Travelers New Coverage Launch: $56 Trefis Price Estimate

The Travelers Companies (NYSE:TRV) is a leading property & casualty insurance company providing automobile, property, workers compensation, liability, bond and surety insurance products to both individuals and businesses. Currently Travelers primarily conducts business in the U.S. where it earns more than 95% of its revenues. The company intends to expand its international footprint and has bought a 43% in a leading P&C insurer in Brazil. The company competes with several hundred P&C insurers including Hartford Financial Services (NYSE:HIG), AIG (NYSE:AIG), GEICO of Berkshire Hathaway (NYSE:BRK.B) and Progressive (NYSE:PGR).

We recently launched coverage on Travelers with a $56 price estimate for the company’s stock, which is about 20% above the current market price.

Travelers’ Primary Sources of Value

We have broken down our analysis of Travelers into three main business segments:

1. Business & Financial Insurance – We estimate that Travelers derives about two-thirds of its value from this division, which provides financial and professional insurance in addition to various Property and Casualty products such as workers’ compensation, general liability (including product, directors & officers, professional coverage, commercial multi-peril), commercial property and auto insurance to business customers.

2. Personal Insurance – This division provides various products and services such as property, auto and general liability insurance to individuals. We estimate that the Personal Insurance division contributes about 15% of the company’s value.

3. Investment of Insurance Premiums – Through this division Travelers invests the premiums it has collected in various securities such as government and corporate bonds, equities, short-term securities and real estate investments. We estimate that this division contributes nearly 16% of the company’s value.

See our complete analysis of Travelers here

Business & Financial Insurance: The Key to Travelers’ Profitability and Value

The US P&C insurance industry is intensely competitive and as such it is difficult to increase penetration and market share. However despite this competition, Travelers has maintained high profitability with stable revenues due to its niche customer and product placement. For these reason, in addition to the company’s strong financial position, we believe that Travelers will remain competitive in the U.S. Business & Financial Insurance market.

Product Mix:

General liability and workers’ compensation account for about 35% and 15%, respectively, of business insurance premiums. The remainder primarily comes from auto and property insurance.

Customer Mix:

Over 50% of business insurance is written through Select and Commercial Accounts, which are provided to small and medium enterprises. Less than 8% of business insurance is through National Accounts, which are provided to large enterprises. The remaining ~40% of the premiums come from Industry and Specialized accounts, which can be enterprises of any size.

Investment Gains are Expected to Decline…

The majority of Travelers’ investment portfolio is composed of investment grade bonds, both corporate and government, which are sensitive to changes in interest rates. In an extended period of low interest rates, which we expect in light of the Federal Reserve’s recent actions, returns on these investments will decline. Additionally, the company has significant investments in municipal bonds, many of which face potential ratings downgrades which would result in a decline in their value. We expect the current macroeconomic environment to pressure Travelers’ returns on its investment portfolio over the next 2-3 years, after which we expect an increase in returns concurrent with an economic recovery.

… But International Expansion Provides Upside to the Current Stock Price

As competition in the U.S. market constrains growth potential, Travelers is looking internationally for expansion opportunities. At year-end 2010, international insurance accounted for less than 10% of the total Business Insurance segment. The company is increasingly emphasizing the international segment going forward, as evidenced by its recent purchase of a 49% stake in the largest Brazilian P&C insurance company. Travelers also intends to enter other high-growth economies such as India. As a result we believe that the Business & Financial Insurance segment is well-positioned for steady growth.

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