Why The Travelers Companies Is Worth More Than the Premium Price It's Trading At Today

The Travelers Companies (NYSE: TRV  ) continues to make an appealing investment proposition. Consistently high operating returns on equity, a solid upward trend of net written premiums throughout the financial crisis and savvy capital allocation policies have lead to a great investment for shareholders. 

In addition, the property and casualty business has a reputation for returning cash to shareholders in the form of share repurchases and dividends. All these factors should lead to higher share prices in the future.

Growth in a tough market
The Travelers Companies offers a diverse mix of property and casualty insurances for businesses and individuals and has selectively grown high-growth business service lines while cutting back on less promising, low-return businesses over the years.

From 2005 to 2013 consolidated net written premiums increased from $20.4 billion to $22.8 billion reflecting a compound annual growth rate of 1.4%. While this growth rate may not appear to be stunning, the financial crisis and its aftermath certainly affected the insurance industry adversely from 2008 onwards.

American International Group (NYSE: AIG  ) , for instance, downsized its operations dramatically through the sale of insurance assets such as Alico and reported significantly lower revenues as a result.

Therefore, having grown net written premiums by 1.4% annually in one of the arguably most difficult environments for insurance companies, is actually a solid accomplishment.

By the same token, it is noteworthy that The Travelers Companies continued to achieve high levels of profitability throughout the financial crisis. In 2005, The Travelers Companies' operating return on equity stood at 9.6%. In 2013, that number has risen to 15.5%.

More importantly, only in fiscal year 2011 did Travelers Companies' operating return on equity fell below the 10% level.

Source: The Travelers Companies 2014 Investor Day Presentation June 6, 2014

Consistent book value per share growth
By growing high-return business service lines, The Travelers Companies was also able to achieve meaningful increases in its book value per share.

In 2005, its book value per share stood at just $31.94 while it was reported at $73.06 at the end of the first quarter in 2014; representing a compound annual growth rate of nearly 11%.

What is really remarkable about the growth in The Travelers Companies' book value, once again, is that the company consistently grew its book value per share throughout the financial crisis; a reflection of a resilient business model and a respectable achievement indeed.

Source: The Travelers Companies 2014 Investor Day Presentation June 6, 2014

At a current share price of around $95, The Travelers' Companies trades at a 30% premium to its book value.

Share repurchases and dividends are adding value
Strong business performance and solid book value per share growth allowed the insurance company to handsomely reward its shareholders over time.

Share buybacks and dividends peaked in 2010 at $5.7 billion, but total distributions to shareholders have been outstanding for the last nine years as the following chart impressively highlights.

Source: The Travelers Companies 2014 Investor Day Presentation June 6, 2014

Final assessment
The Travelers Companies is a solidly profitable insurance business. With a track record of growing book value in one of the most difficult operating environments for insurance companies and with a convincing record of returning cash to shareholders in terms of share repurchases and dividends, The Travelers Companies continues to make a great value proposition even at a premium valuation.

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