Recent Buy

buyI mentioned just recently when I wrote about adding to my W.P. Carey Inc. (WPC) position that June is shaping up to be one of my busiest months ever in terms of total transactions and total capital put to work.

So it should then come as no surprise that I’m back at it again!

Look, cash is great. I like cash. Smells wonderful. Feels great in the hand.

But cash flow is far, far better. Especially when we’re talking about cash flow that not only automatically replenishes itself, but does so at an increasing rate over time. And that’s what we’re generally talking about when it comes to high-quality dividend growth stocks.

As such, I recently took advantage of an opportunity to turn cash into growing cash flow once more by initiating a position in a company that was on my watch list for this month.

I purchased 10 shares of Travelers Companies Inc. (TRV) on 6/3/15 for $100.61 per share.

Overview

Travelers Companies Inc.  is a holding company that, through its subsidiaries, provides a wide range of commercial and personal property and casualty insurance products and services to individuals, businesses, government units, and associations.

Net written premiums for fiscal year 2014 of $23.9 billion broke down by the following segments: Business and International Insurance, 61%; Personal Insurance, 30%; and Bond & Specialty Insurance, 9%.

The company’s consolidated direct written premiums for FY 2014 were mostly domestic, accounting for 91.7%. The other 8.3% were international.

Fundamentals

Travelers has an incredible corporate history, dating back to 1853. Though, the recent acquisition (in 2004) of The Saint Paul Companies has turned them into one of the largest property-casualty insurers in the US.

I’m going to first take a look at the last ten years’ top-line and bottom-line growth, which includes that entire period of being a much larger company. As such, it’s an apt look at the fundamentals when looking forward. I’ll then move into some other quantitative data to see what kind of quality we’re working with here.

Revenue $24.365 billion in FY 2005. TRV increased that to $27.162 billion in FY 2014. That’s a compound annual growth rate of 1.21%.

Like many P&C insurers, TRV hasn’t had much revenue growth due to a combination of tepid premium growth and low interest rates constraining net investment income.

Fortunately, the bottom line is faring much better.

Earnings per share is up from $2.33 to $10.70 over this stretch, which is a CAGR of 18.46%.

That growth was in large part due to rather substantial share repurchases – TRV has reduced its outstanding share count by about half over the last decade.

So we see some challenges there across the top line, but incredibly impressive growth in profit per share. And I think that bodes well. If they can grow like that when revenue is challenged, imagine what’s possible when interest rates pick up and/or they’re able to generate better premium growth.

S&P Capital IQ predicts that EPS will compound at a 6% annual rate over the next three years.

So there’s some solid growth here, but if TRV weren’t sharing that growth with shareholders in the form of an increasing dividend, I wouldn’t even be looking at the stock. However, TRV has a rich dividend history.

They’ve increased their dividend for the past 11 consecutive years, ever since the aforementioned acquisition closed.

Although the dividend growth history might be a bit short, I think TRV will eventually sport many decades of dividend growth. In addition, the company has paid uninterrupted dividends for 143 years straight. That includes every major modern war, the Great Depression, the Great Recession, and multiple stock market crashes.

The 10-year dividend growth rate stands at a stout 9.5%. In fact, they just announced a 10.9% dividend increase in April.

And because the company’s underlying earnings have grown faster than the dividend, the payout ratio remains a very reasonable 23.7%. So there’s plenty of room for future raises, which goes back to why I think TRV will eventually have a track record of many decades of dividend growth.

In addition to that solid growth and low payout ratio, the stock offers a pretty attractive yield of 2.43%.

So I think there’s just a lot to like here with the dividend. Growth, yield, and sustainability all look great.

TRV, as one would expect, also maintains a very conservative balance sheet. The long-term debt/equity ratio is just 0.26. And an interest coverage ratio of 14.7 indicates no issues at all with interest expenses or debt.

Profitability is also robust, comparing extremely well with the broader industry as well as near peers. They’ve averaged net margin of 11.13% and return on equity of 11.41% over the last five years.

One other key profitability metric that you want to look at with insurers is the combined ratio. The combined ratio is what you arrive at when taking the sum of incurred losses and expenses and dividing that by earned premiums. Anything less than 100% generally indicates underwriting profit; anything over 100% means that claims are exceeding premiums.

TRV’s combined ratio is generally very solid. For FY 2014, it was 89%. I took a look at these figures going all the way back to FY 2006 and they’ve generally been well below 100% except for FY 2011. Travelers was hit by a confluence of Hurricane Irene, wildfires in Texas, costly tornadoes in Alabama and Missouri, and an October snowstorm. And FY 2012 saw a rather high combined ratio (though, not exceeding 100%) due to Hurricane Sandy.

Qualitative Aspects

I truly love the insurance industry. Sure, there are always those chances of getting hit by a catastrophe. But, by and large, it’s an incredible way to make money.

First, you have (or should have) efficient and conservative underwriting in place. This allows for a profitable business model all by itself. If the company is prudent, they’re going to profit some from the difference between premiums and claims. In addition, premiums naturally rise over time due to replacement costs. Add in the possibility of additional clients and you potentially have a great profit machine when run correctly.

Now, most insurance companies don’t make tremendous profits from this because the difference between premiums and claims aren’t that generally that high in any one year, especially in competitive business lines. Add in the occasional catastrophe which can inflate the combined ratio above 100%, and that can lead to losses from time to time.

But the insurance model kicks it up a big notch via what’s called the float.

The float is basically the money that can build up because an insurance company collects premiums up front and the difference between premiums and claims can cumulatively become a large sum of money over time. So until a claim is made against them, an insurance company gets to use “other people’s money” as an extremely low-cost source of capital and invest it accordingly. Since the capital is basically free, there isn’t a need to take on a lot of risk to achieve an attractive rate of return. And since that capital might have to be tapped to pay off premiums later, it’s imperative that it be invested conservatively so as to be available if necessary.

Travelers has built up an investment portfolio worth just over $73 billion as of the end of FY 2014. That’s a huge competitive advantage all by itself, which is used to generate significant profit on top of largely profitable underwriting. And the company is incredibly conservative with the money – 93% of the portfolio is invested in fixed maturity and short-term investments, with the vast majority of the funds in a variety of bonds. 97% of that portion of the portfolio is investment grade.

So that’s a massive investment portfolio we’re talking about here, and it’s been built over time through the underlying strength of the underwriting as well as just the robust nature of the business model itself. Due in part to the sheer size of the portfolio as well as the way it’s invested, rising interest rates could provide for a rather strong tailwind for TRV (as well as other major insurers). That could immediately boost EPS through the additional net investment income.

I believe TRV is generally operating a wonderful business model. More specific to the company itself, I think their size confers economies of scale where they’re able to spread out risk and costs across geographies, clients, and business lines. In addition, I believe their expertise is an advantage in and of itself, giving TRV the ability to appropriately and profitably identify the best underwriting opportunities while limiting risk. The company cites advantages through its ability to use data and analytics to properly price their products.

Although it’s tough to differentiate in personal insurance where it’s a pricing game, I really like their exposure to commercial to offset this. And while there aren’t necessarily switching costs with insurance, it seems just as likely that one is going to stick with what they have when there’s a good relationship going on there. It’s similar to how banks and other financial firms work in regards to their stickiness.

Finally, I actually view management as really solid here. I don’t often mention management, but I’ve watched several interviews of CEO, Jay S. Fishman, and the guy strikes me as incredibly intelligent and interested in maximizing shareholder value when and wherever possible, all while maintaining excellent underwriting standards, diversifying the business as much as possible so as to limit catastrophic risk, and staying conservative with the investment portfolio.

Risks

The main risks I see are related to the very business model. Any major catastrophes can quickly elevate the combined ratio over 100% across the business and lead to losses in underwriting. Moreover, improper underwriting standards and/or any major changes in climate or weather can cripple TRV’s profit. This adds uncertainty and volatility – EPS dropped by approximately 50% from fiscal years 2010 to 2011 due to natural disasters.

TRV markets its products and services primarily through a network of independent agents and brokers, which can make it difficult to control quality and brand perception.

If low interest rates persist, this could continue to constrain net investment income. In addition, any change in the management of the investment portfolio could add risk and/or the potential for losses. The investment portfolio also has exposure to investments outside of fixed income, which could prove volatile. Furthermore, any negative changes in the credit profile for any of the underlying entities that issue the bonds that TRV invests in could adversely affect TRV’s portfolio.

In addition, the insurance industry is highly competitive, especially in personal lines and especially in personal auto insurance. Pricing pressure in certain business lines could limit growth.

Valuation

TRV’s stock trades hands for a P/E ratio of 9.76. That compares favorably to the five-year average of 10.7. And it’s obviously well below that of the broader market.

I valued shares using a dividend discount model analysis with a 10% discount rate and an 8% long-term dividend growth rate. That growth rate is on the upper end of what I usually use, but I think TRV warrants it here with the quality of the business, potential tailwinds when looking out over the long term, low payout ratio, and historical growth. The DDM analysis gives me a fair value of $131.76.

It appears to me that, overall, shares appear attractively valued here with a potentially large margin of safety present depending on how much the company and the dividend grows in the future.

The stock is down about 5% YTD even while the broader market is well into positive territory for 2015. I’m not sure that’s warranted based on the where the business is currently at.

Conclusion

There’s a lot to like here with TRV. The business model is really one of my all-time favorites. Insurance is ubiquitous and largely necessary. And it can be very profitable in and of itself, but the float adds an incredible source of profit that ends up being very low cost and low risk.

I think there are potential tailwinds in place that can add to TRV’s already impressive growth. Rates will likely rise, perhaps significantly, looking out over the next five or ten years, which could allow the very large investment portfolio to work that much harder. In addition, TRV’s international business is growing quickly – it was up 66% YOY in FY 2014.

I’ve historically done well with insurance investments, so this is an industry I feel really comfortable with. The business model is very easy to understand and it’s been around for a very long time. Furthermore, I don’t see it radically changing over the foreseeable future, other than maybe risk shifting and being modeled differently if/when self-driving cars become prevalent. But personal auto is a relatively small portion of TRV’s overall business.

One thing to be aware of is that due to the aforementioned catastrophic risk, TRV’s stock can occasionally drop precipitously when earnings drop on the back of significant claims. So I’d like to average my way into this stock over time, just in case something like that happens. But just like you can’t time the market, you obviously can’t time (or hope for) catastrophic events.

This is a company I was strongly looking at in the fall of last year, and I regret not picking it up back then. But I’ve discussed my desire to expand my insurance holdings, so I’m incredibly pleased to finally make a move toward that end. Unfortunately, HCC Insurance Holdings, Inc. (HCC), another insurance stock I’ve long wanted to get my hands on, is apparently being acquired. Can’t win them all.

This purchase adds $24.40 to my annual dividend income, based on the current $0.61 quarterly dividend.

I’m going to include current valuation opinions from other analysts below, which I use to concentrate my reasonable valuation estimate:

Morningstar rates TRV as a 3/5 star valuation, with a fair value estimate of $108.00.

S&P Capital IQ rates TRV as a 4/5 star “buy”, with a fair value calculation of $118.40.

I’ll update my Freedom Fund in early July to reflect this recent purchase.

Full Disclosure: Long WPC and TRV.

What are your thoughts on TRV? Agree with the analysis? Like this stock? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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71 Comments

  1. Well written post and good buy. Insurance is must for people to protect their properties and other things. If not, they usually find out the hard way when a major catastrophic event happens.
    Tenants come to mind as a lot of tenants do not get tenant insurance and you hear about this whenever a major fire at an apartment happens.

    This stock will continue to do well over time as the population increases which means more insurance contracts and premiums for the insurance industry.

    Is this stock 59 in your portfolio, which I am taking a guess at?

  2. Jason, you are on a roll! 🙂

    Keep that snowball rolling and it’ll get you to your goal!

    Cheers, mate!

    Alex

  3. IP,

    Insurance is a fantastic industry. Ubiquitous, necessary, and it doesn’t change much over time. Those check off some big boxes for me.

    And you’re right: TRV is the 59th stock in the portfolio. The Freedom Fund continues to grow. 🙂

    Thanks for dropping by!

    Cheers.

  4. Alex,

    I’m pushing that snowball with as much force as I ever have. Should be an avalanche within a few years here. 🙂

    Hope you’re having a great month over there as well!

    Best regards.

  5. A nice buy, Jason. I’m also very enthusiast about high quality insurance companies, for the same reasons as you mentioned: their clear business model, their float and the promise of rising rates in the years to come. My eye is on TRV for a potential next buy.
    I’m also eyeing shell. Although I’m already heavy in energy I can’t ignore the 6%+ yield. I also believe that their further expansion into gas with the takeover of BG bodes well for the future. You have any opinion on Shell at the current price?
    Take care.

  6. Jos,

    I’ve long wanted to expand my insurance holdings beyond just AFL. I once had a nice position in a small P&C insurer, but it was bought out for a handsome premium years ago.

    As far as Shell goes, it’s okay here. The yield is surely nice, but it sports some of the worst fundamentals in the supermajor space. CVX and XOM (especially the latter) run far better businesses, so just make sure you’re really comfortable with what you’re buying. It seems roughly fairly priced here if it can grow the dividend in the low single digits moving forward.

    Thanks for stopping by!

    Best regards.

  7. Thanks for the update. Apparently great minds think alike. I started adding WPC right before your first hit point. AND also added 3 times, each a couple days before you posted. And 2 weeks ago I added TRV.

    What I love about trv is the insurance business is essentially nearly 100% independent of the economy since they only invest in high grade fixed income and insurance losses are unrelated to economy generally

    As a result in 2008-10 when the stock was beaten down due to great recession..their profits never dropped so they just did an insanely large buyback to take advantage where they retired something like 40pct of the shares in a few years. That led to explosive eps growth.

    Normally one wants their divi stock to go lower so they can take advantage and buy more but with trv you don’t even have to add more on a decline for it to have been advantageous since the company is doing it for you. They announced a 5bil buyback recently…so hopefully it drops to 90 so it retires closer to 20 pct of shares.

    I also like CB which is an aristocrat.

    Cheers.

  8. Ben,

    I guess great minds do indeed think alike. 🙂

    Great point there about the lack of correlation between the broader economy and TRV’s business model. There is still significant risk there, but the risks are different than a lot of other businesses that are more tied to economic growth.

    TRV is really solid. They just continue to do what works. They operate a solid underwriting process, invest conservatively, build the float, buy back shares, and return a ton of value to shareholders. It’s an underrated business, in my opinion.

    Glad to be a fellow shareholder here. Let’s indeed hope the stock drops so that the buyback (and possibly our subsequent purchases) become even more advantageous. 🙂

    Take care!

  9. Good day Jason, it looks like you done your home work, and have picked up a high quality company. With looking like a rate hike is coming TRV should be able take advantage of it. this also a well managed company. I enjoy the updates take care Michael

  10. michael,

    We’ll see how it goes. TRV should do well with rising rates – would love to see that $73 billion work just a little harder. 🙂

    Thanks for the support!

    Cheers.

  11. Definitely a busy June for you so far and we’re only halfway through. Looking forward to seeing what otger moves you make over the rest of the month.

    For some reason I keep forgetting to look at the insurance industry, despite knowing it’s h uhh storically been a solid place to invest. With a conservative balance sheet, conservative underwriting, and incestment of the float theres a lot to like. TRV looks pretty compelling here and I guess I need to add CB to my list of companies for further research. Unfortunately that list continues to grow. Looks like a solid buy DM!

  12. Great pickup DM. A can’t go wrong with one of the large insurance companies. They have an interesting business model and one that it pretty fun to study. I have had them on my radar but have always embedded up looking the other way since I have a nice stake in AFL already. Rock solid purchase though. Way to add yet another strong dividend paying company to your portfolio! Keep up the great work.

    Bert

  13. Jason, another great addition to the portfolio. Easy business to understand and helps you get some more exposure to the insurance industry.

    Are you all caught up on the articles or are you still buying up everything you can? 🙂

  14. JC,

    Busy, busy June. I knew I’d be busy, but not quite this busy. The extra cash from the LO acquisition will now mean that I’ve gotta go out shopping once more. 🙂

    TRV’s a great business. I’ve been looking at the stock for a long time, but just haven’t been able to pull the trigger until now. Wish I would have bought some insurers back in the fall, but I’m making up for lost time (and opportunities) here.

    Thanks for stopping by. Hope all is well with the family!

    Best regards.

  15. Bert,

    We’ll see how it goes. I certainly love the fundamentals. Great in absolute and relative terms pretty much across the board.

    Thanks for stopping in. Hope you’re having a great weekend!

    Cheers.

  16. R2R,

    Yeah, I’ve long wanted more exposure to insurance. Great business model and extremely profitable when applied correctly.

    I still have a few articles to put out there. And now that I have some cash from the LO acquisition by RAI, it looks like I’ll have even more articles to put out. Definitely going to be a busy finish for the month. 🙂

    Best regards!

  17. Hey Jason,

    The insurance world is something I had never looked at until reading the snowball and finding out how much Warren Buffet loves insurance companies. I’m sure in a year or so when I am able to invest I will likewise be investing in this industry.

    Tyler

  18. I am planning on investing in an insurance company this week, a UK stock, Legal and General. I think they represent solid companies.

  19. Tyler,

    Buffett has proclaimed his love for the insurance business model many times now, even writing an article many years ago about why Geico was the security he liked best. And I guess we can see why he liked it so much. 🙂

    What’s great about insurance as well is that you get exposure to the financial industry without having to buy a bank, in case you’re not interested in banks. But you get a similar model in that it’s in large part predicated upon gaining access to a large sum of low-cost capital.

    Cheers!

  20. Laura,

    Sounds like we’re definitely on the same page here. 🙂

    Best of luck with Legal and General. Seems like you’ve done your homework there!

    Thanks for sharing.

    Best wishes.

  21. ADD,

    Nice move there. TRV is a really, really solid company across the board. Double-digit growth, excellent fundamentals, attractive yield, and great metrics in every category.

    Glad to be a fellow shareholder. 🙂

    Best regards.

  22. Good pick, I too like the p&c companies though the only one I own is much smaller. What is your opinion of the life ins. Industry as an investment?

  23. ZLT,

    There are some really high-quality smaller P&C insurers out there, though I’m always mindful of size being an advantage here.

    Life insurance is supplementary, so I’m only real excited investing there when it’s part of a larger business. Aflac is a good example of that.

    Thanks for stopping by!

    Cheers.

  24. That is really cool! As always, I really appreciate you being willing to share so openly! So, I have been reading through some of the books you recommend, and really appreciate the recommendations! I am not sure if I found this through your recommendation or not, but there was a book called, “dividends still don’t lie” by kelley wright. I just finished it, and he made some interested predictions back in 2010 that didn’t seem to pan out… but he also used dividend yield rates (and their fluctuations between high yields and low yields) as a way to discern if the company was undervalued or overvalued… I realize that there are many approaches to dividend investing, but I am curious about the extent that you look at the historic yield in terms of a tool to discern over/under value. I know you look at the presence of dividend increases and consistency, but how important to you is the yield fluctuation? I only ask because many times, in your recent buy articles, you mention the dividend yield rate, but I don’t often hear you mention the fluctuation … and when I read your article today I just wondered the same thing again. Any insight would be great! Thanks!

  25. JC,

    That’s a good question there.

    It’s something I do look at in terms of a stock’s current yield against its recent historical average yield. For comparison’s sake, TRV’s five-year average yield is 2.4%.

    However, I don’t place a lot of weight on it. And that’s only because you’ll sometimes see stocks move from a low-yielding stock to a higher-yielding stock if the dividend growth outpaces earnings growth and the payout ratio becomes quite high. KO is a good recent example of this. Its current yield is about 40 basis points higher than its five-year average, but the payout ratio is also historically high. So I think you always have to be aware of where all these numbers are at, instead of just relying on one or two metrics.

    In the end, a business is, to me, ultimately worth the entire sum of all future cash flows (in the form of dividends) discounted back to today. So that’s where I place the most weight.

    Hope that helps!

    Best regards.

  26. Captain,

    Good question!

    I’ve discussed that quite a bit, but, no, I don’t have a target number. I’ll stop buying new positions when I run out of great ideas. And I still have plenty of really good ideas, as my recent watch lists have pointed out. Not sure where it’ll all end, but I could see the portfolio at some point eclipsing 100 stocks. I just don’t find it particularly time consuming to track.

    We’ll see where it goes, though. I’m excited to see what the masterpiece looks like when I’m all done painting. 🙂

    Cheers.

  27. Hi Jason — I’ve been a shareholder of TRV since May 2013. It’s done well for me. Congrats on the purchase and thanks for the nice write-up!

  28. Nice solid buy with TRV. See, I do like some of your buys 🙂 Actually I have TRV on my watch list for many months and wish I had pulled the trigger on it back in time. I still have two great insurance names AFL and CB but would like to add another solid name in the sector. CINF and ORI look somewhat interesting. Curious to know if you are eyeballing other insurance names. Thanks for sharing.

  29. Jason,

    Sorry about HCC, but congrats on TRV! It is a quality company and has been known as such for a long time. They look like a company on the balance sheet that will reward you a lot in the long run.

    – Gremlin

  30. Jason,
    Great information! There has been a lot of discussion on increase in interest rates will drive down the price of REITs. So, therefore the current price of REITs are way over priced. WCP hit a 52 week low of $61.07. I agree with you that now is the time to start adding some bargains!
    Thanks,
    Nut501

  31. Great buy! Can’t go wrong with an insurance company that also happens to be part of the DOW and sports a phenomenal balance sheet. This should bode well in the long term as interest rates normalize and TRV outperforms many dividend paying stocks.

    Best of luck,
    Dividend Odyssey

  32. Jason,

    Investing in insurance has always spooked me a bit although I’ve dabbled in and currently have a very small position in CB.

    AIG is my main fear. Do you have thoughts on the matter?

    Thanks!

  33. DH,

    Ha! Good to know we’re on the same page here. 🙂

    Yeah, I like CB quite a bit as well. Their combined ratio is always quite low. Great fundamentals across the board. That’ll probably be the next P&C insurer I invest in, especially now that HCC is off the table. ACE and RLI also look interesting from the quick looks I’ve taken. ACE has specialty insurance in there.

    We’ll see how it goes with TRV. But I’m pretty confident they’ll be around in another 50 years, and much more profitable at that.

    Cheers!

  34. Gremlin,

    Yeah, TRV isn’t a popular name in the community. But it’s tough to go wrong with well over 100 consecutive years of dividend payments.

    We’ll see how it goes here, but I’m pretty confident with TRV’s long-term prospects. Their reputation precedes them. 🙂

    Thanks for dropping by!

    Best regards.

  35. Nut501,

    We’ll see what happens with the REITs. I just recently published an article that included research on REITs going back decades that shows they actually do quite well when rates are rising. As always, it pays to do your own due diligence and separate facts from noise. Listening to everyone else without knowing the facts won’t get you very far.

    Cheers!

  36. DO,

    Thanks so much!

    I don’t pay much (any?) attention to macroeconomics in general, including interest rates. But TRV’s portfolio will benefit over the long term from rising rates for sure. Just a matter of fact since it’s invested the way it is. So that’s something to be mindful of if rising interest rates is something that concerns you. TRV has done well during the last 10 years, so I think they’ll certainly do well if/when higher rates allow the portfolio to generate additional net income for the company.

    We’ll see how it goes here, but I’m excited for their prospects over the next few decades. Just a really high-quality insurer.

    Thanks for the support!

    Best regards.

  37. Adam,

    Insurance isn’t for everyone, especially P&C. There is certainly catastrophic risk there, though I think TRV is insulated incredibly well due to its size and breadth.

    I’m not sure what you’re getting at with AIG, however. If you fear it as in you think it’ll take business away from other insurers, then I’d probably invest there. If you’re talking about their disastrous performance during the financial crisis, you’ll have to look at their investment portfolio and compare it to other firms that were more conservative (like TRV) to see the difference.

    Cheers!

  38. Yeah — I was referring to 2008 for AIG and not AIG in its current format. Thanks for the comment!

  39. I will check out TRV. The dividend growth rate is fantastic. I have some AFL and can probably add a little more insurance.
    Actually, I don’t like investing a little bit at a time because of the transaction fee. Who is your broker and how much do you pay per transaction? Is there an alternative?

  40. RB40,

    Yeah, I’m in the same spot as you. I had AFL, but wanted some P&C exposure. P&C is far more necessary, so I like that. I plan on incrementally adding some more P&C exposure over time.

    As far as brokerage fees, I pay $4.95 with TradeKing. I find 0.5% commission acceptable, especially considering that fees will be negligible after the accumulation phase (once I’m living off of my dividend income and no loner buying stocks).

    Best wishes!

  41. Hi DM,

    Nice buy, I was wondering when you would finally get some insurance stocks. I really love insurance companies( and they are easy to understand since I work in the insurancebussiness). I personnaly own Ageas( biggest insurance company in belgium and booming in asia) and MunichRe( can’t go wrong with a bussiness if Warren Buffett has a 10% stake in it).

    Cheers,
    G

  42. Geblin,

    I’m really fortunate to have done pretty well in the insurance space over the years. AFL is one of my largest positions and it’s done well by me. And I remember waking up one day and finding out HGIC (a smaller P&C insurer) was being bought out for a 90% premium. I wish I would have bought more insurance over the years, but just never did. Making up for lost time (and opportunities) now. 🙂

    Sounds like you’re a happy investor in the insurance space as well. It’s just a great business model. Profitable at its core, but the float really adds a tremendous amount of appeal.

    Thanks for dropping by!

    Best regards.

  43. DM,

    As usual, you’ve caused me to spend a part of my morning doing research. 😉 No problem though. It’s great to learn about the strength of insurance companies, domestic and international.

    I must say, I was thrown for a loop when I read this:

    I truly love the insurance industry.

    But, of course, now I see why.

  44. FI Monkey,

    Ha! Maybe I should have qualified that statement with: “As an investor…” I guess I just figured that was a given. 🙂

    Buffett loves insurance and I can clearly see why. Just a really solid business model, all in all. Hope to increase my exposure incrementally over the next year or two.

    Glad the post provided some value your way!

    Cheers.

  45. Ahoy. in the insurance space have you looked at PRU? Seems to compare more favorably in some aspects, less in others. The growth rate is much higher and significantly more cash flow. I am thinking of picking up a few shares….Thoughts?

  46. WMT or UNP, which of these two should I add ti my portfolio right now? UNP has better ratio but WMT seems to have fully corrected.
    Any thoughts?
    Thanks

  47. Looking at the idea of insurance “industry” is pretty awkward. We, as humans, have an innate fear of what can happen. Because of this we spend countless dollars monthly paying for a what-if that may or may never come. I’m sure we all agree it’d be nice to have a crystal ball to see which insurance we could reduce or cut completely if we never use it in our lifetime. (flood insurance I’m looking at you!)
    Nice pickup on Travelers they are a solid name and the 2.4% yield is always nice!
    -Rich

  48. Jason, a good purchase here. For insurance companies, I am interested in AFL, CB and TRV. For TRV, I really like it, but a little expensive for me at this moment. Hopefully, we will see a dip where I can buy this quality company.
    In any case, good job on getting more cashflow – which is the name of the game.
    D4S

  49. And what about UPS? I consider a stock in a very promising sector, where the e -commerce is and will be increasingly more important. This world class leader´s actual yield is close to 3% and the dividend policy during the last years has been very nice. May be a good choose for a residual part of any portfolio.

  50. dzogen,

    Yeah, PRU cut its dividend pretty heavily during the financial crisis, which is something a lot of other insurance firms didn’t have to do. But PRU isn’t really an insurance company, per se, but rather a financial services company. As far as a higher growth rate is concerned, its EPS is currently about half of what it was 10 years ago, so I’m not sure what you’re looking at there. All in all, its financial results are too volatile for me.

    Cheers!

  51. Alessandro,

    That’s not really a question I can answer. I just can’t make stock recommendations for others.

    But I can tell you that I recently added to my WMT stake a bit as I think it’s far more attractive now than when it was $90/share.

    All in all, I much prefer the railroad industry over retail. Less competition and far higher margins. And I think UNP is a better value now (both have corrected about the same YTD in percentage terms). However, I also think both have a place in a diversified portfolio (they’re both in my portfolio). If I had to choose one or the other, I’d be looking at UNP.

    Hope that helps!

    Take care.

  52. Rich,

    I think that fear is there because most people don’t have any money.

    For instance, approximately half of our population couldn’t handle a surprise $400 bill:

    http://www.federalreserve.gov/econresdata/2014-report-economic-well-being-us-households-201505.pdf

    When you look at it like that, insurance is a necessity. Especially P&C. And that’s one of the big reasons I like this industry as an investor.

    Of course, it’s one more reason you should consider financial independence. You can self-insure at that point. 🙂

    Best wishes!

  53. D4S,

    Thanks for dropping by!

    That’s interesting you think TRV is expensive. Care to elaborate on that a bit? What’s your valuation for TRV and how did you arrive at it?

    TRV doesn’t seem like it’s vastly undervalued here, but I also don’t think it’s particularly expensive. I suppose part of it comes down to how much growth you think they have left in the tank. From what I can see, it looks like there’s plenty more to come. Depends on interest rates to some degree. Although if they can manage EPS growth like what we see above with low rates, it’s exciting to think what’s possible with that portfolio of theirs working that much harder. 🙂

    Cheers!

  54. Seotxe5,

    UPS has a great business model over there. The stock landed on my watch list a few months back. But I continue to be mystified/disappointed by the growth. Net income has gone nowhere over the last decade (it’s actually down quite a bit), though EPS is roughly flat thanks to significant buybacks. And I still haven’t really read a good reason as to why that is. I guess I’m just surprised that they can’t leverage their incredible competitive position and infrastructure a bit better.

    The dividend has grown nicely over the last decade, but that’s been mainly through an expansion in the payout ratio. That can’t continue on much longer, so they’ll have to grow as a company to continue that policy. We’ll see how that one goes.

    Thanks for stopping by!

    Take care.

  55. Jason, based on the yield over 5 yr avg yield it is 4% over. I generally prefer 10% over. Having said this, the PEs (current and forward) are both very favorable in relation to the industry. I agree with you on the growth and in particular the rate of return. I estimate a return close to 12% assuming 7% growth. Moreover, M* gives it 3 stars and s&p gives it 4 stars meaning that this is a good indication to buy.
    Maybe I need to revisit my entry point.
    D4S

  56. D4S,

    Thanks for sharing!

    I’d definitely be okay with a 12% return, so we’ll see. That’s not too far off from the annualized return of TRV over the last decade.

    Blending Morningstar’s and S&P Capital IQ’s fair value gives us $113.20. That would indicate the stock is something like 12% undervalued here.

    But I certainly hope TRV drops to $95 or even $90. Would love to see my new capital work that much harder. 🙂

    Cheers!

  57. ARB,

    I wish you were right about that. Would have loved to have loaded up below $50 a few years ago. Unfortunately, it’s a new position.

    Cheers.

  58. Hi Jason,

    Been following you for awhile and love your website and your investment strategy. I am wondering, do you have an end strategy of how many total companies you will own?

  59. Allan,

    Thanks for following along. Really appreciate the readership.

    I don’t have an end goal in mind in terms of how many companies I’ll own a stake in. Just really depends on when I run out of great ideas. When I stop finding excellent companies to own a slice of that also fit my portfolio, I’ll stop buying those slices.

    Hope that helps!

    Cheers.

  60. Hi Jason,
    Great buy. TRV is also on my watchlist.
    I also have a European Insurance company on my watchlist, Munich Re.
    I believe it is significantly undervalued and it has a nice yield and dividend growth history last years.
    Do you have an opinion on that company?

  61. DGIfan,

    Unfortunately, Munich Re doesn’t trade on a US exchange. So I don’t follow it or have an opinion on it. But I know it’s a popular insurance holding for many Europeans. And I understand Berkshire owns a chunk of it as well.

    Wish I could help more.

    Cheers.

  62. Hi Jason,

    We’re on the same wavelength! I had just purchased 10 shares of TRV at 100.10 recently. Insurance may be kind of boring, but it’s a very solid investment, especially TRV. Keep up the good work!

  63. chickenwizrd,

    The more boring, the better. It’s been said that successful investing should be like watching paint dry. I’m okay with pulling up a chair and watching the show. 🙂

    Glad to be a fellow shareholder!

    Best regards.

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