake activity has picked up a bit lately,
but Travelers should still be able to post close to $6 in
earnings per share this year.
Another event that should positively impact Travelers and the
industry overall is when the government ends its involvement
with AIG (NYSE: AIG). AIG has benefited from billions of
dollars in federal subsidies, artificially low interest rates
and similar perks that give it a competitive edge in selling
insurance.
The P&C business frequently suffers from
booms and busts as excess capital can push insurance premiums
down. Travelers states that it focuses on profitability over
volume and
market share growth, but as one of the largest insurers it
must remain competitive during times of surplus capital in the
industry.
Shares of Travelers currently trade at a forward
P/E under 9.0 and very close to book value. This is a great
entry point for one of the steadiest performers in the industry.
Earnings are expanding only at a mid single digit rate, but
could see a boost once AIG has to compete on more even footing.
Shareholder returns have also been strong. The stock sports a
2.5%
dividend yield and management repurchased $3.3 billion in
common stock last year. Returns on equity (ROE) have also been
strong;
ROE was a stellar 18.5% during the most recent quarter and
came in at 13.5% for all of 2009. Management targets a mid-teens
return on equity over the long haul. Travelers estimated that
total returns to shareholders exceeded +50% last year, which
includes stock
appreciation and the reinvestment of dividends.
Book value growth has been more impressive and should remain so
-- it has expanded at +10% annually during the past five years.
The book value multiple should expand as well. The stock price
reached 127% of book value prior to the credit crisis, implying
an upside of at least 25% from current levels with growth in
profits and book value something that investors can bank on for
the foreseeable future.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
