Summary
Travelers is one of the largest insurers in the country, growing both revenues and profits at a healthy rate.
The company benefits from favourable industry dynamics, which allows it to earn economic profits despite fragmentation and competition.
The company’s financial results are very good, with the business’s underwriting margins and combined ratio beating the market.
The stock, along with its free cash flows, is substantially undervalued.
Spencer Platt/Getty Images News The Travelers Companies, Inc. (NYSE: TRV ) is one of the largest property & casualty companies in the country. Although the property & casualty industry is highly fragmented and competitive, the peculiar nature of it allows insurers to earn economic profits. The industry has shown positive results despite struggling with a return of non-catastrophic losses to pre-pandemic losses. Travelers is an elite performer in the industry, with underwriting profits and healthy investment income providing the basis for the creation of shareholder value. Management’s interests are aligned with investors and they have given cash back to investors in the form of dividends and share repurchases at aggressive rates. Travelers’ free cash flow is substantial and supports the business’s dividend and share repurchase program. Free cash flows are also undervalued, along with the company as a whole. Insurance: Where Competition Doesn’t Hurt Profitability
Peter Thiel rightly argues that “competition is for losers” . Competition drives returns toward the cost of capital, making it hard, if not impossible to create economic value. On the face of it, the insurance industry should be a highly unprofitable industry. According to the National Association of Insurance Commissioner (NAIC) , Travelers is the sixth largest property and casualty firm in the United States, with just 3.96% market share. The insurance industry is highly fragmented. NAIC’s 2020 Market Share Report lists 125 major property & casualty insurers offering products and services across all lines. Source: NAIC In Travelers’ 2021 10-K filing , they cite statistics from A.M. Best showing that there are around 1,100 property and casualty groups in the United States, comprising approximately 2,600 property and casualty companies. In 2020, the top 150 insurers account for around 94% of the industry’s total net written premiums. If competition is for losers, then on the face of it, the insurance industry is a loser’s industry.
However, the insurance industry is special. Insurance is required by law, so the business tends to be relatively stable. Regardless of the business cycle, people and businesses need insurance. This gives insurers pricing power which they would otherwise not have.
Insurance products lack any real differentiability. Success is won through a combination of agent recommendations, costs and brand awareness. Agent recommendations matter because most people get their insurance through an agent. Insurers need agents to swing business their way. Because differentiation does not really exist, insurers have to be able to price their products at cheaper rates than their competitors. Brand awareness matters because insurance is about trust and strong brands tell consumers that they can trust the insurer. Property & Casualty Is Recovering From the Pandemic
The industry showed good premium growth and solid financial results in 2021, despite the disruptions the industry suffered from.
The industry accelerated its adoption of new technology, spurred on by the pandemic, and the need to adapt to supply chain disruptions. These innovations are aimed at helping insurers better price policies, enhance efficiencies and drive down costs.
According to Aon (NYSE: AON ), total premium growth in the first nine months of the year was 9.5%, up 7.3 points from the same period in 2020. Commercial lines grew at 9.8%, compared to personal lines which grew at 4.8%. As the economy rebounded, the sector also experienced growth in commercial and personal auto as well as worker’s compensation. Travelers is the market leader in worker’s compensation, with 6.84% of the market. It is also the second largest insurer in total commercial auto, with market share of 6.22%. It is the tenth largest insurer in total private passenger auto, with a market share of 1.96%.
The industry experienced a $5.6 billion net underwriting loss due to a return of non-catastrophe losses to pre-pandemic levels. However, net income for the industry grew by 8% in the first nine months of 2021, from $35.5 billion in 2020 to $43.5 billion in 2021, fueling a growth in policy surplus to 73%. Total expense ratio stayed at 38.4%.
Aon’s reporting also shows that direct loss ratios across the bulk of lines in the first nine months of 2021 were lower than in the same period the […]
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