Travelers Companies: Making the Best of Bad Times

Of all the places to find enthusiastic optimism now, the insurance industry is one of the most unlikely.

But Oct. 22 results from Travelers Companies (TRV) left executives and investors sounding surprisingly joyful. For last quarter, Travelers reported earnings of $1.61 per share, topping Wall Street's expectation of $1.30 and results of 55¢ per share a year ago.

Adding to investor excitement, Travelers boosted its dividend by 10% to 33¢ per share. That stands out in a sector in which companies have been slashing dividend payouts for more than a year. Travelers shares jumped 7.7% to 51.70, a 52-week high, on Oct. 22.

"We feel very good about what we've been able to accomplish in the extended period of financial turmoil and marketplace disruption," Travelers Chairman and Chief Executive Jay Fishman told analysts. "And we believe that our results over this period of time have been quite impressive."

Shareholder RewardsSince the start of 2009, according to Standard & Poor's data, financial firms in the S&P 500-stock index have adjusted their dividends 49 times, and only 10 have been increases, most quite modest. Among financial companies, Travelers' dividend hike ties for the largest so far this year.

Despite the crisis and recession, the U.S.'s fourth-largest property casualty insurer has rewarded shareholders in additional ways. Last quarter, Travelers bought back $1 billion of its own stock, and it plans to buy another $1.5 billion this quarter. Since mid-2006, Travelers has bought 27% of its market capitalization through share buybacks. It shows no signs of slowing down. The board authorized another $6 billion in share repurchases, Travelers said Oct. 22.

The company can be so generous to shareholders because its conservative investment portfolio has navigated rough market conditions better than many rivals. "Our investment portfolio continues to be very high-quality and well-diversified across industries, investment types, and individual issuers," Jay Benet, Travelers' chief financial officer, said Oct. 22. The market rally of the past seven months boosted returns on key parts of the portfolio, especially hedge fund and private equity funds, the company said.

Travelers' financial strength has given it an advantage with customers willing to pay extra for security, according to Morningstar (MORN) analyst Drew Woodbury. "Travelers has put itself in a position of relative strength after outperforming in 2008, giving it opportunities to steal profitable business," Woodbury noted Oct. 22.

Positioned for RecoveryThat's not to say Travelers isn't feeling the effects of the recession. Premiums fell 2.6% in the past year, as cash-strapped customers cut their insurance coverage.

However, other aspects of the insurance business are holding up well, according to FBR Capital Markets (FBR) analyst Bijan Moazami, and an improved economy could lift premiums again. "The decrease in premiums is primarily driven by the economic slowdown, which could reverse," Moazami wrote Oct. 22.

Travelers executives insist the company is very well-positioned. By gaining market share during the recession, it will be able to boost profits even more when the economy improves. "Our competitive advantages matter," Travelers President Brian MacLean told analysts. "And fundamentally that is what's driving our strong results and bullish attitude."

Earnings reports from other insurers over the next few weeks will show how much of a competitive advantage Travelers really has built up this year. Hartford Financial Services (HIG) is expected to unveil results on Nov. 3, followed by Allstate (ALL) on Nov. 4.

Uncertain Long-TermEven if their reports are weak by comparison, some analysts believe Travelers might find it difficult to continue wowing investors. First, the advantage of Travelers' financial strength might be diminishing as the financial markets show more stability. "We believe the benefits from a flight-to-quality is tapering off," Credit Suisse (CS) analyst Vinay Misquith noted Oct. 22. FBR's Moazami believes Travelers' investment portfolio may remain stagnant. "With the bond market rally, investment yield likely will remain low for a while," he wrote.

What's more, premiums might not rebound quickly, and all insurers could continue to suffer from a struggling economy. Wells Fargo (WFC) analyst John Hall warned "premium growth will remain constrained by a weak economy." FBR's Moazami agrees, saying "the slow pace of economic activity" should take a toll on premiums and other business metrics. "The long-term outlook is not as rosy," he said.

If other insurance firms can also report impressive earnings, that will add to Travelers' long-term worries, warned Keefe, Bruyette & Woods (KBW) analyst Cliff Gallant. "Our concern for the group [of national property and casualty insurers] remains that good results now will lead to increased competition in 2010 and weak results thereafter," he wrote Oct. 22.

Travelers, with its branded red umbrellas, may have the advantage for now in the fiercely competitive insurance industry, but it might be moving into some strong headwinds.

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