The Travelers Companies (TRV) is one of the oldest insurance organizations in the United States dating back to 1853. The company offer a wide range of personal and casualty insurance to businesses, governments, and individuals. With the insurance business being very competitive on price, service, products, relationships, and distribution Travelers scale gives it great positioning. Of the 1,130 property/casualty insurance groups in the United States the top 150 make up 93% of premiums, and Travelers placing at 6th in net premiums written means it’s got solid placement. The past few years have seen rising combined ratios due to catastrophes, but over the long term Travelers still present good value at the current price.
10 Year Financials
Source SEC 10-K’s
For a business involved in something like insurance I like to look over the long term financials to even out erroneous events in a signal year. As can be seen above total revenue over the past decade has grown at a 2.32% clip. The major generator of this growth was premium revenues, as to be expected. Premium revenue grew at a CAGR of 2.81% while net investment income declined at a rate of -2.12% due to the after tax yield falling from 3.4% to 2.8%. Net income is lower than the start of the decade but has fluctuated quite often.
Source: SEC 10-K’s
While premium revenues have increased almost every year, the net income fluctuations are attributable to claims vary each year. Looking at the first chart above shows that correlation between increased claims and less net income. As can be seen 2011 was a specifically bad year with a 23% increase in claims due to increases in catastrophe losses from Hurricane Irene. The past three years have also been subpar with several bad hurricanes and large wildfires in the United States. Overall, one must look over the long term average to get a good sense of the general business operations as weather is unpredictable. With that being said the average loss ratio over the decade is 64%, meaning Travelers in making on average 24 cents on every dollar of premiums sold. Now looking the expense ratio, we can see it has been very stable at around 35% and recently has trended downward. This shows it has been less expense to acquire, underwrite, and service products.
Source: SEC 10-K
Presented above is the combined ratio as stated by Travelers in yearly filings. This ratio is very important as it shows the losses and expenses as a percent of premiums earned during a year. Again, as can be seen in 2011 Travelers on average actually lost 5 cents per dollar of premium. Over the decade, the average combine ratio come in at 94.6%. This is good, as it shows that Travelers makes money on its premiums over the long term.
Also to note is that the average 10 year ROE is 11.40%. To me anything above 10% is good, as it shows the business is covering the cost of capital. Along with this, the company has a debt to total capital excluding unrealized investment gains of 23.2% and a debt to equity of 3.21x as of the most recent quarter.
Source: SEC 10-K’s
Travelers can be broken down into three main segments: business insurance, personal insurance, and bond/specialty insurance. As can be seen above, the business insurance is the largest of the segments making up 56.1% of total revenue. The large increase in 2014 in business insurance and decrease in bond/specialty is due to the removal and inclusion on international insurance into the business segment. As can be seen, the most profitable segment is bond/specialty insurance with an average combined ratio since 2014 of 69.8%. The business insurance average combined ratio since 2014 is 96.2% while the personal insurance average over the decade was 97.1%. The recent upswing in 2019 of the combined ratio in business insurance has been due to a 3% increase due to catastrophes and a 1.7% increase due to unfavorable reserve development. Along with that, personal insurance saw a 11.7% and 10.7% increase in 2017 and 2018 due to catastrophes. With all this being said, the long term average is still profitable, and the underwriting expense has consistently decreased over the past three years in all segments while premiums have increased.
Right now, Travelers is trading at around $113 per share. Using just 2019 EPS of $9.92 the business is trading at a P/E of 11.4x. But because this business fluctuates and I am a long term investor I’ll use the ten year average EPS of $8.44, giving me a P/E of 13.38. With a book value per share of $106.43 Travelers is trading at a 1.06x. Travelers also offers a 3% dividend yield. To me it seems that the company is fairly valued.
Insurance companies are often good investments if bought at the right price as these businesses can make money of the float. But the business has to remain in proper standing with its operations. Travelers has seen an increase in claims over the past three years which has raised the combined ratio. But with a long term view the company has performed very well over the past decade. Many of the increases in claims are due to catastrophes in the business and personal insurance segments. I think that this medium term headwind can be a good place to buy into the business. With the valuation down 23.3% over this year the company is trading at a 13.38x 10 year average P/E and 1.06x book value on top of a 3% yield.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TRV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.