TRV - The Travelers Companies

[Cigarbutt]

The company has been on a secondary watchlist, remembered that Mr. Buffett took a position around 2009, noticed that he recently re-initiated a position in TRV, decided to take a look and noticed right before putting this up that a fellow member had put a nice summary on the Board on January 26, 2017, in the "what are you buying section".
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I have opened a position in The Travelers Companies (TRV):

Average annual operating return on equity over the last 10 years: 13.8%
CARG in BVPS over the last 10 years: 9.7%
BVPS in 2008: +5%
CAGR in dividends over the last 10 years: 10.1%
Total return to shareholders for the last 10 years: 250%
Dividend Yield: 2.2%
Payout Ratio: 25%
Debt/Equity: 0.26
Price/BVPS: 1.4
P/E: 12

This is imo an outstanding company selling at an attractive price.
The change in management that occured last year might constitute a source of uncertainty. Anyway, Mr. Schnitzer already was CEO of Business and International Insurance, and seems to know the company very well and to be perfectly alligned with its culture.

Cheers,

Gio
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I don't have much to add.
Short summary: Very long history, underwriting bumps in the early 2000's, fusion of St-Paul and Travelers in 2004 and since then, mostly under the leadership of Jay Fishman, incredibly steady and profitable operations.

The potential negatives (apart from the usual):
-Capital allocation has been very strong, including a large amount of free cash flow devoted to share repurchases but the price/intrinsic value decision IMO has started to become neutral to negative (P/B has gone from 1.14 (end 2007) to 1.49 (end 2017).
-They have been unusually focused on profitable lines (unusual but good) but things may have started to change (NWP/equity recently up from 0.84 to 1.1 and reserve releases going down pretty much along industry averages). Still, avg CR, in last 10 years: 92.5%, in the last 5 years: 91.4%.
-Total investments per share has grown at 8.7% per year in the last 12 years. This has been driven essentially by share repurchases and rising float per share in the future remains to be defined.

Valuation

Really depends on one's hurdle rate.
In the last 12 years, BV has grown at 8.2% per year. Share price growth for the same period came at 9.0% and estimation of dividend yield corresponds to pretty much 2% resulting in total return at around 11%. So, whatever interest rate scenario, long term expectations of a 10% yearly return are reasonable.

A way to assess the potential drivers of return, it is useful to decompose into two components:
1-ROE of 7-9% on investment return from the float - interest expense on debt, depending on level of interest rates (since 2006, net investment income without realized gains/losses has come down from 4.9% to 3.3%).
2-ROE based on underwriting profit with a base case scenario at CR 92.5 producing ROE of about 6% with today's underwriting leverage

There may be temporary market reactions to interest rate changes especially if there is a "regime" change but the portfolio is solidly positioned to withstand "shocks". One day, the value of the portfolio under the helm of Mr. Buffett may warrant some kind of control premium.

The market value may be slightly ahead of itself but, long term wise, this looks to be a solid, boring and "safe" compounder.

For now, I'm not planning to buy but have put it on a list for the fiduciaries in case I die suddenly (I also should prepare in case of senility but count on writser to settle the record straight in due course).

[khturbo]

I agree with what you've posted here. If you look at it from the mid 2000's, I think it has outperformed BRK on an intrinsic value basis by a couple of percentage points per year, although I haven't checked that in the past year or two.

It's interesting in how different their model is  - don't invest all of the shareholder's equity in productive assets and get rid of all excess capital through share repurchases and buybacks. Getting rid of the excess capital keeps the leverage of the float and underwriting profits high compared to shareholder's equity, ensuring a really good ROE. I think one strategy could be to buy at a better multiple to book value then kind of uninvest the repurchases if the valuation gets above fair value. In that way, you'd actually have a very good dividend stream and wouldn't worry about buybacks occurring at a price level where they probably don't meet your own hurdle rate.

Honestly I wish BRK would have behaved a bit more like this in the last 20 or so years.

[no_free_lunch]

They certainly have an impressive track record.  They have reduced shares outstanding by almost 25% over the past 4 years.  In 2008 they bought back 10% just that year and then in 2010 & 11 they bought another 25% of the company.  It is a true cannibal.  To add to your points khturbo, I like that it prevents them from outgrowing their business model.  It keeps them, hopefully, from having to do acquisitions.   Since 2007, revenue has only grown by about a quarter but with share repurchases bvps has more than doubled and they have consistently paid a dividend.

If you look at their financial statements they also tend to run great combined ratios, usually below 100.

You are not going to get rich quickly with this one but maybe it can just keep grinding out 9-10% returns.

I will keep watching.

[Cigarbutt]

TRV recently reported noisy results which have been attributed to social inflation, with a calendar combined ratio above 100%. But they are seeing hardening and are growing float. FWIW, it's interesting to realize that 'victims' actually earn less when lawyers are involved and then the litiginous process is much longer. For the insurer, the overall cost is larger and the long tail becomes longer. In the end the costs are passed onto the end consumer but isn't there anything that could be done from the governance point of view?

Anyways, a humble assessment reveals that TRV has grown intrinsic value by about 10% since the initial post and trades at the same level, after an about 2.5% dividend. A trader could have done well since it traded as high as 20% higher last year when momentum sentiment was more optimistic.

If I don't become a trader, I plan to update this thread every year.