Why Travelers Is Right for Your IRA
This article is part of our Right for Your IRA series, in which Foolish writers each pick a stock or ETF that could be a great fit in a tax-advantaged retirement account.
Ah, retirement. Kicking back and taking life on one's own terms with no financial worry is a worthy goal indeed. All it really requires is some diligent saving and a few excellent ideas to get you on your Foolish way. And The Travelers Companies (NYS: TRV) is one of those ideas that should pay off handsomely over the long run.
Under the umbrella
Founded in 1853 as the St. Paul Fire and Marine Insurance Company, Travelers has been in the insurance business for a long time. As one of the U.S.'s largest property casualty companies, Travelers covers quite a bit of ground with operations in the U.S., U.K., Canada, Ireland, and even Brazil.
The company is comprised fundamentally of three business segments: business insurance; financial, professional and international insurance; and personal insurance. Not long ago Travelers was actually part of Citigroup (NYS: C) , but thanks to a spinoff in 2002 and subsequent merger with The St. Paul Companies in 2004, we have the Travelers we know today.
Why travel with these guys?
There are a number of reasons that Travelers is IRA-worthy:
Dividends are an IRA's best friend: Travelers pays a healthy 2.8% dividend, which is right in line with the average yield of all the Dow Jones Industrial Average (INDEX: ^DJI) components today. As part of the Class of 2009, along with Cisco Systems (NAS: CSCO) , Travelers is still one of the new kids on the Dow block and no doubt wants to prove it's there to stay. Management is "fully committed" to returning capital to shareholders via share repurchases and dividends, and I expect this behavior to continue. And as an IRA is tax-advantaged, that allows more time for those dividends to compound and build wealth.
I appreciate it!: Travelers has done a good job consistently growing its book value each year. In fact, going back to 2008, the company reported book value per share of $43.12. At the close of 2011 it had grown that book value per share to $62.31. Travelers is a fairly conservatively run operation that, like many insurance companies in today's market conditions, is trading close to its book value. As the insurance pricing environment improves, investors should not only realize a better price-to-book multiple, but also the long-term expectation that Travelers will continue to grow its book value -- meaning capital appreciation in the stock price as well.
Stable, reputable brand: Insurance is a necessity. You can't drive a car, own a home, or run a business without it. So it pays to have a solid reputation in the field. Having worked in the insurance business myself (for Travelers, incidentally), I remember quite well dealing with smaller operations that were, well, let's just say "less reputable." Travelers has made a tremendous push through the years to build the brand, and today the company is the second-largest writer of commercial U.S. property casualty insurance as well as the third-largest writer of U.S. personal insurance through independent agents.
Ratio-nally speaking: One way to judge the efficacy of an insurance operation is by looking at its combined ratio. In simplest terms, the combined ratio looks at what an insurer brings in versus what it pays out. A combined ratio of more than 100% indicates an operating loss, and less than 100% indicates an underwriting profit. So it goes without saying that over time we want this number to trend less than 100%, but there will be bad years. In fact, 2011 represented the worst weather-related losses in the company's history as it reported a combined ratio of 105.1%. But a glance at the chart below shows that over time, management has done a good job maintaining a healthy combined ratio:
Insurance is all about managing risk
Many of the risks that come with insurance companies revolve around their financial stability and credit and debt ratings. As it stands, Travelers' balance sheet is in excellent shape, and it maintains excellent ratings across the board, so I see no reason to be concerned. The majority of the company's investment portfolio is allocated to a diverse mix of government, municipal, and corporate bonds, and while there is considerable exposure to municipal bonds, which are a little more on the risky side, management is very proactive in assessing their investments to make sure risk is kept at a reasonable level.
Weather and other natural disasters are another unpredictable risk for insurance operations, and Travelers is not alone. Just last year, stalwart Berkshire Hathaway (NYS: BRK.A) reported losses due to earthquakes in Japan and New Zealand and other weather-related events. But given the company's diversity and growing footprint, Travelers should remain one of the market leaders in a vital industry.
Getting rich slowly
There's a lot to be said for getting rich and retiring. But remember: Rome wasn't built in a day, and neither is your retirement portfolio. We Fools say "Get rich slowly," because that's the surefire way to do it. Manage your money wisely, pay yourself first, and stack your IRA with dividend-paying winners like Travelers. Before you know it, you'll be kicking back and calling the shots, all retirement long.
You may not be retiring tomorrow, but it's closer than you think, and it pays to get started now. Looking for some more great stock ideas to help you in your quest? Click here to get our free special report on "3 Stocks That Will Help You Retire Rich" now!
See what else our Foolish writers would add to an IRA; click back to the series intro for links to the entire series.
At the time this article was published Motley Fool Stock Advisor analystJason Moserowns shares of Berkshire Hathaway and even carries a red Travelers umbrella in his golf bag. The Motley Fool owns shares of Berkshire Hathaway, Cisco Systems, and Citigroup.Motley Fool newsletter serviceshave recommended buying shares of Berkshire Hathaway. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.