Travelers dished out more to shareholders than it earned in operating profit.

Photographer: Ron Antonelli/Bloomberg

Travelers May Need Its Own Talking Lizard

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.
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Travelers sure has been good to its shareholders.

The latest earnings report shows the insurer has paid out almost $2.8 billion so far this year -- $2.2 billion in buybacks and the rest in dividends -- as it booked about $2.6 billion in operating income. 

However, the shares have not shown much of a pop from all those repurchases. They were flat this year before today’s report. To be fair, that was better than the drop of 1.3 percent for an index of insurers in the S&P 500 and the 4.9 percent decline in financial shares. That said, almost $3 billion seems like an expensive tab to pay for a flat stock price.

As Alan Schnitzer takes over the top job at Travelers from Jay Fishman, who is battling ALS and stepping down as CEO in December, he’ll have to decide if giving all that cash back to investors is the best use of the money. Schnitzer won’t be alone.

Out of 88 financial companies in the S&P 500, 14 are dishing out more to shareholders than they earn, including Travelers, according to data compiled by Bloomberg. (Out of 21 insurers, six have payout ratios above 100 percent.)

Buying back stock has been the simple, easy solution to keeping shareholders happy over the past few years, but there are signs that it's not working as well as it once did. The S&P 500 Buyback Index, an equal-weighted gauge of companies that are most aggressively repurchasing shares, outperformed an equal-weighted version of the S&P 500 for most of the bull market. But it has steadily underperformed since March, indicating that investors today are more quick to reward companies that put their money to work in other ways.

Could Travelers find a better use of its cash? It’s certainly a question Schnitzer needs to examine. Fishman said Tuesday that the company (which is not known for making big deals) is actively reviewing merger and acquisition possibilities, so that's one option. Another would be to enter the advertising arms race that has turned Geico’s wise-cracking lizard, the khaki-clad Jake from State Farm and Flo from Progressive into household names.

Progressive has a payout ratio that’s about half of Travelers’ and the shares are up more than 20 percent this year (though they underperformed last year). Revenue growth at Progressive and Geico has left Travelers in the dust in recent years as personal insurance lines boomed for them while stagnating at Travelers. Meanwhile insurer Ace Ltd. is poised to become a lot bigger when it completes its acquisition of Chubb Corp.

Schnitzer could very well look at Travelers and its mid-teens return on equity and conclude everything is fine and he doesn’t need the risk that comes along with chasing growth, especially if it means signing up drivers who crash more (as appears to be the case with Geico.) After all, policy sales rose 2.6 percent to a record $6.19 billion last quarter at Travelers even as it returned all that money to shareholders.

Still, it would make sense for him to keep an eye out for other uses of that cash, whether that means buying another insurer -- or hiring a lizard.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Michael P Regan at mregan12@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net