The Travelers Companies, Inc. (NYSE:TRV) is the sixth largest property and casualty insurer in the U.S. with a market share of 4.5% in terms of premiums earned.  We have revised our price estimate for Travelers to $94, implying a premium of 10% to the market price.
In our valuation model, we have divided the company into three business divisions: Business and Financial Insurance, Personal Insurance and Investment Income. In this article, we focus on Business and Financial Insurance, which accounts for 60% of the company’s revenues and 65% of operating income.
Travelers’ main insurance product line in this division is workers’ compensation accounting for almost 30% of the net written premiums. The line covers employers for workplace injuries to employees. The benefits offered include medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The products included in this line of insurance include both fixed premium policies, loss sensitive policies and also loss prevention and risk management policies where the company charges insurance fees rather than premiums.
The workers’ compensation market accounts for 10% of the total P&C premiums generated in the U.S. Total premiums from the product line increased from $43.5 billion in 2010 to $46.5 in 2012. The recovering U.S. job market will provide further stimulus for growth in this line of insurance. Due to the financial crisis, the unemployment rate peaked at 10.1% in 2009 but has since recovered, reaching a four-year low of 7.5% in April 2013.  Manufacturing employment has increased by 4.3% since 2010 while jobs in the construction industry have increased by 5.4% since the start of 2011.  Both of these are big markets for workers’ compensation and growth in the job market will lead to increased demand for insurance in the coming years.
We also expect growth in the market from premium rate increases implemented by P&C insurers. Investment income is a big source of income for P&C insurers. ((ref:1)) Most companies invest in fixed maturity securities, the yields from which are influenced by interest rates. The current low interest rate environment will cut into the investment yield that insurers can earn. In this scenario, we expect insurance rate increases across the industry as companies try to look for profitability from underwriting to compensate for a decline in investment income.
Travelers’ is currently the second largest insurer in this line in the U.S., behind MassMutual. The company’s market share has increased from 6% in 2010 to 7.3% in 2012. In 2011, increased claims and losses due to Hurricane Irene and Tropical Storm Lee led to an underwriting loss for the Business Insurance division. The combined expense ratio (claims and other expenses divided by premiums earned) for the year was 101%. Despite the devastation caused by Superstorm Sandy, Travelers managed an underwriting profit from the business insurance division in 2012. The combined ratio for the division was 94% in 2012.
Going forward, we expect the company to maintain underwriting discipline. The company has managed to keep a high retention rate (>80%) despite recent rate hikes indicating its ability to retain clients. We expect the market share to stay around 7.3% in the coming years.
Commercial Automobile Insurance
Travelers is the market leader in commercial automobile insurance, which accounts for 16% of the business division’s premiums. ((ref:1)) The product covers bodily injury and property damage from the use of automobiles and trucks in business. Commercial automobile premiums account for 5% of the P&C premiums in the U.S. Total premium volume from this line of insurance increased from $24.3 billion in 2010 to $24.6 billion in 2012.  The ongoing economic recovery in the U. S. will stimulate growth in this line of insurance.
Commercial automobile and truck sales plunged by 35% from 2007 to 2009.  However, an improving job market and favorable credit conditions have led to a recovery in the market. Commercial vehicle sales have grown by 10% each year since 2010. We expect the increased demand and price hikes by insurance companies in lieu of low interest rates to drive growth in the commercial automobile insurance market.
Travelers’ market share in the U.S. in this line has dropped from 8.2% in 2010 to 7.8% in 2012. Although it is still the market leader in this category, we expect it to compromise on market share in order to maintain underwriting profitability. Some insurance companies compromise on risk assessment while underwriting an insurance policy. Although this practice can help gain market share, it is usually harmful in the long run as unassessed risks can lead to losses later on.  Travelers has maintained strict underwriting discipline with rate increases according to the market environment. As a result, it has historically been one of the few P&C companies to run on an underwriting profit.
We expect Travelers to maintain this underwriting discipline in the coming years with increases in premium rates. Although the company has managed to keep high retention rates in this category, we expect a slight decline in market share as the company faces stiff competition from companies like Progressive Group and Liberty Mutual both of which have a market share of more than 6%. 
Commercial Multiperil is a combination of commercial property, automobile, workers ’ compensation and general liability insurance primarily for small businesses. It is Travelers’ second biggest product line, accounting for 26% of the business insurance premiums.
The product line accounts for 7% of the P&C premiums in the U.S.  Total premiums from the line increased from $33 billion in 2010 to $35 billion in 2012. Like the workers’ compensation line of insurance, we expect rate increases in this line of insurance as low interest rates cut into insurance companies’ income.
Growth will also be stimulated by improving macro-economic conditions. In 2011, private business starts in the U.S. increased by 2.2% over 2010 while a 2.7% growth rate was observed in 2012.  In contrast, the number of bankruptcy filings declined by 15% in 2011 and by 16% in 2012.  Growth in businesses across the U.S. will lead to higher demand for commercial multiperil insurance in the coming years.
Travelers’ has maintained a market share of around 9% in the product line in the last three years and we expect this trend to continue, with a slight decline as the company maintains underwriting discipline with price increases.
Other Lines Of Business Insurance
Travelers also offers other business insurance products like fidelity and surety insurance, commercial property insurance and general liability insurance which covers third party claims occurring on the premises of the insured part. As the company is not a big player in these lines of insurance, we have clubbed them together.
Total premiums in the U.S. from P&C business insurance lines excluding the three lines mentioned above have increased from $140 billion in 2010 to $157 billion in 2012.  Travelers earned around $6.7 billion in premiums from these lines of insurance in the last three years. We expect modest growth in these lines in the coming years. However, we expect the growth rate to increase in the long term as interest rates normalize, allowing Travelers to offer lower premium rates and gain market share.Notes:
- NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS PROPERTY AND CASUALTY INSURANCE INDUSTRY 2012 TOP 25 GROUPS AND COMPANIES BY COUNTRYWIDE PREMIUM [↩] [↩] [↩] [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- Overview and Outlook for the Workers Comp Market: Growth, Performance and the Economic Environment, Insurance Information Institute [↩]
- Auto & Truck Sales – Bureau of Economic Analysis [↩]
- Warren Buffet’s Letter To Shareholders [↩]
- NAIC Report Card [↩]
- Private sector establishment births and deaths, seasonally adjusted, Bureau of Labor Statistics [↩]
- American Bankruptcy Institute [↩]