Is It Time to Buy Travelers Companies Inc Stock?
The Travelers Companies is one the few property and casualty insurance companies that manages to trade at a premium to its accounting book value. Many insurance companies still trade at a discount to their book values, which is attributable to both the impact of the financial crisis in 2008, and low interest rates, which make it difficult for insurance businesses to achieve high investment returns from their invested premiums.
However, The Travelers Companies has consistently achieved high operating returns on equity throughout the financial crisis, and also handsomely increased its book value per share. Both themes have convinced investors that The Travelers Companies should rightfully trade at a premium book valuation.
Strong operating returns on equity
Consistency is a big thing for investors. All investors like to invest in a business that achieves high returns on equity independent of the prevailing economic conditions. But this is not an easy thing to do. In the insurance business, where catastrophic losses can throw a company off balance and impact its financial results in any quarter, the achievement of consistently high returns on equity is a respectable accomplishment.
The Travelers Companies certainly has excelled in this regard as the following chart highlights.
A lot of The Travelers Companies' great ROE performance has to do with strong risk-management skills. The insurance company, for instance, reported only two slight underwriting losses since 2005 -- in 2005 and in 2011. This indicates great underwriting discipline.
Further evidence of The Travelers Companies' superior risk selection and operating performance compared to its insurance peers can be found in its book-value growth record. The Travelers Companies' book value per share has steadily grown throughout the financial crisis, which admittedly was not an easy thing to do.
Most insurance companies, including Hartford Financial and Allstate, for instance, took substantial book value hits as the financial crisis hit the sector hard in 2008. However, The Travelers Companies even then managed to squeeze out a book-value gain of 2%.
Strong returns on equity, rare (and small) underwriting losses, and a strong balance sheet also led to competitive financial-strength ratings. A company's ability to make good on its promises -- to pay out cash if claims are filed -- is regularly evaluated by rating agencies.
While Berkshire Hathaway is the top-ranked insurance giant, The Travelers Companies certainly doesn't have to shy away from insurance-rating comparisons with its AA rating from S&P, and Aa2 rating from Moody's.
Investors like companies with high returns, a strong book-value growth record, and few underwriting losses, which is also the reason why The Travelers Companies trades at a sizable premium to its book value: exactly 26%. American International Group , for instance, one of the largest property and casualty businesses in the world, still trades at a massive 30% discount to its book value -- and a lot of it has to do with its record of book-value destruction during the early innings of the financial crisis.
All in all, quality insurance companies are more likely to trade at a premium to their book values, whereas companies that are perceived as having lower-quality book-value growth records continue to trade at discounts.
The bottom line
The Travelers Companies has an outstanding return on equity history, and confidence-boosting book-value growth during a period of extraordinary stress and a difficult operating environment with low interest rates. As a result, this property and casualty insurance company remains a promising buy despite its premium valuation in the market.
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The article Is It Time to Buy Travelers Companies Inc Stock? originally appeared on Fool.com.Kingkarn Amjaroen owns shares of American International Group. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2016 $30 calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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