VALUATION HIGHLIGHTS

1. Business Insurance (Workers' Compensation, Commercial Multi-peril, Commercial Automobile & Property, General Liability & Others) constitutes 68% of the Trefis price estimate for Travelers's stock.
2. Bond & Specialty Insurance constitutes 25% of the Trefis price estimate for Travelers's stock.

WHAT HAS CHANGED?

Latest Earning

In Q1 2024, Travelers reported Total Revenues of $11.2 billion, up by 16% y-o-y. This increase was because of growth in premiums.

Travelers' top line suffered in 2020, settling for a marginal growth of 1%. It was mainly driven by a 10% y-o-y drop in net investment income due to the lower interest rate environment. However, the net revenue improved at an average annual rate of 9% y-o-y over the next three years and was $41.36 billion in FY2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are the key drivers of Travelers with potential upside or downside to Travelers' stock price.

Business Insurance

• Investment Income Operating Margin: Travelers invests premium income - or float - collected from policyholders, mostly in government and corporate bonds, to generate returns. The company usually maintains high premium rates and underwriting discipline to generate float at negative costs. The cost of float can be defined as the ratio of underwriting loss to average float. We allocate expenses from the insurance divisions to the investment division to calculate margins. We expect a short-term increase in margins as the combined expense ratio normalizes. However, margins will be affected by lower yields from investments in the long run.
• Travelers' U.S. Workers' Compensation Market Share: Travelers' Business Insurance division is the company's most important segment. Workers' compensation accounts for almost 20% (as of 2023) of the premiums earned by the Business Insurance division. Business customers who pay large sums of money on multiple policies are very price-sensitive during times of economic crisis and are less concerned about fast and hassle-free payment of claims than individuals. Also, a large portion of Travelers' business customers comprises small and medium enterprises (SMEs), which have generally not seen earnings improvement to the same extent as larger corporations. Therefore we expect Travelers, which generally charges higher premiums than most competitors and maintains high underwriting margins, to continue to see a modest decrease in its market share until the U.S. economy rebounds fundamentally. However, the Travelers' workers' compensation market share is expected to gradually decline going forward as customers look to cheaper insurance policies as a means of cutting costs.

BUSINESS SUMMARY

Travelers is the sixth-largest property and casualty (P&C) insurance company in the United States, going by direct written premiums. The company has a strong presence across the country, with California and New York being the largest contributors. Also, it has a minor international presence, with the largest contribution from Canada. The company provides auto and home insurance to individuals and auto, property, general liability, workers' compensation, financial, and professional insurance to businesses. Customers buy Travelers' insurance policies because of the company's reputation for excellent customer service, fast and fair claims processing, as well as its ability to meet its financial obligations. Travelers is also known for its conservative culture because it invests most of its insurance premiums in investment-grade fixed-income securities, which helped the company come out of the financial crisis relatively unscathed.

SOURCES OF VALUE

Business & Financial Insurance Premiums

Travelers' primary source of value is the Business and Financial Insurance division. Travelers collected $19.8 billion in premiums for business insurance in 2023. This division's products include workers' compensation, commercial automobile, commercial multiperil, and financial/bond insurance.

Investment of Insurance Premiums

Travelers invests the premiums that it collects from its customers in order to generate income to pay for insurance claims and pay dividends to shareholders. Insurance companies primarily invest in bonds, stocks, short-term securities, and alternative assets such as real estate, hedge funds, and private equity. The company is generally considered one of the most conservative insurance companies, as around 90% of its investments are in investment-grade bonds, while many other insurance companies also hold substantial investments in equities and other risky assets.

Personal Insurance

Travelers' personal insurance division offers property, auto, and liability insurance to individuals and households. This division generated $15 billion in revenues in 2023. Travelers has been slowly losing market share in the personal insurance market, primarily because of higher premiums relative to competitors. The company maintains high underwriting margins with a negative cost of float.

KEY TRENDS

Growth in U.S. P&C Insurance Premiums

The property and casualty (P&C) insurance market was not significantly impacted by the financial crisis. U.S. P&C market premium volume increased slightly, but for Travelers, this was offset by a slight decrease in market share. Going forward, we expect market premium volumes to increase slightly, and we expect Travelers to marginally increase its market share in both the Business and Personal Insurance segments.

Investment Gains Likely to improve

The majority of Travelers' investment portfolio is composed of investment-grade bonds, both corporate and government, which are sensitive to changes in interest rates. Given the current interest rates, we expect the investment gains to remain high for some more time.