The Travelers Companies, Inc. (NYSE:TRV) is one of the biggest property and casualty insurers in the U.S., catering primarily to business clients. The company reported revenues of $25 billion in 2011, with an operating margin (influenced by natural disasters like Hurricane Irene and Tropical Storm Lee) of 7%. Travelers saw good revenue growth in the first nine months of 2012 and was able to improve its margins close to historical levels of around 18%, but is likely to take a hit in the fourth quarter due to the impact of Superstorm Sandy. Please see our article: The Market Has Overreacted To Travelers’ Revised Sandy Estimates for a detailed analysis of the impact of Superstorm Sandy on Travelers margins.
Our price estimate of $70 for Travelers is in line with the current market price.
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The revenue streams from which Travelers earns its money are below.
Premiums and policy fees from business and financial insurance account for about 60% of Travelers’ revenue. Travelers has built a solid brand image and has a wide distribution network of independent agents and brokers throughout the U.S. Although the company had to undertake several pricing initiatives that led to insurance rates climbing by almost 8% in the first nine months of 2012, it was able maintain a high retention rate of 80% in its business insurance division and also reported a slight increase in net premiums written.
Travelers market share as a proportion of the total business and financial insurance premiums for all property and casualty insurance companies in the U.S. at the end of 2011 was over 6%. We expect a slight decline in the market share, particularly due to increased competition from peers like AIG (NYSE:AIG) and Hartford Financial Services Group (NYSE:HIG), but growth in the overall market which stands just a notch below $250 billion will mean strong revenue growth for Travelers going forward.
Premiums from the personal insurance division account for about 30% of Travelers revenue. Products are distributed through a network of around 12,500 independent agents through the U.S.
The company has maintained a share of just over 3% in the individual insurance market through the last few years. Almost 15% of the divisions’ premiums originate in the state of New York, which was worst affected by Superstorm Sandy. The company has done a good job of handling the catastrophe with a complaints to claims ratio of 0.26%.  A strong showing in one of the worst storms in the country’s history will help Travelers increase or at least maintain its market share.
Income from investment of insurance premiums accounts for 10% of Travelers revenue. The company has an asset base of about $75 billion, most of which, around $65 billion, is invested in fixed maturity securities. Around $40 billion of these fixed maturity investments are in obligations of states and municipalities with around $20 billion in corporate bonds. The company has reported a yield of around 4% from these investments in the last few years, but we expect a dampened yield curve in the coming years, as the Federal Reserve continues to keep interest rates low to encourage borrowing and spending.
Income from equity securities and real estate investments is nearly negligible. Other investments include private equity and hedge fund investments. Travelers also owns 43% of the common stock of the Brazilian company, J. Malucelli.Notes: