Wednesday, January 26, 2011

TRV – Q4 earnings & FY 2011 wrap-up 1/25/2011

           The Travelers Companies reported fourth quarter net income of $1.95 per share, a decline from a record $2.36 per share in the same period last year. Despite the decrease TRV easily outpaced the consensus estimate of $1.66 per share, illustrating the fact that Q4 2009 was not a reasonable target because it benefited from three rare items. For the year, Travelers reported net income per Diluted Share of $6.62 compared to $6.33 in 2009. Yearly revenue was up 2%, and net written premiums increased by 1%. Forward guidance was not provided, but management was optimistic about the 2011 pricing environment. TRV’s board has authorized an additional 5 billion in stock buybacks in anticipation of strong operating cash flow next year.

           During the conference call, CEO Jay Fishman addressed numerous questions about the company’s municipal bond portfolio. Analysts were concerned that the continuing budget deficits across all levels of domestic government might lead to pockets of insolvency. Any weakness in government debt would impact TRV because they systematically invest more of their reserves in the municipal market than their competitors, a strategy which helped them avoid MBS losses like those of Allstate – who is currently suing Bank of America over 700 million in bad debt. Fishman allayed these concerns by saying, “If one takes the 10 states that our analysis suggests are the most challenged, whether that's through pension or medical liability, medical payments or debt obligations, we own an aggregate in all of those 10 states. And this is excluding pre-refunded bonds, we own an aggregate of $1 billion of state-issued general obligation bonds in those entire 10 states. That represents 3.1% of our municipal portfolio.”

           TRV management also detailed their first venture into a developing market, “we will invest approximately $370 million or 43% of the common stock at J. Malucelli, the market leader in the [construction insurance] business in Brazil.” This is a welcome first step for a company that has almost no business outside of the United States, Canada, and the UK. Unfortunately, management later admitted that, “The Malucelli situation was really very opportunistic. And it really came about because of an outreach from the folks in Brazil… We don't have any ambition to be a global company.”

           Looking ahead, the concerns I voiced about the company’s long term strategy in my Q3 review are still unresolved. They are mirrored succinctly by Morningstar’s Drew Woodbury, “In the absence of growth opportunities, the company has been buying back shares… The company repurchased more than 18% worth of its year-end 2010 equity. In 2011, management expects to buy back $1.5 billion more than its full-year operating earnings. We think previous repurchases have been a good use of capital, given alternative low-return opportunities, but we would hope that as the market improves Travelers will put more capital toward expanding its business.”


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