Managements long term goal is to produce a superior

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Management’s long-term goal is to produce a superior ROE in the mid-teens. This means that in parts of the underwriting cycle, management may sacrifice growth in order to retain profitability, as is currently the case. However, with interest rates at historically low levels, management may not be able to reach its ROE targets even with its focus on underwriting. The company has not changed its long-term goals, but has acknowledged that persistently low long-term interest rates could prompt a review and potential change. Travelers faces macroeconomic risks related to the impact of slow economic growth and volatile equity markets on its balance sheet, capital levels, credit ratings, revenues and income. Other critical metrics to monitor include the company’s exposure to mortgage-backed securities, global bonds and real estate. As of March 31, the company’s $73 billion investment portfolio consisted of 93% fixed-income securities, 1% equities, 1% real estate, and 5% other. Approximately 97% of the fixed-income securities were investment grade, and the average duration was four years. COMPANY DESCRIPTION Travelers is a leading provider of auto, home and business property casualty insurance. The company is organized into three units: Business Insurance; Bond & Specialty Insurance; and Personal Insurance. TRV is included in the S&P 500 Index and the Dow Jones Industrial Average. INDUSTRY Our rating on the Financial Services sector is Market-Weight. Investors are moving to the sidelines amid the change in leadership at the Fed. In addition, despite improving net interest margins, earnings at money-center banks continue to face pressure from anemic trading activity, which has led to an increase in sector P/E and PEG ratios. The sector accounts for 14.7% of the S&P 500, down from 16.3% following the exclusion of REIT stocks. Over the past five years, the weighting has ranged from 10% to 17%. We think the sector should account for 14%-16% of diversified portfolios. The Financial sector is slightly underperforming thus far in 2018, with a loss of 1.4%, after performing largely in line with the market in 2017, with a gain of 20.1%. The projected P/E ratio on 2018 earnings is 13.1, below the market multiple of 16.7. As for earnings expectations, analysts now expect full-year earnings to increase 30.0% in 2018 following growth of 11.8% in 2017 and 3.3% in 2016. Yields are below the market average, as many banks, REITS and insurance companies slashed or suspended dividends during the financial crisis of 2008-2009, and have not yet returned them to precrisis levels. Dividends and share repurchases also remain subject to regulatory approval for large banks deemed too-big-to-fail. VALUATION We think that TRV shares are attractively valued at current prices near $132, below the midpoint of the 52-week range of $114-$151.
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  • Spring '12
  • DirkJenter
  • Finance, ........., Market Digest

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