Travelers Charts Safe Course: Best in Class

ST. PAUL, Minn. (TheStreet) -- The near collapse of American International Group (AIG) under the weight of troubled mortgage deals raised questions about other insurers.

While AIG dove deep into a risky market, other insurers stuck to conservative strategies, helping them weather the weak economy. Among them is Travelers ( TRV), which has plotted a steady course during the past two years and might be the best option for those looking for a stable insurance pick.

Insurers take premiums from clients and invest them in stocks and bonds to provide the growth necessary to meet future obligations. In the best cases, insurers reap large enough returns to invest the surplus and enhance underwriting profits. However, during times of volatile interest rates and stock prices, both activities become more difficult.

As stocks plunged in 2008, Hartford Financial ( HIG) and Progressive ( PGR) suffered large losses from investments on their income statements. Progressive lost $807 million while Harford lost $6 billion, which led to a net loss of $2.7 billion in 2008. These losses are substantial for shareholders and those insured by these companies because they eat into funds that cover the future obligations of policies they write.

Travelers prudent investment strategy helped it avoid much of this mess. Chief Executive Officer Jay Fishman and Chief Investment Officer William Heyman oversee a portfolio that's heavily weighted toward fixed income, with only a small fraction invested in equities.

The benefits of this strategy are twofold. First, it allows the company to adjust its bond portfolio based on its liabilities, reducing risk. Second, it allows the majority of investment losses to bypass the income statement.

Bonds are held to maturity or considered "available for sale," meaning they're held at cost until maturity or adjusted to market prices off of the income statement. They're shielded from mark-to-market net income changes because the company isn't likely to sell them. That means the losses and gains on available-for-sale bonds impact shareholder equity but not net income, and held to maturity bonds a simply held at cost.

This conservative investment structure makes Travelers more stable because short-term price swings are not passed along to the balance sheet as much, which would erode the equity. Travelers' obligations aren't tied to stock fluctuations that could make the company vulnerable to funding shortfalls.

During the past two years, Hartford shares have dropped 71%, twice as much as the S&P 500 Index. Shares of Progressive and Allstate ( ALL) have lost14% and 43% respectively. Travelers stock is up 11%, buoyed by its security in the face of unstable markets.

Citigroup ( C) spun off Travelers in 2002 because of fears over underwriting risks in the wake of the Sept. 11 terrorist attacks. Now Travelers serves as a shining example of prudence and strong management in an industry rife with poor risk decisions.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.

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