In this installment of Using the Value Line Report, we will be analyzing one of the Dow Jones’ resident insurer The Travelers Companies (TRV – Free Travelers Stock Report). Our goal with this review is to highlight the more important factors to consider when seeking exposure to the insurance sector and how the company’s business model and end markets influence its investment appeal.
Travelers is one of a limited group of property and casualty insurance companies that is trading at a premium to its book value. Many of its peers have been struggling with valuations, due to lingering effects of the financial crisis of the last decade and lower overall interest rates, which make it challenging for insurers to achieve strong returns on their invested premiums. However, Travelers has generally and fairly consistently achieved high operating returns on equity and also handsomely increased its book value per share, which likely justifies its premium-to-book valuation.
That said, we will take a closer look at the company’s operations to determine what gives it an edge. Travelers is involved in a highly contrasted style of insurance coverage, as well as a somewhat more complex business model. Indeed, the Statistical Array confirms this, as the historical financial data that lives in this field are rather intricate.
Luckily, even investors who lack familiarity with the more pertinent performance indicators of property/casualty insurance companies can find helpful guidance in the Analyst Commentary. Mr. Alan G. House sheds light on some of the factors investors should be paying attention to when analyzing TRV. Indeed, in this segment, Mr. House discussed Travelers’ recent results and noted that “The main reason for the relatively strong performance was a very good combined ratio, which came in at 86.9% in the period. This means the company generated more than $13 in pretax income for every $100 in policies insured. This helped to counteract an only modest increase in net premiums earned and negative net investment income comparisons.” This statement reflects the importance of the measures of profitability here, as the combined ratio refers to how much underwriting profit is being generated (figure below 100%) or, conversely, how much more the company is paying in claims than it is receiving in premiums (figure above 100%). Further into the commentary, Mr. House mentions “The insurance industry has experienced increased capacity in recent quarters, which has made rate hikes increasingly difficult to come by. Hence, we call for a continuation of only modest improvement at the top line in 2016. Also, the recent string of low catastrophe losses over the past few years might not be sustainable longer term, given the variability of the weather, prompting us to look for an uptick in the loss ratio this year.” This offers some insight into why there are several other measures that an investor must take into account when considering this type of equity, as the unpredictability of the potential for catastrophe claims increases the risk and complexity here. Nonetheless, a look at the Graph and the High/Low Prices over the past several years demonstrates that the stock has enjoyed a solid run.
This information leads us to the strong case for momentum investors here. Indeed, shifting our attention to the top-left corner of the page, the Ranks box reveals that TRV’s Timeliness rank is 2 (Above Average). This suggests that the stock’s price performance is on track to outpace the broader market’s averages over the next six to 12 months. In addition, although TRV’s seemingly less predictable earnings results (Earnings Predictability 55 out of 100 in the Financial Ratings box) would suggest a riskier play, the Safety rank of 1 (Highest) and Beta score of .85 (below the market neutral), both of which are found in the Ranks section, indicate that Travelers is actually among the more secure equities in the Value Line investment universe. Again, looking at the bottom right-hand corner of the page to the aforementioned Financial Ratings box, we find further support for the momentum play, as TRV boasts top-notch marks for Price Stability and Price Growth Persistence (95 and 90 out of 100, respectively).
All told, the Projections box shows that this issue holds more than just good near-term momentum. TRV’s 3- to 5-year total return potential makes this stock an attractive investment choice at present, based on its income component, as well as overall risk and P/E valuation. That said, the Value Line report offers a wealth of information to help investors make the conscientious choice among a plethora of options in the marketplace.