The Travelers Companies, Inc. (NYSE:TRV) recently revealed estimates for the damage caused by Superstorm Sandy on the East Coast.((Insurers’ Sandy Claims Estimates Show No Long-Term Damage, Wall Street Journal, 5th December, 2012)) The claims estimate of $650 million reported by the insurer was much less than many had anticipated and this led to a 5% increase in the company’s stock price. We however believe that the markets have overestimated the impact of the losses. After all, catastrophe related losses account for only a small percentage (11% in 2011 and 5% in 2010) of the total claims and expenses incurred by Travelers. Our price estimate of $70 for Travelers is 5% below the current market price.
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Calculations For The Business And Financial Insurance
Travelers sells property and casualty insurance to businesses and financial institutional clients, about 60% of its $25 billion revenues are earned from premiums and policy fees collected from these. The division accounts for more than 70% of our price estimate, and thus we believe it is important to discuss the impact of Sandy on operations first.
In 2011, natural disasters like Hurricane Irene and Tropical Storm Lee led to catastrophe related losses of around $1 billion. The total claims and expenses reported by the division during the year were around $14 billion and catastrophe losses accounted for just 7% of these.
Moving ahead to 2012, the division reported catastrophe losses of $360 million for the first nine months of the calendar year. Since the company has not given a breakdown of the estimated losses in the fourth quarter of the year, we have distributed them amongst business insurance and personal insurance on the basis of revenues. Using this technique, we expect around $430 million of the company’s estimated $650 million Sandy related losses to be incurred by the business insurance division. Thus the total catastrophe related losses in the calendar year are expected to be around $790 million.
In the last three years, total adjusted claims and expenses without accounting for catastrophe losses have been about 80% of the premiums and policy fees income for the division. We expect similar losses this year, leading to claims and expenses without catastrophe losses of $12 billion. Adding the catastrophe losses, we get a total expense of around $12.8 billion, leading to an operating margin of about 14.75%, which is actually an improvement over the 11.60% margin reported last year.
In the long-term we expect margins to stabilize around the historical average of 15%, our estimate is based on the assumption that there are no major catastrophes like Hurricane Irene of Superstorm Sandy in the coming years. You can modify the interactive chart below to gauge the effect of a change in forecast on our price estimate.
Using a similar approach for the personal insurance division, we see that catastrophe losses in the first nine months were around $450 million. Of the $650 million estimated losses, we have assigned $220 million to personal insurance. Historically, adjusted claims and expenses without catastrophe losses have been around 85% of the net premiums and policy fees. The total expenses for the 2012 calendar year work out to be about $7.2 billion, leading to an operating margin of 6%. Again, long term projections are close to historical values.