Financials The Travelers Companies,
Krause Fund Research Spring 2012
The Travelers Companies, Inc. (NYSE: TRV)
Financials
April 17, 2012
Recommendation: HOLD Analysts
Current Price $59.16 Target Price $62.69-$69.12
Luke Rasumussen [email protected] Timothy Reed [email protected]
TRV Weathers the Storm
James Sdregas [email protected]
Travelers is one of only three publicly traded P&C insurers to land in top the tier of a recent customer satisfaction poll by J.D. Power.
Jordan Wagner [email protected]
Company Overview The Travelers Companies, Inc. (TRV), a component of the DJI, operates as a property-casualty insurer, protecting customers from potential losses in the event of catastrophe or other misfortune. Travelers operates in three main business segments: Personal; Business; and Financial, Professional and International. The company’s primary form of revenue is premiums collected from clients. Travelers invests premiums in an array of securities ranging from short term securities to long term fixed maturities. Travelers uses premiums and returns from investments to pay claims to policy holders in the event of loss.
Stock Performance Highlights 52 week High 52 week Low Beta Value Average Daily Volume
$64.17 $45.97 0.78 3.07 m
A current soft-pricing cycle led by discount retailers Geico and Progressive should be nearing an end due to high catastrophe losses in 2011. Travelers focus on domestic clientele (>95% of revenue comes from domestic operations) will benefit the company as the U.S. economic condition improves, and also limits exposure to high risk European markets. The U.S. Fed has vowed to keep interest rates low through 2014, putting pressure on P&C insurers whose revenues are comprised of 15-20% of returns on investment. P&C insurers factor expected inflation into policy prices, with the low estimate typically setting the bar in a very competitive industry. If the current interest rate environment allows for runaway inflation, the industry as a whole will feel the effects.
Share Highlights Market Capitalization Shares Outstanding Book Value per share EPS (2012 est.) Forward P/E Ratio Dividend Yield Dividend Payout Ratio
$23.25 b 393.07 m $58.79 $5.19 11.1 2.80% 34.33%
One Year Stock Performance
Company Performance Highlights ROA ROE Revenue
1.03% 5.71% $25.45 b TRV: Blue, S&P 500: Red Source: Google Finance
Financial Ratios Current Ratio Debt to Equity Combined Ratio
38.66% 3.281 105.88% Important disclosures appear on the last page of this report.
Even though there are positive signs the large amount of uncertainty centering on the global economy will prevent the broad market from large short‐term growth as we expect GDP to remain around 2.3% annually. The P&C Industry will perform similar to the overall market as consumers are particularly skeptical of financial service companies. Distrust of the industry will be offset by the decrease in unemployment, which we believe will fall to 8.1%, and prediction of increased housing starts. We believe that even though the outlook for insurance is positive no excess returns can be made until consumer confidence in the financial industry increases. 2‐3 Year Outlook After a period of slow short‐term growth we predict the economy will enter a period of considerable growth as GDP returns to historical levels of 3.0% annually. The debt crisis in Europe will reach solution within the next 2 years serving to increase consumer confidence in the global economy. We also expect unemployment to decrease to 7.0%, which while still high, will further increase GDP and create a larger amount of disposable income in the economy. Due to a prolonged period of low interest rates we predict inflation to raise to 4.0% spurring action by the Fed to raise the federal funds rate thus increasing investing activities and interest spreads essential to financial companies. In the long term of 3‐5 years the P&C industry should outpace the S&P. Recovery and increased spending at the consumer level will ignite large purchases of cars and homes that had been put off in recessionary periods. Insurers will benefit from the renewed demand especially considering premiums will have increased due to higher catastrophe levels. Commercial businesses will also shed excess cash that they had held in recessionary periods and expand operations increasing their demand for new policies.
Executive summary The Travelers Companies Inc. operates in the Property‐Casualty (P&C) insurance industry. The firm’s main services are providing insurance against loss for consumers and businesses, both internationally and domestically. A current soft market has kept prices low and thus affected profits. Despite being tampered by low interest rates, which affect investment income, we expect a recovery in the U.S. economy to spark an increase in consumer spending and thus provide more assets in need of insurance. At this time we recommend holding Travelers due to size and position within the industry but hesitate to rate a buy due to current challenges faced by the P&C industry. Economic and Capital Markets Outlook 6‐12 Month Outlook In the next 6 months the economy will grow at a slow to moderate rate. We predict that GDP growth will hover around a 2.3% annual rate. Unemployment will continue to decline slowly as economic prospects in the United States look better relative to where they have been in previous years. The unemployment rate will drop to 8.1% by the time of the 2012 presidential election. Consumers will continue to be cautious coming out of the recession. However, the growth in GDP and the improvement in unemployment statistics will lead to gradually improving consumer confidence. Source: Google Finance Recent economic performance shows positive growth in many key areas although the growth rate is lower than many have expected. The fed has announced to keep the federal funds rate low. Low yields on treasuries are increasing activity on the stock exchange as consumers seek higher returns. The higher volume will drive increases in the S&P Index, however continued uncertainty in Europe will keep average returns modest. 1
Industry Analysis
losses. Because the P&C industry is highly competitive, the lowest inflation estimate tends to set the price. As the FED has set policy targeting low rates through 2014 it is important to keep an eye on inflation when studying this industry. Housing Housing sales serve as a strong indicator of demand for P&C policies since increasing housing sales widens the market for those in need of insurance. During 2011 US sales of existing homes decreased by 23.5%.14 Additionally 74% of mortgage originations during the year were refinancing’s due to historically low rates, which does not increase the market demand for P&C insurance.
Industry Description The P&C insurance industry provides underwriting services to compensate customers in the event of losses. Insurance seekers pay premiums, generally priced on interest rates, to the underwriter who pays a claim to the customer if loss occurs. P&C insurer’s coverage includes commercial and personal lines, the latter dealing mostly with homeowner’s and personal auto insurance. Expenses consist predominantly of losses paid on policyholder claims but also to commission paid to brokers, salespeople and agents who provide policies to customers. Earned premiums are largest component of income along with investment income from reinvested premiums and capital gains made on sales of reinvestments. Key Economic Variables Interest Rates and Inflation Increased interest rates cause prices to come down as more supply comes into market, and vice versa for decreased rates. This can be explained because when interest rates are low firms see investment income opportunities decrease. Because these investment returns are often called on to cover losses in underwriting, lower rates make the industry more risky. In normal circumstances low rates tend to drive up the price as players leave the market to avoid risk. Recently however, prices have remained low despite low rates due to weak demand in a depressed market. We expect this soft‐pricing environment to subside as an economic recovery gains traction and demand for insurance increases. When establishing prices customers are to pay in premiums a firm considers future inflation expectations. When inflation is expected to be higher, insurers will charge higher premiums to cover potentially higher
Figure 1: Residential Construction Spending Source: NAHB
New home construction starts also faced similar decreases by falling 45,000 units from 2011 production levels.12 Although housing sales have suffered the construction sector experienced its first net increase in hires since 2006.11 This is a strong indicator of future housing construction which we believe will increase by 10‐15% in 2012. In the long run we expect housing sales to increase at a faster rate of 20% as current vacancies and overcapacities are filled. Commercial construction also decreased 5.1% in 2011.7 2
The decrease has caused a large amount of vacancies which will prove for a cheaper source of expansion as the economy recovers and commercial companies.
Figure 2: Net Hires for Construction Sector Source: NAHB
policy pricing which will diminish large P&C firms current advantages.8 P&C firms will continue to benefit from the TRIA which has been extended through 2014.10 GDP and Unemployment As a measure of the overall health of the economy, GDP is an important statistic to insurance companies. In times GDP is growing strongly, consumers and businesses are more active in the market place and seek more insurance. We expect developments in the crisis in Europe and changes in consumer confidence to drive GDP for the foreseeable future.
Economic Crisis at Home and Abroad Economic trouble in both the US and EU have caused a wide range of variability for both US and international security exchanges. The P&C insurance industry is heavily dependent on investment returns which currently account for between 15%‐20% of total revenues.1 During 2011 A.M. Best Co placed a watch rating on five privately held insurers with AAA ratings.13 Although Travelers and the majority of P&C firms have little direct exposure to risk in European debt they still face issues pertaining to the crisis’ slowing effect on the US economic recovery. Since we expect no short‐term resolution in Europe, firms such as Travelers who rely primarily on US, state, and municipal debt for investing (51.32% of total investments) will face struggles earning substantial investment returns due to maturing investments being reinvested at historically low treasury rates.5 Central regulation is a prevalent issue for insurance as the NAIC continues seeking to create uniformity across the country. With 7 of the 10 largest insurer failures occurring since 2000 the NAIC will receive more support in creating regulation of the insurance industry.9 Central regulation will decrease competition on premiums and
Figure 3: Real GDP Growth Source: Bloomberg
Encouraging jobless claims numbers released in early February saw claims continue on a downward trend. Consensus for claims was at 370,000 while actual claims came in at 358,000.6 As more members of the labor force find work and see their disposable income increase, we expect demand for insurance to increase as consumers acquire new assets. Further, as unemployment falls, employers will need to increase policies in workman’s compensation and related coverage.
3
Figure 4: Unemployment Rate Source: Bloomberg
Combined Ratio Catastrophe losses are the most unpredictable aspect of an insurance provider’s underwriting results. After low years in 2006 and 2007, catastrophe losses have been significantly greater in recent years. The combined ratio is often used to measure underwriting results. A ratio greater than 100% indicates a loss, a ratio less than 100% a profit. Because underwriting is the most volatile aspect to firms in the industry, strong performance is an indicator of a strong company. In 2010 the industry’s combined ratio was 102.4%, up from 101.0% in 2009. Higher catastrophe claims saw the rate at 105.0% in 2008.1 Recent disasters in the US and abroad have reported combined ratio estimates for 2011 at 107.5%1,3
Figure 5: New Jobless Claims Source: Bloomberg
The huge losses in 2011 exhibited by a combined ratio of 107.5% should reduce some of the excess underwriting capacity and drive prices up. We expect prices to also be influenced by an overall rebound in the economy. Demand for insurance is fairly inelastic but we still expect an increase in demand as more disposable income comes to market. Market Competition/Comparison of Peers Concentration The insurance industry is highly condensed but remains highly competitive. The top 10 property and casualty insurers cover nearly 50% of the market.1
Recent Developments and Trends Premiums Written Premiums generally lasting 12 months serve as good representative of revenue generation. Written premiums of personal lines comprise of 42% of total industry written premiums and were up 3.3% in 2010. Premiums for commercial lines comprise 35% and were down 2.7% 2010. This is expected to be the result of excess underwriting capacity and poor demand in a weakened economy. Balanced lines combine the two and are the remaining 23% of total industry premiums. Balanced lines were up 2.1% 2010.1 Investment income makes up about 15%‐20% of annual revenue historically and was up 0.4% in 2010.2 However with the current yield on the 10 Year US Note remaining around 2% we expect firms to struggle with investment income. 4
and claims are paid, which causes competing firms to aggressively pursue the most attractive policies for insuree’s generally in the form of low cost.8 During the past 5 years P&C insurers have experienced a soft cycle, with discount retailers, such as Geico and Progressive igniting price wars through aggressive advertising campaigns.7 A low amount of catastrophe losses during the period allowed firms to keep prices low, however recent years have seen an increase in catastrophic events which will lead to a trend of increasing prices. Although deregulation has increased the amount of financial organizations entering the P&C industry the industry still favors larger, market leading firms with great financial capacity. Since the industry has experienced net underwriting losses for the last 4 years the companies that have the means to earn higher investment income are best suited to maintain a strong presence.7 Company Specific Analysis Overview The Travelers Companies Inc. is one of the largest property and casualty insurers in the US and dates back to 1853.5 As stated in its 10‐K, the company focuses of profitable growth rather than premium volume or market share. Travelers deals in three areas: personal insurance, business insurance, and financial, professional and international insurance. Operating Segments Traveler’s operations can be split into three sects: Personal, Business, and Financial Professional and International (FPI). International operations make up approximately 5.0% of company revenue.4 A breakdown of revenue sources is as follows:
Figure 6: P&C Market Saturation Source: NetAdvantage S&P Survey
The industry is in a mature stage, making entry for new participants difficult, yet competition among existing firms remains high. Saturation in the industry is high as evidenced by 98% of premium income coming from renewals.7 A few key statistics for top competitors in the industry are as follows: Company
ROE (%)
ROA (%)
PM (%)
DIV Yield (%)
Trailing P/E
Forwar d P/E
ACE
6.68
1.77
9.41
2.60
15.90
9.74
Chubb
10.77
N/A
12.71
2.30
12.01
11.60
Progressive
17.13
4.71
6.55
1.90
13.67
12.78
Travelers
5.71
1.04
5.60
2.80
17.53
9.73
Allstate
4.18
0.68
2.41
2.70
20.64
7.75
AIG
6.63
0.37
13.41
0.00
6.09
10.86
Figure 7: P&C Industry Leaders Key Ratios Source: Yahoo!Finance
Regulation A lack of central regulation has made the insurance industry immensely competitive. In addition to the lack of federal regulation increasing competition insurance companies real costs are unknown until policies mature 5
State
Figure 8: Travelers Business Segmentation Source: 10‐K
California New York Texas Pennsylvania Florida New Jersey Illinois Massachusetts Georgia All other domestic 43.8 Total domestic 94.4 International 5.6 Consolidated total 100
2010
2009
2008
Business
$11,891
$12,098
$12,580
FPI
3,534
3,713
3,966
Personal
7,877
7,474
7,291
Total
$23,302
$23,285
$23,837
Figure 9 (in millions): Monetary Breakdown of Segments Source: 10‐K
Business insurance operations range from general liability to ocean marine coverage to agribusiness. The Financial, Professional and International sect includes bond and financial products as well as specialized coverage to foreign entities. Approximately 6,100 independent agents and brokers use companywide computer modeling and risk assessment techniques to provide services to customers.5 Personal insurance consists primarily of automobile and homeowner’s insurance. Personal insurance is provided to customers through 12,400 independent agents who are supported 7 service centers covering 16 marketing regions. Distribution Traveler’s distribution channels include not only agents and brokers, but also direct marketing though online resources and toll free numbers. It also employs salaried employees who distribute policies internationally and domestically. A breakdown of Traveler’s total written premiums in 2010 by location is as follows:
Figure 10: Travelers Premiums by Location Source: 10‐ K
Catalysts for Growth and Change The insurance industry has experienced a prolonged soft‐market stemming from many variables including overall economic uncertainty and heavy pricing competition. We believe that combined ratio’s exceeding 100% will force the industry to raise prices of underwriting activities making way for increased underwriting profits. As P&C firms raise prices the market will become more attractive to entry firms which we believe will increase the number of competitors. However large, stable firms will still hold firm control of the overall market attributable to their large current customer bases and the high percentage of reinsurances. The future of P&C Insurers will also benefit from economic recovery and renewed consumer confidence. Falling unemployment rates and increasing housing sales will greatly raise the demand for P&C policies on both a consumer and commercial level. To attract new customers P&C’s will continue to adopt 6
% of Total 9.70 9.7 7.3 5.1 4.3 3.9 3.8 3.6 3.2
specialized policies to better suit individual needs which we believe will begin to reduce the current focus of pricing competition. In the next 3‐5 years we expect increasing regulation from the NAIC as a predicted higher catastrophe rates will cause inevitable insolvency issues. The NAIC has stated that they wish to create national uniformity in rates and premiums.8 This will decrease advantages SWOT Analysis Strengths As a measurement of underwriting results, the combined ratio shows managements effectiveness in handling the more volatile aspect of the industry. Firms posting combined ratios better than their competitors are thought to be managing risk effectively. Travelers has repeatedly posted numbers below industry averages, an in 2010 had a combined ratio of 93.2% vs. 102.4% for the industry.5 Travelers focuses its operations domestically, with around only around 5% of revenue coming from international sources. With current economic uncertainties in Europe, mainly Greece, if one domino falls widespread failures could occur. Weaknesses Amidst the domestic and international financial uncertainty, the FED has vowed to keep its target for current low interest rates in place through 2014. Firms in the P&C insurance industry rely on returns from invested premiums to cover potential losses from underwriting. Travelers allocates a large portion of its investment capital to fixed income securities, whose returns are diminished by low rates. As long as interest rates remain low the industry faces potential for net losses in the event catastrophe losses outweigh returns on investments.
Opportunities Discount competitors in the industry, such as Geico and Progressive, use mass marketing techniques to reach a wide array of customers. To support the high volume of policy seekers internet mediums are established as ways for customers to pick up coverage. Travelers can benefit from investing in web based distribution. The web provides an easy opportunity for customers to access products at their own discretion. Travelers and other P&C insurers have also began experimenting with mobile phone applications to provide yet another medium through which customers can access their products. It is important to note, many insurance policies are very complex, and also customer loyalty is key in a competitive industry. For these reasons a strong human workforce must always remain in the business plan. Threats Inflation risk in the industry is always an issue. As earlier discussed, when inflation is expected to be high firms will charge higher premiums to adjust. However, the industry being so competitive the low inflation estimate typically determines price. We expect an economic recovery to slowly build in the short term before gaining real traction in 2‐3 years. If this happens and the FED fails to adjust its targets and tools for manipulating interest rates properly, we could see runaway inflation. Contrarily to its strength in avoiding risk in foreign markets, Travelers focus on domestic operations put it at risk for a U.S. slip. Though we are bullish on a U.S. recovery, if a double‐ dip recession that some expect were to occur, Travelers would feel the effect.
7
Valuation Assumptions and Sensitivity Analysis
extremely difficult to predict. Models can be built to estimate the level of workman’s compensation or automobile coverage expense a firm may incur based on the risk level associated with the policy holders. However a greater portion of the overall claims expense has to deal with catastrophic losses associated with extreme weather, for which there is no accurate predictor.
Our valuation models included several different valuing methods: Discounted Cash Flows using Free Cash Flow to Equity (simple) ‐ $63.49 Discounted Cash Flows using Free Cash Flow to Equity (formal) ‐ $62.70 Dividend Discount Model – $69.12 Relative P/E ‐ $62.69 Relative P/B ‐ $56.06 In order to value Travelers we began by forecasting investment asset accounts (i.e. fixed maturities, equity securities, short term investments etc.). To predict these accounts we examined what kind of returns Travelers has been able to achieve in the past for each of their investment assets. We then combined this data with our expectations for macroeconomic conditions to determine expected returns for the different asset accounts. Using this information and data we used to calculate average returns from the different business segments, we were able to forecast revenue. Return on Bus. Ins. Policies Price
2012 Claim Adj. Exp. as % of Total Policies Price
Figure 13: Price Sensitivity to Claim Adj. Expense as % of Total Policies Source: 10‐k
A key assumption in our models is the carrying value (CV) growth rate. We estimate the CV growth rate to be 1.75%. The logic behind 1.75% is that historical GDP growth has been roughly 3% annually. Travelers operates in a highly competitive, mature industry. Pricing as competitive as it is within the industry, we don’t expect any firms to be able to grow at a rate similar to the rest of the economy over the long term. CV Growth Rate 1.25% 1.50% 1.75% 2.00% 2.25% Price 63.37 63.59 63.82 64.07 64.35
14.25% 14.50% 14.75% 15.00% 15.25% 62.52 63.02 63.52 64.03 64.53
Figure 11: Price Sensitivity to Return on Business Insurance Segment Policies Source: 10‐k
Return on Pers. Ins. Policies Price
Figure 14: Price Sensitivity to CV Growth Rate Source: 10‐k
Another key assumption used was our cost of equity used to discount cash flows in the FCFE models and DDM. We estimated the stock to have a beta of .78 and the market risk premium to be 5.81%. 0.74 0.76 0.78 0.8 0.82 Beta 66.38 65.08 63.82 62.61 61.45 Price
54.25% 54.50% 54.75% 55.00% 55.25% 61.42 62.47 63.52 64.58 65.63
Figure 12: Price Sensitivity to Return on Personal Insurance Segment Policies Source: 10‐k
Claims expenses comprise the largest expense for P&C insurers so the model is quite sensitive to forecasts for claims expenses. To forecast claims we evaluated past expenses based on the number of outstanding policies. This expense is
Figure 15: Price Sensitivity to Beta Source: Yahoo! Finance
8
13.63% 13.83% 14.03% 14.23% 14.43% 64.24 63.87 63.50 63.13 62.75
When forecasting policy growth we used a modest rate compared to industry averages to account for possibility of negative growth in any one of the forecast horizon years. Furthermore, a P&C insurer may choose to limit policy growth to avoid risky underwriting. Traveler’s perennial position amongst industry leaders in combined ratio, a measure of underwriting results, displays sound underwriting practices that may be correlated to slower policy growth. Policy Growth 2013 Price
‐0.25% 0.75% 1.75% 2.75% 3.75% 60.77 62.14 63.49 64.81 66.11
Figure 16: Price Sensitivity to Policy Growth Source: 10‐k
9
Works Cited 1: Seifert, C. (2011, 0009 22). Insurance:
8: Randall, S. (n.d.).
http://www.law.fsu.edu/journals/lawr eview/downloads/263/rand.pdf. Retrieved from http://www.law.fsu.edu/journals/lawr eview/downloads/263/rand.pdf
Property-casualty. Retrieved from http://www.netadvantage.standardan dpoors.com/NASApp/NetAdvantage /showIndustrySurvey.do?code=ipc 2: Iso. (n.d.). Retrieved from
9: Improving property and. (2009, 0004 01).
http://www.iso.com/Research-andAnalyses/Studies-andWhitepapers/Insurer-FinancialResults-2010.html
Retrieved from http://www.mckinsey.com/clientserv ice/Financial_Services/Knowledge_ Highlights/Recent_Reports/~/media/ Reports/Financial_Services/Improvin g_P_C_Regulation.ashx
3: P/c insurers’ combined ratio for 2011
estimated at 107.5%. (2012, 0002 06). Retrieved from http://www.insurancejournal.com/ne ws/national/2012/02/06/234256.htm
10: Ball, R. (n.d.). Terrorism insurance act
(tria) extended to expire december 31, 2014. Retrieved from http://www.integrogroup.com/data/Fi le/whitepapers/tria_update___dec_2007_exte nsion.pdf
4: Property, casualty and direct insurance in
the us. (n.d.). Retrieved from http://clients.ibisworld.com/industry us/Majorcompanies.aspx?indid=132 5
11: Rodriguez, J. (n.d.). Construction 5: Travelers 2010 10-k. (n.d.). Retrieved
industry forecast 2012. Retrieved from http://construction.about.com/od/Con tractors/a/Construction-IndustryForecast-2012.htm
from http://investor.travelers.com/phoenix .zhtml?c=177842&p=irol-irhome 6: Bloomberg economic calendar. (n.d.).
Retrieved from http://www.bloomberg.com/markets/ economic-calendar/
12: New residential construction. (n.d.).
Retrieved from http://www.census.gov/construction/ nrc/
7: Kelly, D. (2011, 0012 31). Ibisworld
industry report 52412. Retrieved from http://clients.ibisworld.com/industry us/default.aspx?indid=1325
13: Powell, R. (2011, 00007 22). Insurance
stocks may get hit by europe crisis. Retrieved from http://www.marketwatch.com/story/i nsurance-stocks-may-get-hit-byeurope-crisis-2011-07-22
10
14: National association of realtors. (n.d.).
Retrieved from http://www.realtor.org/wps/wcm/con nect/b810d08049dae5a8972adf7393f 1335d/RELEHS.pdf?MOD=AJPER ES&CACHEID=b810d08049dae5a8 972adf7393f1335d 15：Google finance: Portfolios. (n.d.).
Retrieved from http://www.google.com/finance/portf olio?action=view 16：Yahoo!finance. (n.d.). Retrieved from http://finance.yahoo.com/
11
Travelers Companies Inc Revenue Decomposition Fiscal Years Ending Dec. 31 Earned premiums Business Insurance: Workers' compensation Commercial automobile Property General liability Commercial multi-peril Other Total Business Insurance Financial, Professional & International Insurance: Fidelity and surety General liability International Other Total Fin., Prof. & Int'l Insurance Personal Insurance: Automobile Homeowners and Other Total Personal Insurance Total earned premiums Net investment income Fee income Other revenues Total operating revenues for reportable segments Other revenues Net realized investment gains (losses) Total consolidated revenues
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2,457 1,956 1,761 1,899 2,894 1 10,968
2,489 1,912 1,669 1,739 2,958 (1) 10,766
2,899 1,940 1,607 1,738 3,126 17 11,327
2,853 1,945 1,747 1,849 3,015 6 11,416
2,882 1,964 1,765 1,867 3,046 8 11,533
2,954 2,013 1,809 1,914 3,122 11,813
3,107 2,118 1,903 2,013 3,284 12,425
3,063 2,088 1,876 1,985 3,237 12,248
1,015 929 1,255 134 3,333
1,023 884 1,276 134 3,317
970 832 1,218 154 3,174
992 865 1,239 144 3,240
1,009 880 1,261 146 3,296
1,027 895 1,283 149 3,354
1,045 911 1,306 151 3,413
1,065 928 1,330 154 3,477
3,696 3,421 7,117 21,418 2,776 306 153 24,653 10 17 24,680
3,693 3,656 7,349 21,432 3,059 287 130 24,908 (60) 264 25,112
3,720 3,869 7,589 22,090 2,879 296 127 25,392 (1) 55 25,446
3,833 3,937 7,769 22,425 2,983 332 140 25,879 (13) 48 25,915
3,830 3,934 7,764 22,593 3,005 334 141 26,073 (13) 49 26,109
3,897 4,003 7,900 23,067 3,068 341 144 26,620 (13) 50 26,657
3,767 3,869 7,637 23,474 3,122 347 146 27,090 (13) 51 27,127
3,778 3,881 7,659 23,384 3,110 346 146 26,986 (13) 51 27,023
Travelers Companies Inc Income Statement Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
21,432 3,059 287 264 70 25,112
22,090 2,879 296 55 126 25,446
22,425 2,983 332 48 127 25,915
22,593 3,005 334 49 128 26,109
23,067 3,068 341 50 131 26,657
23,474 3,122 347 51 133 27,127
23,920 3,182 354 52 135 27,643
24,339 3,237 360 53 138 28,127
13,210 3,802 3,406 388 20,806 4,306 934 156 1,090 3,216
16,276 14,934 3,876 3,935 3,556 3,571 386 728 24,094 23,168 1,352 2,747 -139 632 65 -74 632 1,426 2,116
15,195 3,964 3,598 687 23,445 2,665 613
15,461 4,047 3,674 681 23,863 2,794 643
15,732 4,119 3,738 682 24,271 2,857 657
16,007 4,191 3,804 694 24,696 2,947 678
16287 4264 3870 706
Revenues Premiums earned Net investment income Fee income Net realized investment gains (losses) Other revenues Total Revenues Claims and Expenses Claims & claim adjustment expenses Amortization of deferred acquisition costs General & administrative expenses Interest expense Total Claims and Expenses Income (Loss) Before Income Taxes Total current tax expense (benefit) Total deferred tax expense (benefit) Income tax expense (benefit) Net income (loss) NI Growth Net Income Per Share Net earnings (loss) per share - basic EPSg Weighted Average Number of Common Shares Outstanding Weighted average shares outstanding - basic
-11.21%
6.69
-55.66%
48.35%
3.4 5.12
25,128 2,999 690
613
643
657
678
690
2,052
2,151
2,200
2,269
2,309
-3.01%
5.08
4.85%
5.40
2.24%
6.26
3.17%
6.54
1.75%
6.79
4.86%
-49.18%
50.66%
-0.85%
6.26%
16.05%
4.40%
3.88%
476.5
415.8
413.0
404.0
398.6
351.2
347.1
340.0
Travelers Companies Inc Balance Sheet Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
62,820 519 838 0 5,616 2,929 72,722 200 791 5,497 11,519 813 1,782 493 5,343 3,365 502 2,154 105,181
64,232 559 865 0 3,594 3,451 72,701 214 768 5,730 11,182 828 1,786 7 5,186 3,365 433 2,402 104,602
65,773 500 899 3,065 3,743 73,980 207 782 5,817 11,150 820
64,617 504 839 3,075 4,060 73,095 358 772 5,861 11,255 805
65,495 542 782 3,085 3,743 73,648 453 778 5,385 11,857 801
65,705 583 811 3,096 3,451 73,645 447 778 5,480 11,946 795
66,258 627 841 3,107 3,742 74,576 328 788 5,576 12,247 789
66,126 676 873 3,121 4,059 74,854
1,786 228 5,001
1,786 221 4,787
1,786 232 4,154
1,786 237 4,228
1,786 241 4,302
1,786 205 4,158
3,365 433 2,444
3,365 390 2,487
3,365 401 2,530
3,365 413 2,575
3,365 426 2,620
3,366 439 2,666
51,131 10,921 5,343 407 6,611 5,293 79,706
51,419 11,102 5,186 389 6,605 5,424 80,125
68 20,162 18,847 1,255 14,857 25,475 $105,181
0 20,732 19,579 2,005 17,839 24,477 $104,602
Assets Fixed maturities, available for sale at fair value Equity securities, at fair value Real estate Mortgage loans Short-term securities Other investments Total Investments Cash Investment income accrued Premiums receivable Reinsurance recoverables Ceded unearned premiums Deferred acquisition costs Deferred tax asset Contractholder receivables Goodwill Other intangible assets Other assets Total Assets Liabilities Claims & claim adjustment expense reserves Unearned premium reserves Contractholder payables Payables for reinsurance premiums Debt Other liabilities Total Liabilities Shareholders' Equity Preferred Stock Savings Plan - convertible preferred stock Common stock Retained earnings Accumulated other changes in equity from nonowner sources Treasury stock, at cost Unearned compensation Total Shareholders' Equity Total Liabilities and Shareholders' Equity
106,013
53,765 11,111 5,190 391 6,033 5,660 82,151
0 18,637 21,901.81 1,648 18,325.25 23,862 $ 106,013 $
105,182
52,064 11,165 5,242 395 5,986 5,616 80,468
0 18,073 24,104 1,636 19,099 24,714 105,182 $
105,391
105,695
49,666 11,402 5,353 416 5,698 5,627 78,162
0 18,944 26,350 1,639 19,703 27,230 105,391
50,816 11,600 5,446 419 5,714 5,643 79,638
$
0 19,368 28,542 1,644 23,497 26,057 105,695 $
107,042
141 791 5,674 12,775 769
107,623
49,754 11,545 5,420 429 5,787 5,715 78,651
48,368 11,727 5,505 448 5,819 5,746 77,613
0 19,707 30,659 1,664 23,671 28,359 107,010
0 20,051 32,748 1,674 24,527 29,946 $ 107,559
Travelers Companies Inc Cash Flow Statement Fiscal Years Ending Dec. 31
2012E
2013E
2014E
2015E
2016E
2017E
2,162
2,179
2,277
2,200
2,238
2,274
Cash Flows From Operations Net Income Adjustment to reconcile net income to net cash provided by operating activities: Add: Depreciation and Amortization Changes in working capital accounts: Investment Income Accrued Premiums Receivable Reinsurance Recoverables Ceded Unearned Premiums Deferred Acquisition Costs Deferred Tax Asset Contractholder Receivables Claims and Adjustment Expense Reserves Unearned Premium Reserves Payables for Reinsurance Premiums Contractholder Payables Other Liabilities Cash From Operations
880 812 751 778 805 838 -14 -87 32 8 0 -221 185 2346 9 2 4 236 5,543
9 -44 -105 15 0 7 214 -1701 54 4 51 -44 1,451
-6 475 -601 4 0 -11 633 -2398 237 21 111 11 1,504
0 -95 -89 6 0 -5 -73 1150 198 3 93 16 4,181
-10 -96 -301 6 0 -4 -74 -1062 -55 11 -26 72 1,505
-3 -98 -528 20 0 36 144 -1386 182 19 85 31 1,613
-486 -357
-773 -13
-605 3
-3,794 5
-174 21
-856 9
Dividents Paid to Shareholders Increase (Decrease) in Common Stock Cash From Financing
-572 -718 -2,095 -4,228
-47 -746 -563 -2,143
-288 -794 871 -812
16 -796 423 -4,146
73 -917 339 -659
31 -1015 345 -1,486
Cash From Investing (Increase) Decrease in Other Assets Change in Investments Cash From Investing
-42 -1,279 -1,321
-43 885 842
-44 -553 -596
-44 3 -41
-45 -930 -976
-46 -279 -324
Cash Flows From Financing Increase in Treasury Stock Accumulated Other Changes in Equity From nonowner Net Cashflow From Issuances and Payment of Note Payable and Long Term Debt
Change in Cash Cash at Beginning of Period New Cash Balance
-7
214 207
151
207 358
95
358 454
-6
454 448
-130
448 318
-197
318 121
Travelers Companies Inc Common Size Income Statement **Percentage of Total Assets
Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
19.55% 2.53% 0.28% 0.02% 0.15% 22.53%
20.38% 2.91% 0.27% 0.25% 0.07% 23.88%
21.12% 2.75% 0.28% 0.05% 0.12% 24.33%
21.16% 2.81% 0.31% 0.05% 0.12% 24.46%
21.52% 2.86% 0.32% 0.05% 0.12% 24.87%
21.93% 2.92% 0.32% 0.05% 0.12% 25.35%
22.25% 2.96% 0.33% 0.05% 0.13% 25.71%
22.35% 2.97% 0.33% 0.05% 0.13% 25.83%
11.33% 3.48% 3.07% 0.35% 18.23% 4.30% 0.81% 0.18% 0.99% 3.31%
12.56% 3.61% 3.24% 0.37% 19.78% 4.09% 0.89% 0.15% 1.04% 3.06%
15.56% 3.71% 3.40% 0.37% 23.03% 1.29% -0.13% 0.06% -0.07% 1.36%
14.09% 3.71% 3.37% 0.69% 21.86% 2.59% 0.60% 0.00% 0.60% 2.00%
14.47% 3.78% 3.43% 0.65% 22.33% 2.54% 0.58% 0.00% 0.58% 1.95%
14.70% 3.85% 3.49% 0.65% 22.69% 2.66% 0.61% 0.00% 0.61% 2.05%
14.91% 3.90% 3.54% 0.65% 23.00% 2.71% 0.62% 0.00% 0.62% 2.08%
14.96% 3.92% 3.55% 0.65% 23.08% 2.75% 0.63% 0.00% 0.63% 2.12%
Revenues Premiums earned Net investment income Fee income Net realized investment gains (losses) Other revenues Total Revenues Claims and Expenses Claims & claim adjustment expenses Amortization of deferred acquisition costs General & administrative expenses Interest expense Total Claims and Expenses Income (Loss) Before Income Taxes Total current tax expense (benefit) Total deferred tax expense (benefit) Income tax expense (benefit) Net income (loss)
Travelers Companies Inc Common Size Balance Sheet **Percentage of Total Assets
Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
59.73% 0.49% 0.99% 0.19% 0.80% 5.34% 2.78% 69.14% 0.19% 0.75% 5.23% 10.95% 0.77% 1.69% 0.47% 5.08% 3.20% 0.48% 2.05% 100.00%
61.41% 0.53% 1.04% 0.22% 0.83% 3.44% 3.30% 69.50% 0.20% 0.73% 5.48% 10.69% 0.79% 1.71% 0.01% 4.96% 3.22% 0.41% 2.30% 100.00%
62.07% 0.47% 0.00% 0.00% 0.85% 0.00% 2.89% 3.53% 69.82% 0.15% 0.74% 5.49% 10.52% 0.77% 1.69% 0.22% 4.72% 3.18% 0.41% 2.31% 100.00%
61.54% 0.48% 0.00% 0.00% 0.80% 0.00% 2.93% 3.87% 69.62% 0.16% 0.74% 5.58% 10.72% 0.77% 1.70% 0.21% 4.56% 3.20% 0.37% 2.37% 100.00%
62.28% 0.52% 0.00% 0.00% 0.74% 0.00% 2.93% 3.56% 70.03% 0.22% 0.74% 5.12% 11.27% 0.76% 1.70% 0.22% 3.95% 3.20% 0.38% 2.41% 100.00%
62.27% 0.55% 0.00% 0.00% 0.77% 0.00% 2.93% 3.27% 69.80% 0.25% 0.74% 5.19% 11.32% 0.75% 1.69% 0.22% 4.01% 3.19% 0.39% 2.44% 100.00%
61.92% 0.59% 0.00% 0.00% 0.79% 0.00% 2.90% 3.50% 69.69% 0.24% 0.74% 5.22% 11.46% 0.74% 1.67% 0.23% 4.03% 3.14% 0.40% 2.45% 100.00%
48.61% 10.38% 5.08% 0.39% 0.10% 5.85% 6.20% 12.15% 0.05% -0.07% 6.29% 5.03% 75.78%
49.16% 10.61% 4.96% 0.37% 0.33% 5.64% 5.99% 11.97% 0.05% -0.06% 6.31% 5.19% 76.60%
50.74% 10.49% 4.90% 0.37% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.69% 5.34% 77.52%
49.59% 10.63% 4.99% 0.38% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.69% 5.34% 76.62%
47.23% 10.84% 5.09% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 74.30%
48.16% 10.99% 5.16% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 75.46%
46.57% 10.81% 5.07% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 73.59%
0.06% 19.17% 17.92% 1.19% 14.13% 24.22% 100.00%
19.82% 18.72% 1.92% 17.05% 23.40% 100.00%
0.00% 17.59% 20.47% 1.55% 17.14% 0.00% 22.48% 100.00%
0.00% 17.22% 22.62% 1.55% 18.01% 0.00% 23.38% 100.00%
0.00% 18.02% 24.63% 1.55% 18.50% 0.00% 25.70% 100.00%
0.00% 18.37% 26.63% 1.55% 22.01% 0.00% 24.54% 100.00%
0.00% 18.68% 28.38% 1.55% 22.21% 0.00% 26.41% 100.00%
Assets Fixed maturities, available for sale at fair value Equity securities, at fair value Gross real estate Less: accumulated depreciation Real estate Mortgage loans Short-term securities Other investments Total Investments Cash Investment income accrued Premiums receivable Reinsurance recoverables Ceded unearned premiums Deferred acquisition costs Deferred tax asset Contractholder receivables Goodwill Other intangible assets Other assets Total Assets Liabilities Claims & claim adjustment expense reserves Unearned premium reserves Contractholder payables Payables for reinsurance premiums Total short-term debt Senior notes Total long-term debt Total debt principal Unamortized fair value adjustment Unamortized debt issuance costs Debt Other liabilities Total Liabilities Shareholders' Equity Preferred Stock Savings Plan - convertible preferred stock Common stock Retained earnings Accumulated other changes in equity from nonowner sources Treasury stock, at cost Unearned compensation Total Shareholders' Equity Total Liabilities and Shareholders' Equity
Travelers Companies Inc Value Driver Estimation Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
FCFE (simple) Net Income ‐ Δ Total Assets + Δ Total Liabilities FCFE (simple)
3,622 3,216 1,426 (191) (4,379) (579) (2,287) (2,439) 419 1,526 5,156 2,424
2,116 2,052 2,151 1,362 (969) 170 2,020 (1,698) (2,310) 2,774 1,323 (329)
2,200 2,269 2,309 345 1,495 809 1,481 (872) (1,015) 3,336 (98) 486
FCFE (formal) Net Income Sources of Cash: + ↑ in Debt + ↑ in Contractholder payables + ↑ in Payables for reinsurance premiums + ↑ in Other Liabili es + ↑ in Unearned premium reserves + ↑ Claims & claim adjustment expense reserves + ↑ in Preferred Stock + Sources of Cash Uses of Cash: +↑ in Fixed Assets +↑ in Investments +↑ in Short‐Term Securi es +↑ in Other Investments +↑ in Investment income accrued +↑ in Premiums Receivable +↑ in Reinsurance recoverables +↑ in Ceded unearned premiums +↑ in Deferred Acquisi on Costs +↑ in Contractholder Receivables +↑ in Other Assets ‐ Uses of Cash FCFE (Formal) Equity Economic Profit (EP) Model Net Income Beginning TSE ROE Rₑ Equity Economic Profit (EP)
3,622 3,216 1,426 2,116 2,052 2,151 2,200 2,269 2,309 346 (553) 18 (406) (96) (1,596) (10) (2,297)
84 (454) (139) 6 60 (1,996) (11) (2,450)
(6) (157) (18) 131 181 288 (68) 351
(574) 4 2 234 9 2,346 ‐ 2,020
(55) 51 4 (52) 54 (1,701) ‐ (1,698)
(290) 111 21 9 237 (2,398) ‐ (2,310)
19 93 3 18 198 1,150 ‐ 1,481
81 (18) 11 80 (38) (989) ‐ (872)
44 85 19 43 182 (1,389) ‐ (1,015)
38 4,644 (370) (424) 2 (483) (1,416) (25) (16) (553) (438) 959 366
(27) (2,959) 764 (106) (34) 26 (1,297) (103) 24 (454) 22 (4,144) 4,910
27 1,452 (2,022) 501 (23) 233 (337) 15 4 (157) 248 (59) 1,836
34 1,482 (529) 814 14 87 (32) (8) ‐ (185) 42 1,719 2,417
(60) (1,152) 10 609 (9) 44 105 (15) ‐ (214) 43 (640) 993
(57) 917 10 (0) 6 (475) 601 (4) ‐ (633) 44 408 (566)
28 251 10 (609) (0) 95 89 (6) ‐ 73 44 (24) 3,705
30 597 12 (0) 10 104 319 (5) ‐ 80 45 1,191 206
32 (84) 14 609 3 98 548 (20) ‐ (144) 46 1,101 193
3,622 3,216 1,426 2,116 2,052 2,151 2,200 2,269 2,309 25,319 27,415 25,475 24,477 23,818 24,548 27,028 25,891 28,259 14.31% 11.73% 5.60% 8.64% 8.61% 8.76% 8.14% 8.77% 8.17% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 1,622 1,050 (587) 182 170 212 64 224 76
Travelers Companies Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth Cost of Equity ROE Fiscal Years Ending Dec. 31
1.75% 7.90% 8.17% 2012E
2013E
2014E
2015E
2016E
2017E CV
DCF Model FCFE (Simple) Net Income ROE Periods to Discount Discount Factor DCF V(e ) Less: ESOP Sh. Out Target Po Today's Po
2774 2116 8.643% 1 1.079 2571 26010 196 415.80 $ 62.08 $ 63.49
1323 2052 8.614% 2 1.164 1136
‐329 2151 8.764% 3 1.256 ‐262
3336 2200 8.138% 4 1.356 2461
‐98 2269 8.765% 5 1.463 ‐67
486 2309 8.171% 5 1.463 20170
FCFE (Formal) Net Income ROE Periods to Discount Discount Factor DCF V(e ) Less: ESOP Sh. Out Target Po Today's Po
2417 2116 8.643% 1 1.079 2240 25686 195.99 415.80 $ 61.30 $ 62.70
993 2052 8.614% 2 1.164 853
‐566 2151 8.764% 3 1.256 ‐451
3705 2200 8.138% 4 1.356 2733
206 2269 8.765% 5 1.463 141
193 2309 8.171% 5 1.463 20170
EP Model EP Net Income Beginning TSE ROE Periods to Discount Discount Factor PV EP PV of EP V(e ) Shares Outstanding Less: ESOP Target Po Today's Po
182 2116 24477 8.64% 1 1.079 168 1533 26010 415.80 195.99 $ 62.08 $ 63.49
170 2052 23818 8.61% 2 1.164 146
212 2151 24548 8.76% 3 1.256 169
64 2200 27028 8.14% 4 1.356 47
224 2269 25891 8.77% 5 1.463 153
76 2309 28259 8.17% 5 1.463 850
Travelers Companies Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 Key Assumptions CVg of EPS CV ROE Cost of Equity DDM (Future Cash Flows) EPS DIV Payout Ratio Rentention Ratio Periods to Discount Discount Factor Discounted CF's Intristic Value Target Price Future Cash Flows P/E Multiple EPS(next period) Future Stock Price
2012E
2013E
2014E
2015E 2016E CV 2017E CV
1.75% 8.17% 7.90%
$ 5.12 $ 5.08 $ 5.40 $ 6.26 $ 6.54 $ 6.79 1.749 1.85394 2.002255 2.262548 2.601931 5.337818 34.14% 36.50% 37.10% 36.12% 39.79% 65.86% 63.50% 62.90% 63.88% 60.21% 1 2 3 4 5 5 1.079 1.164 1.256 1.356 1.463 1.463 $ 1.62 $ 1.59 $ 1.59 $ 1.67 $ 1.78 $ 59.33 $ 67.59 $ 69.12 11.7109 $ 5.12 $ 59.99
Travelers Companies Inc Relative P/E, PEG, and P/B ****4/4/2012 Yahoo! Finance Ticker Company ACE ACE Limited CB The Chubb Corporation ALL Allstate PGR Progressive Corp HIG Hartford Financial Service XL XL Group plc CINF Cincinnati Financial Group
Price $ 73.07 $ 69.83 $ 32.55 $ 22.89 $ 20.96 $ 21.25 $ 34.35
EPS 2012E $7.55 $5.76 $3.69 $1.56 $3.38 $1.86 $1.51
EPS 2013E $7.65 $5.96 $4.04 $1.69 $3.74 $2.16 $1.44 Average
P/E 12 9.7 12.1 8.8 14.7 6.2 11.4 22.7 12.2
P/E 13 9.6 11.7 8.1 13.5 5.6 9.8 23.9 11.7
Est. 5yr Gr. 10 7.92 9.13 8 7.73 10.0 5.0
P/B 12 0.98 1.22 0.87 2.36 0.4 0.7 1.1 0.97
PEG 12 0.97 1.53 0.97 1.83 0.80 1.14 4.55 1.8
PEG 13 0.96 1.48 0.88 1.69 0.73 0.98 4.77 1.8
BVequity
TRV Implied Value: Relative P/E (EPS12) Relative P/E (EPS13) PEG Ratio (EPS12) PEG Ratio (EPS13) P/B 12
0 $ 59.99
5.12 5.08 11.7 11.8
$ 62.69 $ 59.62 $ 54.48 $ 52.90 $ 56.06
5.805438 57.67495 2.0 2.0
Travelers Companies Inc Key Management Ratios
Fiscal Years Ending Dec. 31 Liquidity Ratios Current Ratio
2010
2011
2012E
2013E
2014E
2015E
2016E
41.13%
38.66%
36.95%
38.49%
39.53%
38.65%
40.38%
13.66%
11.48%
10.60%
11.34%
11.37%
10.82%
11.50%
11.73%
5.60%
8.64%
8.61%
8.76%
8.14%
8.77%
3.06%
1.36%
2.00%
1.95%
2.05%
2.08%
2.12%
3.129
3.281
3.449
3.277
2.891
3.075
2.787
24.22%
23.40%
22.48%
23.38%
25.70%
24.54%
26.41%
8.289
3.694
2.908
2.987
3.161
3.227
3.272
12.81%
5.60%
8.16%
7.86%
8.07%
8.11%
8.21%
17.15%
5.31%
10.60%
10.21%
10.48%
10.53%
10.66%
32.20%
32.20%
32.06%
32.06%
32.06%
32.06%
32.06%
61.64%
73.68%
65.10%
65.75%
65.52%
65.51%
66.47%
93.84%
105.88%
97.17%
97.81%
97.58%
97.57%
98.53%
(Current Assets/Current Liabilities)
Cash Ratio [(Cash+available for sale securities)/Current Liabilities]
Activity or Asset‐Management Ratios ROE (NI/Beg. TSE)
ROA [(NI+Interest Expense)/Total Asset]
Financial Leverage Ratios Debt Equity Ratio [(Debt+PV Op Leases)/TSE)
Equity to Assets (TSE/Total Assets)
Interest Coverage Ratio (Net Income/Interest Expense)
Profitability Ratios Profit Margin (Net Income/Revenue)
Operating Margin (EBT/Revenue)
Expense Ratio [(Underwriting Expense‐Fee Income)/Premiums Earned]
Loss Ratio [(Claim and Claim Adj Exp/Premiums Earned)]
Combined Ratio (Expense Ratio+Loss Ratio)
Travelers Companies Inc Key Assumptions of Valuation Model ***All numbers in millions unless noted Ticker Symbol Current Share Price Fiscal Year End Pre‐Tax Cost of Debt Beta Risk‐Free Rate Equity Risk‐Premium Cost of Equity Policy Growth 2012 Policy Growth 2013 Policy Growth 2014 Policy Growth 2015 Policy Growth 2016 Policy Growth 2017 EPS average CV Growth Rate Stock Price (DCF Simple)
TRV 59.19 Dec. 31 5.81% 0.783098 3.35% 5.81% 7.90% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 5.611859 1.75% $ 63.49
Marginal Tax Rate Investment Income as % of Earned Premiums Fee Income as % of Earned Premiums Other Revenue as % of Earned Premiums Other Operating Revenue as % of Earned Premiums Claims & claim adj. expenses as % of Total Policies SG&A as % of Earned Premiums
23.00% 13.30% 1.48% ‐0.06% 0.62% 14.03% 15.93%
Best
$ 63.49 Worst 0.50% 0.75% 1.00% 1.25% 1.50% CV Growth 1.75% Rate 2.00% 2.25% 2.50% 2.75% Best 3.00%
0.68 68.53 68.89 69.27 69.68 70.14 70.63 71.17 71.76 72.41 73.14 73.95
0.7 67.31 67.62 67.96 68.33 68.72 69.15 69.63 70.14 70.71 71.34 72.04
0.72 66.13 66.40 66.70 67.02 67.36 67.74 68.15 68.60 69.09 69.63 70.24
0.74 64.99 65.23 65.48 65.76 66.06 66.38 66.73 67.12 67.54 68.01 68.52
‐3.25% 48.91 50.45 51.97 53.49 55.00 56.49 57.97 59.45 60.91 62.36 63.80
‐2.25% 50.37 51.90 53.43 54.95 56.45 57.94 59.42 60.89 62.35 63.80 65.24
‐1.25% 51.80 53.34 54.86 56.38 57.88 59.37 60.85 62.31 63.77 65.21 66.64
‐0.25% 53.22 54.75 56.27 57.78 59.28 60.77 62.24 63.71 65.16 66.59 68.02
0.82 60.78 60.89 61.02 61.15 61.29 61.45 61.61 61.79 61.99 62.20 62.44
0.84 59.81 59.90 59.99 60.09 60.20 60.32 60.45 60.59 60.74 60.91 61.09
0.86 58.86 58.93 59.00 59.07 59.15 59.24 59.33 59.44 59.55 59.66 59.80
Policy Growth 2013 0.75% 1.75% 2.75% 54.61 55.98 57.32 56.14 57.50 58.85 57.66 59.02 60.36 59.17 60.52 61.86 60.66 62.01 63.34 62.14 $ 63.49 64.81 63.61 64.96 66.27 65.07 66.41 67.71 66.51 67.84 69.15 67.95 69.27 70.56 69.36 70.68 71.96
3.75% 58.64 60.16 61.67 63.16 64.64 66.11 67.56 68.99 70.42 71.82 73.22
4.75% 59.94 61.45 62.95 64.44 65.91 67.37 68.81 70.24 71.66 73.05 74.44
5.75% 61.21 62.72 64.21 65.69 67.16 68.61 70.04 71.46 72.86 74.25 75.62
13.75% 56.24 57.29 58.35 59.40 60.46 61.51 62.56 63.62 64.67 65.73 66.78
14.00% 56.74 57.80 58.85 59.90 60.96 62.01 63.07 64.12 65.18 66.23 67.28
Return on Business Insurance Policies 14.25% 14.50% 14.75% 15.00% 15.25% 57.25 57.75 58.25 58.76 59.26 58.30 58.80 59.31 59.81 60.31 59.35 59.86 60.36 60.87 61.37 60.41 60.91 61.42 61.92 62.42 61.46 61.97 62.47 62.97 63.48 62.52 63.02 $ 63.52 64.03 64.53 63.57 64.07 64.58 65.08 65.59 64.63 65.13 65.63 66.14 66.64 65.68 66.18 66.69 67.19 67.69 66.73 67.24 67.74 68.24 68.75 67.79 68.29 68.80 69.30 69.80
15.50% 59.76 60.82 61.87 62.93 63.98 65.04 66.09 67.14 68.20 69.25 70.31
15.75% 60.27 61.32 62.38 63.43 64.48 65.54 66.59 67.65 68.70 69.76 70.81
13.00% 110.44 107.35 104.43 101.66 99.04 96.54 94.17 91.91 89.76 87.70 85.73
13.25% 101.33 98.49 95.80 93.26 90.85 88.55 86.37 84.30 82.32 80.43 78.62
Claim Expense as % of Total Policies CV 13.50% 13.75% 14.00% 14.25% 14.50% 92.22 83.10 73.99 64.88 55.77 89.63 80.76 71.90 63.04 54.18 87.18 78.55 69.92 61.30 52.67 84.86 76.45 68.05 59.65 51.25 82.66 74.47 66.28 58.08 49.89 80.56 72.58 $ 64.59 56.60 48.61 78.58 70.78 62.98 55.19 47.39 76.68 69.07 61.45 53.84 46.23 74.88 67.44 60.00 52.56 45.12 73.15 65.88 58.61 51.33 44.06 71.51 64.39 57.28 50.16 43.05
14.75% 46.66 45.32 44.05 42.84 41.70 40.62 39.59 38.61 37.68 36.79 35.94
15.00% 37.55 36.45 35.42 34.44 33.51 32.63 31.80 31.00 30.24 29.51 28.82
13.23% 66.73 66.38 66.03 65.68 65.33 64.98 64.63 64.28 63.93 63.58 63.23
13.43% 66.36 66.01 65.66 65.31 64.96 64.61 64.26 63.91 63.56 63.21 62.86
Claim Adj Exp 12 As % of Total Policies 13.63% 13.83% 14.03% 14.23% 14.43% 65.99 65.62 65.24 64.87 64.50 65.64 65.27 64.89 64.52 64.15 65.29 64.92 64.55 64.17 63.80 64.94 64.57 64.20 63.82 63.45 64.59 64.22 63.85 63.47 63.10 64.24 63.87 $ 63.50 63.13 62.75 63.89 63.52 63.15 62.78 62.40 63.54 63.17 62.80 62.43 62.06 63.19 62.82 62.45 62.08 61.71 62.84 62.47 62.10 61.73 61.36 62.49 62.12 61.75 61.38 61.01
14.63% 64.13 63.78 63.43 63.08 62.73 62.38 62.03 61.68 61.33 60.98 60.64
14.83% 63.76 63.41 63.06 62.71 62.36 62.01 61.66 61.31 60.96 60.61 60.26
Worst Worst
Return on Personal Insurance Policies
Best
$ 63.49 53.50% 53.75% 54.00% 54.25% 54.50% 54.75% 55.00% 55.25% 55.50% 55.75% 56.00%
13.50% 55.73 56.79 57.84 58.90 59.95 61.01 62.06 63.11 64.17 65.22 66.28 Best
Best
MRP
Worst
$ 63.49 4.80% 5.00% 5.20% 5.40% 5.60% 5.80% 6.00% 6.20% 6.40% 6.60% 6.80%
12.75% 119.55 116.21 113.05 110.06 107.23 104.53 101.97 99.52 97.19 94.97 92.85 Best
$ 63.49 Best 13.03% 13.23% 13.43% 13.63% Claim Adj 13.83% Exp 13 As % 14.03% of Total 14.23% Policies 14.43% 14.63% 14.83% Worst 15.03%
13.03% 67.10 66.75 66.40 66.05 65.70 65.35 65.00 64.65 64.30 63.95 63.60
Worst
0.8 61.78 61.92 62.08 62.24 62.42 62.61 62.82 63.04 63.29 63.56 63.85
Worst
$ 63.49 Worst ‐3.25% ‐2.25% ‐1.25% ‐0.25% 0.75% Policy 1.75% Growth 2014 2.75% 3.75% 4.75% 5.75% Best 6.75%
Beta 0.76 0.78 63.88 62.82 64.09 62.99 64.31 63.17 64.54 63.37 64.80 63.59 65.08 $ 63.82 65.38 64.07 65.70 64.35 66.06 64.65 66.46 64.97 66.89 65.34
0.88 57.95 57.99 58.04 58.09 58.14 58.20 58.26 58.32 58.39 58.47 58.56 Best
6.75% 62.46 63.96 65.45 66.92 68.38 69.82 71.24 72.65 74.04 75.42 76.78 Best
16.00% 60.77 61.83 62.88 63.93 64.99 66.04 67.10 68.15 69.21 70.26 71.31 Worst
15.25% 28.44 27.59 26.80 26.04 25.32 24.65 24.00 23.38 22.80 22.24 21.71 Worst
15.03% 63.39 63.04 62.69 62.34 61.99 61.64 61.29 60.94 60.59 60.24 59.89
Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
Important disclosures appear on the last page of this report.
The Travelers Companies, Inc. (NYSE: TRV)
Financials
April 17, 2012
Recommendation: HOLD Analysts
Current Price $59.16 Target Price $62.69-$69.12
Luke Rasumussen [email protected] Timothy Reed [email protected]
TRV Weathers the Storm
James Sdregas [email protected]
Travelers is one of only three publicly traded P&C insurers to land in top the tier of a recent customer satisfaction poll by J.D. Power.
Jordan Wagner [email protected]
Company Overview The Travelers Companies, Inc. (TRV), a component of the DJI, operates as a property-casualty insurer, protecting customers from potential losses in the event of catastrophe or other misfortune. Travelers operates in three main business segments: Personal; Business; and Financial, Professional and International. The company’s primary form of revenue is premiums collected from clients. Travelers invests premiums in an array of securities ranging from short term securities to long term fixed maturities. Travelers uses premiums and returns from investments to pay claims to policy holders in the event of loss.
Stock Performance Highlights 52 week High 52 week Low Beta Value Average Daily Volume
$64.17 $45.97 0.78 3.07 m
A current soft-pricing cycle led by discount retailers Geico and Progressive should be nearing an end due to high catastrophe losses in 2011. Travelers focus on domestic clientele (>95% of revenue comes from domestic operations) will benefit the company as the U.S. economic condition improves, and also limits exposure to high risk European markets. The U.S. Fed has vowed to keep interest rates low through 2014, putting pressure on P&C insurers whose revenues are comprised of 15-20% of returns on investment. P&C insurers factor expected inflation into policy prices, with the low estimate typically setting the bar in a very competitive industry. If the current interest rate environment allows for runaway inflation, the industry as a whole will feel the effects.
Share Highlights Market Capitalization Shares Outstanding Book Value per share EPS (2012 est.) Forward P/E Ratio Dividend Yield Dividend Payout Ratio
$23.25 b 393.07 m $58.79 $5.19 11.1 2.80% 34.33%
One Year Stock Performance
Company Performance Highlights ROA ROE Revenue
1.03% 5.71% $25.45 b TRV: Blue, S&P 500: Red Source: Google Finance
Financial Ratios Current Ratio Debt to Equity Combined Ratio
38.66% 3.281 105.88% Important disclosures appear on the last page of this report.
Even though there are positive signs the large amount of uncertainty centering on the global economy will prevent the broad market from large short‐term growth as we expect GDP to remain around 2.3% annually. The P&C Industry will perform similar to the overall market as consumers are particularly skeptical of financial service companies. Distrust of the industry will be offset by the decrease in unemployment, which we believe will fall to 8.1%, and prediction of increased housing starts. We believe that even though the outlook for insurance is positive no excess returns can be made until consumer confidence in the financial industry increases. 2‐3 Year Outlook After a period of slow short‐term growth we predict the economy will enter a period of considerable growth as GDP returns to historical levels of 3.0% annually. The debt crisis in Europe will reach solution within the next 2 years serving to increase consumer confidence in the global economy. We also expect unemployment to decrease to 7.0%, which while still high, will further increase GDP and create a larger amount of disposable income in the economy. Due to a prolonged period of low interest rates we predict inflation to raise to 4.0% spurring action by the Fed to raise the federal funds rate thus increasing investing activities and interest spreads essential to financial companies. In the long term of 3‐5 years the P&C industry should outpace the S&P. Recovery and increased spending at the consumer level will ignite large purchases of cars and homes that had been put off in recessionary periods. Insurers will benefit from the renewed demand especially considering premiums will have increased due to higher catastrophe levels. Commercial businesses will also shed excess cash that they had held in recessionary periods and expand operations increasing their demand for new policies.
Executive summary The Travelers Companies Inc. operates in the Property‐Casualty (P&C) insurance industry. The firm’s main services are providing insurance against loss for consumers and businesses, both internationally and domestically. A current soft market has kept prices low and thus affected profits. Despite being tampered by low interest rates, which affect investment income, we expect a recovery in the U.S. economy to spark an increase in consumer spending and thus provide more assets in need of insurance. At this time we recommend holding Travelers due to size and position within the industry but hesitate to rate a buy due to current challenges faced by the P&C industry. Economic and Capital Markets Outlook 6‐12 Month Outlook In the next 6 months the economy will grow at a slow to moderate rate. We predict that GDP growth will hover around a 2.3% annual rate. Unemployment will continue to decline slowly as economic prospects in the United States look better relative to where they have been in previous years. The unemployment rate will drop to 8.1% by the time of the 2012 presidential election. Consumers will continue to be cautious coming out of the recession. However, the growth in GDP and the improvement in unemployment statistics will lead to gradually improving consumer confidence. Source: Google Finance Recent economic performance shows positive growth in many key areas although the growth rate is lower than many have expected. The fed has announced to keep the federal funds rate low. Low yields on treasuries are increasing activity on the stock exchange as consumers seek higher returns. The higher volume will drive increases in the S&P Index, however continued uncertainty in Europe will keep average returns modest. 1
Industry Analysis
losses. Because the P&C industry is highly competitive, the lowest inflation estimate tends to set the price. As the FED has set policy targeting low rates through 2014 it is important to keep an eye on inflation when studying this industry. Housing Housing sales serve as a strong indicator of demand for P&C policies since increasing housing sales widens the market for those in need of insurance. During 2011 US sales of existing homes decreased by 23.5%.14 Additionally 74% of mortgage originations during the year were refinancing’s due to historically low rates, which does not increase the market demand for P&C insurance.
Industry Description The P&C insurance industry provides underwriting services to compensate customers in the event of losses. Insurance seekers pay premiums, generally priced on interest rates, to the underwriter who pays a claim to the customer if loss occurs. P&C insurer’s coverage includes commercial and personal lines, the latter dealing mostly with homeowner’s and personal auto insurance. Expenses consist predominantly of losses paid on policyholder claims but also to commission paid to brokers, salespeople and agents who provide policies to customers. Earned premiums are largest component of income along with investment income from reinvested premiums and capital gains made on sales of reinvestments. Key Economic Variables Interest Rates and Inflation Increased interest rates cause prices to come down as more supply comes into market, and vice versa for decreased rates. This can be explained because when interest rates are low firms see investment income opportunities decrease. Because these investment returns are often called on to cover losses in underwriting, lower rates make the industry more risky. In normal circumstances low rates tend to drive up the price as players leave the market to avoid risk. Recently however, prices have remained low despite low rates due to weak demand in a depressed market. We expect this soft‐pricing environment to subside as an economic recovery gains traction and demand for insurance increases. When establishing prices customers are to pay in premiums a firm considers future inflation expectations. When inflation is expected to be higher, insurers will charge higher premiums to cover potentially higher
Figure 1: Residential Construction Spending Source: NAHB
New home construction starts also faced similar decreases by falling 45,000 units from 2011 production levels.12 Although housing sales have suffered the construction sector experienced its first net increase in hires since 2006.11 This is a strong indicator of future housing construction which we believe will increase by 10‐15% in 2012. In the long run we expect housing sales to increase at a faster rate of 20% as current vacancies and overcapacities are filled. Commercial construction also decreased 5.1% in 2011.7 2
The decrease has caused a large amount of vacancies which will prove for a cheaper source of expansion as the economy recovers and commercial companies.
Figure 2: Net Hires for Construction Sector Source: NAHB
policy pricing which will diminish large P&C firms current advantages.8 P&C firms will continue to benefit from the TRIA which has been extended through 2014.10 GDP and Unemployment As a measure of the overall health of the economy, GDP is an important statistic to insurance companies. In times GDP is growing strongly, consumers and businesses are more active in the market place and seek more insurance. We expect developments in the crisis in Europe and changes in consumer confidence to drive GDP for the foreseeable future.
Economic Crisis at Home and Abroad Economic trouble in both the US and EU have caused a wide range of variability for both US and international security exchanges. The P&C insurance industry is heavily dependent on investment returns which currently account for between 15%‐20% of total revenues.1 During 2011 A.M. Best Co placed a watch rating on five privately held insurers with AAA ratings.13 Although Travelers and the majority of P&C firms have little direct exposure to risk in European debt they still face issues pertaining to the crisis’ slowing effect on the US economic recovery. Since we expect no short‐term resolution in Europe, firms such as Travelers who rely primarily on US, state, and municipal debt for investing (51.32% of total investments) will face struggles earning substantial investment returns due to maturing investments being reinvested at historically low treasury rates.5 Central regulation is a prevalent issue for insurance as the NAIC continues seeking to create uniformity across the country. With 7 of the 10 largest insurer failures occurring since 2000 the NAIC will receive more support in creating regulation of the insurance industry.9 Central regulation will decrease competition on premiums and
Figure 3: Real GDP Growth Source: Bloomberg
Encouraging jobless claims numbers released in early February saw claims continue on a downward trend. Consensus for claims was at 370,000 while actual claims came in at 358,000.6 As more members of the labor force find work and see their disposable income increase, we expect demand for insurance to increase as consumers acquire new assets. Further, as unemployment falls, employers will need to increase policies in workman’s compensation and related coverage.
3
Figure 4: Unemployment Rate Source: Bloomberg
Combined Ratio Catastrophe losses are the most unpredictable aspect of an insurance provider’s underwriting results. After low years in 2006 and 2007, catastrophe losses have been significantly greater in recent years. The combined ratio is often used to measure underwriting results. A ratio greater than 100% indicates a loss, a ratio less than 100% a profit. Because underwriting is the most volatile aspect to firms in the industry, strong performance is an indicator of a strong company. In 2010 the industry’s combined ratio was 102.4%, up from 101.0% in 2009. Higher catastrophe claims saw the rate at 105.0% in 2008.1 Recent disasters in the US and abroad have reported combined ratio estimates for 2011 at 107.5%1,3
Figure 5: New Jobless Claims Source: Bloomberg
The huge losses in 2011 exhibited by a combined ratio of 107.5% should reduce some of the excess underwriting capacity and drive prices up. We expect prices to also be influenced by an overall rebound in the economy. Demand for insurance is fairly inelastic but we still expect an increase in demand as more disposable income comes to market. Market Competition/Comparison of Peers Concentration The insurance industry is highly condensed but remains highly competitive. The top 10 property and casualty insurers cover nearly 50% of the market.1
Recent Developments and Trends Premiums Written Premiums generally lasting 12 months serve as good representative of revenue generation. Written premiums of personal lines comprise of 42% of total industry written premiums and were up 3.3% in 2010. Premiums for commercial lines comprise 35% and were down 2.7% 2010. This is expected to be the result of excess underwriting capacity and poor demand in a weakened economy. Balanced lines combine the two and are the remaining 23% of total industry premiums. Balanced lines were up 2.1% 2010.1 Investment income makes up about 15%‐20% of annual revenue historically and was up 0.4% in 2010.2 However with the current yield on the 10 Year US Note remaining around 2% we expect firms to struggle with investment income. 4
and claims are paid, which causes competing firms to aggressively pursue the most attractive policies for insuree’s generally in the form of low cost.8 During the past 5 years P&C insurers have experienced a soft cycle, with discount retailers, such as Geico and Progressive igniting price wars through aggressive advertising campaigns.7 A low amount of catastrophe losses during the period allowed firms to keep prices low, however recent years have seen an increase in catastrophic events which will lead to a trend of increasing prices. Although deregulation has increased the amount of financial organizations entering the P&C industry the industry still favors larger, market leading firms with great financial capacity. Since the industry has experienced net underwriting losses for the last 4 years the companies that have the means to earn higher investment income are best suited to maintain a strong presence.7 Company Specific Analysis Overview The Travelers Companies Inc. is one of the largest property and casualty insurers in the US and dates back to 1853.5 As stated in its 10‐K, the company focuses of profitable growth rather than premium volume or market share. Travelers deals in three areas: personal insurance, business insurance, and financial, professional and international insurance. Operating Segments Traveler’s operations can be split into three sects: Personal, Business, and Financial Professional and International (FPI). International operations make up approximately 5.0% of company revenue.4 A breakdown of revenue sources is as follows:
Figure 6: P&C Market Saturation Source: NetAdvantage S&P Survey
The industry is in a mature stage, making entry for new participants difficult, yet competition among existing firms remains high. Saturation in the industry is high as evidenced by 98% of premium income coming from renewals.7 A few key statistics for top competitors in the industry are as follows: Company
ROE (%)
ROA (%)
PM (%)
DIV Yield (%)
Trailing P/E
Forwar d P/E
ACE
6.68
1.77
9.41
2.60
15.90
9.74
Chubb
10.77
N/A
12.71
2.30
12.01
11.60
Progressive
17.13
4.71
6.55
1.90
13.67
12.78
Travelers
5.71
1.04
5.60
2.80
17.53
9.73
Allstate
4.18
0.68
2.41
2.70
20.64
7.75
AIG
6.63
0.37
13.41
0.00
6.09
10.86
Figure 7: P&C Industry Leaders Key Ratios Source: Yahoo!Finance
Regulation A lack of central regulation has made the insurance industry immensely competitive. In addition to the lack of federal regulation increasing competition insurance companies real costs are unknown until policies mature 5
State
Figure 8: Travelers Business Segmentation Source: 10‐K
California New York Texas Pennsylvania Florida New Jersey Illinois Massachusetts Georgia All other domestic 43.8 Total domestic 94.4 International 5.6 Consolidated total 100
2010
2009
2008
Business
$11,891
$12,098
$12,580
FPI
3,534
3,713
3,966
Personal
7,877
7,474
7,291
Total
$23,302
$23,285
$23,837
Figure 9 (in millions): Monetary Breakdown of Segments Source: 10‐K
Business insurance operations range from general liability to ocean marine coverage to agribusiness. The Financial, Professional and International sect includes bond and financial products as well as specialized coverage to foreign entities. Approximately 6,100 independent agents and brokers use companywide computer modeling and risk assessment techniques to provide services to customers.5 Personal insurance consists primarily of automobile and homeowner’s insurance. Personal insurance is provided to customers through 12,400 independent agents who are supported 7 service centers covering 16 marketing regions. Distribution Traveler’s distribution channels include not only agents and brokers, but also direct marketing though online resources and toll free numbers. It also employs salaried employees who distribute policies internationally and domestically. A breakdown of Traveler’s total written premiums in 2010 by location is as follows:
Figure 10: Travelers Premiums by Location Source: 10‐ K
Catalysts for Growth and Change The insurance industry has experienced a prolonged soft‐market stemming from many variables including overall economic uncertainty and heavy pricing competition. We believe that combined ratio’s exceeding 100% will force the industry to raise prices of underwriting activities making way for increased underwriting profits. As P&C firms raise prices the market will become more attractive to entry firms which we believe will increase the number of competitors. However large, stable firms will still hold firm control of the overall market attributable to their large current customer bases and the high percentage of reinsurances. The future of P&C Insurers will also benefit from economic recovery and renewed consumer confidence. Falling unemployment rates and increasing housing sales will greatly raise the demand for P&C policies on both a consumer and commercial level. To attract new customers P&C’s will continue to adopt 6
% of Total 9.70 9.7 7.3 5.1 4.3 3.9 3.8 3.6 3.2
specialized policies to better suit individual needs which we believe will begin to reduce the current focus of pricing competition. In the next 3‐5 years we expect increasing regulation from the NAIC as a predicted higher catastrophe rates will cause inevitable insolvency issues. The NAIC has stated that they wish to create national uniformity in rates and premiums.8 This will decrease advantages SWOT Analysis Strengths As a measurement of underwriting results, the combined ratio shows managements effectiveness in handling the more volatile aspect of the industry. Firms posting combined ratios better than their competitors are thought to be managing risk effectively. Travelers has repeatedly posted numbers below industry averages, an in 2010 had a combined ratio of 93.2% vs. 102.4% for the industry.5 Travelers focuses its operations domestically, with around only around 5% of revenue coming from international sources. With current economic uncertainties in Europe, mainly Greece, if one domino falls widespread failures could occur. Weaknesses Amidst the domestic and international financial uncertainty, the FED has vowed to keep its target for current low interest rates in place through 2014. Firms in the P&C insurance industry rely on returns from invested premiums to cover potential losses from underwriting. Travelers allocates a large portion of its investment capital to fixed income securities, whose returns are diminished by low rates. As long as interest rates remain low the industry faces potential for net losses in the event catastrophe losses outweigh returns on investments.
Opportunities Discount competitors in the industry, such as Geico and Progressive, use mass marketing techniques to reach a wide array of customers. To support the high volume of policy seekers internet mediums are established as ways for customers to pick up coverage. Travelers can benefit from investing in web based distribution. The web provides an easy opportunity for customers to access products at their own discretion. Travelers and other P&C insurers have also began experimenting with mobile phone applications to provide yet another medium through which customers can access their products. It is important to note, many insurance policies are very complex, and also customer loyalty is key in a competitive industry. For these reasons a strong human workforce must always remain in the business plan. Threats Inflation risk in the industry is always an issue. As earlier discussed, when inflation is expected to be high firms will charge higher premiums to adjust. However, the industry being so competitive the low inflation estimate typically determines price. We expect an economic recovery to slowly build in the short term before gaining real traction in 2‐3 years. If this happens and the FED fails to adjust its targets and tools for manipulating interest rates properly, we could see runaway inflation. Contrarily to its strength in avoiding risk in foreign markets, Travelers focus on domestic operations put it at risk for a U.S. slip. Though we are bullish on a U.S. recovery, if a double‐ dip recession that some expect were to occur, Travelers would feel the effect.
7
Valuation Assumptions and Sensitivity Analysis
extremely difficult to predict. Models can be built to estimate the level of workman’s compensation or automobile coverage expense a firm may incur based on the risk level associated with the policy holders. However a greater portion of the overall claims expense has to deal with catastrophic losses associated with extreme weather, for which there is no accurate predictor.
Our valuation models included several different valuing methods: Discounted Cash Flows using Free Cash Flow to Equity (simple) ‐ $63.49 Discounted Cash Flows using Free Cash Flow to Equity (formal) ‐ $62.70 Dividend Discount Model – $69.12 Relative P/E ‐ $62.69 Relative P/B ‐ $56.06 In order to value Travelers we began by forecasting investment asset accounts (i.e. fixed maturities, equity securities, short term investments etc.). To predict these accounts we examined what kind of returns Travelers has been able to achieve in the past for each of their investment assets. We then combined this data with our expectations for macroeconomic conditions to determine expected returns for the different asset accounts. Using this information and data we used to calculate average returns from the different business segments, we were able to forecast revenue. Return on Bus. Ins. Policies Price
2012 Claim Adj. Exp. as % of Total Policies Price
Figure 13: Price Sensitivity to Claim Adj. Expense as % of Total Policies Source: 10‐k
A key assumption in our models is the carrying value (CV) growth rate. We estimate the CV growth rate to be 1.75%. The logic behind 1.75% is that historical GDP growth has been roughly 3% annually. Travelers operates in a highly competitive, mature industry. Pricing as competitive as it is within the industry, we don’t expect any firms to be able to grow at a rate similar to the rest of the economy over the long term. CV Growth Rate 1.25% 1.50% 1.75% 2.00% 2.25% Price 63.37 63.59 63.82 64.07 64.35
14.25% 14.50% 14.75% 15.00% 15.25% 62.52 63.02 63.52 64.03 64.53
Figure 11: Price Sensitivity to Return on Business Insurance Segment Policies Source: 10‐k
Return on Pers. Ins. Policies Price
Figure 14: Price Sensitivity to CV Growth Rate Source: 10‐k
Another key assumption used was our cost of equity used to discount cash flows in the FCFE models and DDM. We estimated the stock to have a beta of .78 and the market risk premium to be 5.81%. 0.74 0.76 0.78 0.8 0.82 Beta 66.38 65.08 63.82 62.61 61.45 Price
54.25% 54.50% 54.75% 55.00% 55.25% 61.42 62.47 63.52 64.58 65.63
Figure 12: Price Sensitivity to Return on Personal Insurance Segment Policies Source: 10‐k
Claims expenses comprise the largest expense for P&C insurers so the model is quite sensitive to forecasts for claims expenses. To forecast claims we evaluated past expenses based on the number of outstanding policies. This expense is
Figure 15: Price Sensitivity to Beta Source: Yahoo! Finance
8
13.63% 13.83% 14.03% 14.23% 14.43% 64.24 63.87 63.50 63.13 62.75
When forecasting policy growth we used a modest rate compared to industry averages to account for possibility of negative growth in any one of the forecast horizon years. Furthermore, a P&C insurer may choose to limit policy growth to avoid risky underwriting. Traveler’s perennial position amongst industry leaders in combined ratio, a measure of underwriting results, displays sound underwriting practices that may be correlated to slower policy growth. Policy Growth 2013 Price
‐0.25% 0.75% 1.75% 2.75% 3.75% 60.77 62.14 63.49 64.81 66.11
Figure 16: Price Sensitivity to Policy Growth Source: 10‐k
9
Works Cited 1: Seifert, C. (2011, 0009 22). Insurance:
8: Randall, S. (n.d.).
http://www.law.fsu.edu/journals/lawr eview/downloads/263/rand.pdf. Retrieved from http://www.law.fsu.edu/journals/lawr eview/downloads/263/rand.pdf
Property-casualty. Retrieved from http://www.netadvantage.standardan dpoors.com/NASApp/NetAdvantage /showIndustrySurvey.do?code=ipc 2: Iso. (n.d.). Retrieved from
9: Improving property and. (2009, 0004 01).
http://www.iso.com/Research-andAnalyses/Studies-andWhitepapers/Insurer-FinancialResults-2010.html
Retrieved from http://www.mckinsey.com/clientserv ice/Financial_Services/Knowledge_ Highlights/Recent_Reports/~/media/ Reports/Financial_Services/Improvin g_P_C_Regulation.ashx
3: P/c insurers’ combined ratio for 2011
estimated at 107.5%. (2012, 0002 06). Retrieved from http://www.insurancejournal.com/ne ws/national/2012/02/06/234256.htm
10: Ball, R. (n.d.). Terrorism insurance act
(tria) extended to expire december 31, 2014. Retrieved from http://www.integrogroup.com/data/Fi le/whitepapers/tria_update___dec_2007_exte nsion.pdf
4: Property, casualty and direct insurance in
the us. (n.d.). Retrieved from http://clients.ibisworld.com/industry us/Majorcompanies.aspx?indid=132 5
11: Rodriguez, J. (n.d.). Construction 5: Travelers 2010 10-k. (n.d.). Retrieved
industry forecast 2012. Retrieved from http://construction.about.com/od/Con tractors/a/Construction-IndustryForecast-2012.htm
from http://investor.travelers.com/phoenix .zhtml?c=177842&p=irol-irhome 6: Bloomberg economic calendar. (n.d.).
Retrieved from http://www.bloomberg.com/markets/ economic-calendar/
12: New residential construction. (n.d.).
Retrieved from http://www.census.gov/construction/ nrc/
7: Kelly, D. (2011, 0012 31). Ibisworld
industry report 52412. Retrieved from http://clients.ibisworld.com/industry us/default.aspx?indid=1325
13: Powell, R. (2011, 00007 22). Insurance
stocks may get hit by europe crisis. Retrieved from http://www.marketwatch.com/story/i nsurance-stocks-may-get-hit-byeurope-crisis-2011-07-22
10
14: National association of realtors. (n.d.).
Retrieved from http://www.realtor.org/wps/wcm/con nect/b810d08049dae5a8972adf7393f 1335d/RELEHS.pdf?MOD=AJPER ES&CACHEID=b810d08049dae5a8 972adf7393f1335d 15：Google finance: Portfolios. (n.d.).
Retrieved from http://www.google.com/finance/portf olio?action=view 16：Yahoo!finance. (n.d.). Retrieved from http://finance.yahoo.com/
11
Travelers Companies Inc Revenue Decomposition Fiscal Years Ending Dec. 31 Earned premiums Business Insurance: Workers' compensation Commercial automobile Property General liability Commercial multi-peril Other Total Business Insurance Financial, Professional & International Insurance: Fidelity and surety General liability International Other Total Fin., Prof. & Int'l Insurance Personal Insurance: Automobile Homeowners and Other Total Personal Insurance Total earned premiums Net investment income Fee income Other revenues Total operating revenues for reportable segments Other revenues Net realized investment gains (losses) Total consolidated revenues
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2,457 1,956 1,761 1,899 2,894 1 10,968
2,489 1,912 1,669 1,739 2,958 (1) 10,766
2,899 1,940 1,607 1,738 3,126 17 11,327
2,853 1,945 1,747 1,849 3,015 6 11,416
2,882 1,964 1,765 1,867 3,046 8 11,533
2,954 2,013 1,809 1,914 3,122 11,813
3,107 2,118 1,903 2,013 3,284 12,425
3,063 2,088 1,876 1,985 3,237 12,248
1,015 929 1,255 134 3,333
1,023 884 1,276 134 3,317
970 832 1,218 154 3,174
992 865 1,239 144 3,240
1,009 880 1,261 146 3,296
1,027 895 1,283 149 3,354
1,045 911 1,306 151 3,413
1,065 928 1,330 154 3,477
3,696 3,421 7,117 21,418 2,776 306 153 24,653 10 17 24,680
3,693 3,656 7,349 21,432 3,059 287 130 24,908 (60) 264 25,112
3,720 3,869 7,589 22,090 2,879 296 127 25,392 (1) 55 25,446
3,833 3,937 7,769 22,425 2,983 332 140 25,879 (13) 48 25,915
3,830 3,934 7,764 22,593 3,005 334 141 26,073 (13) 49 26,109
3,897 4,003 7,900 23,067 3,068 341 144 26,620 (13) 50 26,657
3,767 3,869 7,637 23,474 3,122 347 146 27,090 (13) 51 27,127
3,778 3,881 7,659 23,384 3,110 346 146 26,986 (13) 51 27,023
Travelers Companies Inc Income Statement Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
21,432 3,059 287 264 70 25,112
22,090 2,879 296 55 126 25,446
22,425 2,983 332 48 127 25,915
22,593 3,005 334 49 128 26,109
23,067 3,068 341 50 131 26,657
23,474 3,122 347 51 133 27,127
23,920 3,182 354 52 135 27,643
24,339 3,237 360 53 138 28,127
13,210 3,802 3,406 388 20,806 4,306 934 156 1,090 3,216
16,276 14,934 3,876 3,935 3,556 3,571 386 728 24,094 23,168 1,352 2,747 -139 632 65 -74 632 1,426 2,116
15,195 3,964 3,598 687 23,445 2,665 613
15,461 4,047 3,674 681 23,863 2,794 643
15,732 4,119 3,738 682 24,271 2,857 657
16,007 4,191 3,804 694 24,696 2,947 678
16287 4264 3870 706
Revenues Premiums earned Net investment income Fee income Net realized investment gains (losses) Other revenues Total Revenues Claims and Expenses Claims & claim adjustment expenses Amortization of deferred acquisition costs General & administrative expenses Interest expense Total Claims and Expenses Income (Loss) Before Income Taxes Total current tax expense (benefit) Total deferred tax expense (benefit) Income tax expense (benefit) Net income (loss) NI Growth Net Income Per Share Net earnings (loss) per share - basic EPSg Weighted Average Number of Common Shares Outstanding Weighted average shares outstanding - basic
-11.21%
6.69
-55.66%
48.35%
3.4 5.12
25,128 2,999 690
613
643
657
678
690
2,052
2,151
2,200
2,269
2,309
-3.01%
5.08
4.85%
5.40
2.24%
6.26
3.17%
6.54
1.75%
6.79
4.86%
-49.18%
50.66%
-0.85%
6.26%
16.05%
4.40%
3.88%
476.5
415.8
413.0
404.0
398.6
351.2
347.1
340.0
Travelers Companies Inc Balance Sheet Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
62,820 519 838 0 5,616 2,929 72,722 200 791 5,497 11,519 813 1,782 493 5,343 3,365 502 2,154 105,181
64,232 559 865 0 3,594 3,451 72,701 214 768 5,730 11,182 828 1,786 7 5,186 3,365 433 2,402 104,602
65,773 500 899 3,065 3,743 73,980 207 782 5,817 11,150 820
64,617 504 839 3,075 4,060 73,095 358 772 5,861 11,255 805
65,495 542 782 3,085 3,743 73,648 453 778 5,385 11,857 801
65,705 583 811 3,096 3,451 73,645 447 778 5,480 11,946 795
66,258 627 841 3,107 3,742 74,576 328 788 5,576 12,247 789
66,126 676 873 3,121 4,059 74,854
1,786 228 5,001
1,786 221 4,787
1,786 232 4,154
1,786 237 4,228
1,786 241 4,302
1,786 205 4,158
3,365 433 2,444
3,365 390 2,487
3,365 401 2,530
3,365 413 2,575
3,365 426 2,620
3,366 439 2,666
51,131 10,921 5,343 407 6,611 5,293 79,706
51,419 11,102 5,186 389 6,605 5,424 80,125
68 20,162 18,847 1,255 14,857 25,475 $105,181
0 20,732 19,579 2,005 17,839 24,477 $104,602
Assets Fixed maturities, available for sale at fair value Equity securities, at fair value Real estate Mortgage loans Short-term securities Other investments Total Investments Cash Investment income accrued Premiums receivable Reinsurance recoverables Ceded unearned premiums Deferred acquisition costs Deferred tax asset Contractholder receivables Goodwill Other intangible assets Other assets Total Assets Liabilities Claims & claim adjustment expense reserves Unearned premium reserves Contractholder payables Payables for reinsurance premiums Debt Other liabilities Total Liabilities Shareholders' Equity Preferred Stock Savings Plan - convertible preferred stock Common stock Retained earnings Accumulated other changes in equity from nonowner sources Treasury stock, at cost Unearned compensation Total Shareholders' Equity Total Liabilities and Shareholders' Equity
106,013
53,765 11,111 5,190 391 6,033 5,660 82,151
0 18,637 21,901.81 1,648 18,325.25 23,862 $ 106,013 $
105,182
52,064 11,165 5,242 395 5,986 5,616 80,468
0 18,073 24,104 1,636 19,099 24,714 105,182 $
105,391
105,695
49,666 11,402 5,353 416 5,698 5,627 78,162
0 18,944 26,350 1,639 19,703 27,230 105,391
50,816 11,600 5,446 419 5,714 5,643 79,638
$
0 19,368 28,542 1,644 23,497 26,057 105,695 $
107,042
141 791 5,674 12,775 769
107,623
49,754 11,545 5,420 429 5,787 5,715 78,651
48,368 11,727 5,505 448 5,819 5,746 77,613
0 19,707 30,659 1,664 23,671 28,359 107,010
0 20,051 32,748 1,674 24,527 29,946 $ 107,559
Travelers Companies Inc Cash Flow Statement Fiscal Years Ending Dec. 31
2012E
2013E
2014E
2015E
2016E
2017E
2,162
2,179
2,277
2,200
2,238
2,274
Cash Flows From Operations Net Income Adjustment to reconcile net income to net cash provided by operating activities: Add: Depreciation and Amortization Changes in working capital accounts: Investment Income Accrued Premiums Receivable Reinsurance Recoverables Ceded Unearned Premiums Deferred Acquisition Costs Deferred Tax Asset Contractholder Receivables Claims and Adjustment Expense Reserves Unearned Premium Reserves Payables for Reinsurance Premiums Contractholder Payables Other Liabilities Cash From Operations
880 812 751 778 805 838 -14 -87 32 8 0 -221 185 2346 9 2 4 236 5,543
9 -44 -105 15 0 7 214 -1701 54 4 51 -44 1,451
-6 475 -601 4 0 -11 633 -2398 237 21 111 11 1,504
0 -95 -89 6 0 -5 -73 1150 198 3 93 16 4,181
-10 -96 -301 6 0 -4 -74 -1062 -55 11 -26 72 1,505
-3 -98 -528 20 0 36 144 -1386 182 19 85 31 1,613
-486 -357
-773 -13
-605 3
-3,794 5
-174 21
-856 9
Dividents Paid to Shareholders Increase (Decrease) in Common Stock Cash From Financing
-572 -718 -2,095 -4,228
-47 -746 -563 -2,143
-288 -794 871 -812
16 -796 423 -4,146
73 -917 339 -659
31 -1015 345 -1,486
Cash From Investing (Increase) Decrease in Other Assets Change in Investments Cash From Investing
-42 -1,279 -1,321
-43 885 842
-44 -553 -596
-44 3 -41
-45 -930 -976
-46 -279 -324
Cash Flows From Financing Increase in Treasury Stock Accumulated Other Changes in Equity From nonowner Net Cashflow From Issuances and Payment of Note Payable and Long Term Debt
Change in Cash Cash at Beginning of Period New Cash Balance
-7
214 207
151
207 358
95
358 454
-6
454 448
-130
448 318
-197
318 121
Travelers Companies Inc Common Size Income Statement **Percentage of Total Assets
Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
19.55% 2.53% 0.28% 0.02% 0.15% 22.53%
20.38% 2.91% 0.27% 0.25% 0.07% 23.88%
21.12% 2.75% 0.28% 0.05% 0.12% 24.33%
21.16% 2.81% 0.31% 0.05% 0.12% 24.46%
21.52% 2.86% 0.32% 0.05% 0.12% 24.87%
21.93% 2.92% 0.32% 0.05% 0.12% 25.35%
22.25% 2.96% 0.33% 0.05% 0.13% 25.71%
22.35% 2.97% 0.33% 0.05% 0.13% 25.83%
11.33% 3.48% 3.07% 0.35% 18.23% 4.30% 0.81% 0.18% 0.99% 3.31%
12.56% 3.61% 3.24% 0.37% 19.78% 4.09% 0.89% 0.15% 1.04% 3.06%
15.56% 3.71% 3.40% 0.37% 23.03% 1.29% -0.13% 0.06% -0.07% 1.36%
14.09% 3.71% 3.37% 0.69% 21.86% 2.59% 0.60% 0.00% 0.60% 2.00%
14.47% 3.78% 3.43% 0.65% 22.33% 2.54% 0.58% 0.00% 0.58% 1.95%
14.70% 3.85% 3.49% 0.65% 22.69% 2.66% 0.61% 0.00% 0.61% 2.05%
14.91% 3.90% 3.54% 0.65% 23.00% 2.71% 0.62% 0.00% 0.62% 2.08%
14.96% 3.92% 3.55% 0.65% 23.08% 2.75% 0.63% 0.00% 0.63% 2.12%
Revenues Premiums earned Net investment income Fee income Net realized investment gains (losses) Other revenues Total Revenues Claims and Expenses Claims & claim adjustment expenses Amortization of deferred acquisition costs General & administrative expenses Interest expense Total Claims and Expenses Income (Loss) Before Income Taxes Total current tax expense (benefit) Total deferred tax expense (benefit) Income tax expense (benefit) Net income (loss)
Travelers Companies Inc Common Size Balance Sheet **Percentage of Total Assets
Fiscal Years Ending Dec. 31
2010
2011
2012E
2013E
2014E
2015E
2016E
59.73% 0.49% 0.99% 0.19% 0.80% 5.34% 2.78% 69.14% 0.19% 0.75% 5.23% 10.95% 0.77% 1.69% 0.47% 5.08% 3.20% 0.48% 2.05% 100.00%
61.41% 0.53% 1.04% 0.22% 0.83% 3.44% 3.30% 69.50% 0.20% 0.73% 5.48% 10.69% 0.79% 1.71% 0.01% 4.96% 3.22% 0.41% 2.30% 100.00%
62.07% 0.47% 0.00% 0.00% 0.85% 0.00% 2.89% 3.53% 69.82% 0.15% 0.74% 5.49% 10.52% 0.77% 1.69% 0.22% 4.72% 3.18% 0.41% 2.31% 100.00%
61.54% 0.48% 0.00% 0.00% 0.80% 0.00% 2.93% 3.87% 69.62% 0.16% 0.74% 5.58% 10.72% 0.77% 1.70% 0.21% 4.56% 3.20% 0.37% 2.37% 100.00%
62.28% 0.52% 0.00% 0.00% 0.74% 0.00% 2.93% 3.56% 70.03% 0.22% 0.74% 5.12% 11.27% 0.76% 1.70% 0.22% 3.95% 3.20% 0.38% 2.41% 100.00%
62.27% 0.55% 0.00% 0.00% 0.77% 0.00% 2.93% 3.27% 69.80% 0.25% 0.74% 5.19% 11.32% 0.75% 1.69% 0.22% 4.01% 3.19% 0.39% 2.44% 100.00%
61.92% 0.59% 0.00% 0.00% 0.79% 0.00% 2.90% 3.50% 69.69% 0.24% 0.74% 5.22% 11.46% 0.74% 1.67% 0.23% 4.03% 3.14% 0.40% 2.45% 100.00%
48.61% 10.38% 5.08% 0.39% 0.10% 5.85% 6.20% 12.15% 0.05% -0.07% 6.29% 5.03% 75.78%
49.16% 10.61% 4.96% 0.37% 0.33% 5.64% 5.99% 11.97% 0.05% -0.06% 6.31% 5.19% 76.60%
50.74% 10.49% 4.90% 0.37% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.69% 5.34% 77.52%
49.59% 10.63% 4.99% 0.38% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.69% 5.34% 76.62%
47.23% 10.84% 5.09% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 74.30%
48.16% 10.99% 5.16% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 75.46%
46.57% 10.81% 5.07% 0.40% 0.00% 0.00% 0.00% 11.15% 0.05% -0.06% 5.41% 5.34% 73.59%
0.06% 19.17% 17.92% 1.19% 14.13% 24.22% 100.00%
19.82% 18.72% 1.92% 17.05% 23.40% 100.00%
0.00% 17.59% 20.47% 1.55% 17.14% 0.00% 22.48% 100.00%
0.00% 17.22% 22.62% 1.55% 18.01% 0.00% 23.38% 100.00%
0.00% 18.02% 24.63% 1.55% 18.50% 0.00% 25.70% 100.00%
0.00% 18.37% 26.63% 1.55% 22.01% 0.00% 24.54% 100.00%
0.00% 18.68% 28.38% 1.55% 22.21% 0.00% 26.41% 100.00%
Assets Fixed maturities, available for sale at fair value Equity securities, at fair value Gross real estate Less: accumulated depreciation Real estate Mortgage loans Short-term securities Other investments Total Investments Cash Investment income accrued Premiums receivable Reinsurance recoverables Ceded unearned premiums Deferred acquisition costs Deferred tax asset Contractholder receivables Goodwill Other intangible assets Other assets Total Assets Liabilities Claims & claim adjustment expense reserves Unearned premium reserves Contractholder payables Payables for reinsurance premiums Total short-term debt Senior notes Total long-term debt Total debt principal Unamortized fair value adjustment Unamortized debt issuance costs Debt Other liabilities Total Liabilities Shareholders' Equity Preferred Stock Savings Plan - convertible preferred stock Common stock Retained earnings Accumulated other changes in equity from nonowner sources Treasury stock, at cost Unearned compensation Total Shareholders' Equity Total Liabilities and Shareholders' Equity
Travelers Companies Inc Value Driver Estimation Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
FCFE (simple) Net Income ‐ Δ Total Assets + Δ Total Liabilities FCFE (simple)
3,622 3,216 1,426 (191) (4,379) (579) (2,287) (2,439) 419 1,526 5,156 2,424
2,116 2,052 2,151 1,362 (969) 170 2,020 (1,698) (2,310) 2,774 1,323 (329)
2,200 2,269 2,309 345 1,495 809 1,481 (872) (1,015) 3,336 (98) 486
FCFE (formal) Net Income Sources of Cash: + ↑ in Debt + ↑ in Contractholder payables + ↑ in Payables for reinsurance premiums + ↑ in Other Liabili es + ↑ in Unearned premium reserves + ↑ Claims & claim adjustment expense reserves + ↑ in Preferred Stock + Sources of Cash Uses of Cash: +↑ in Fixed Assets +↑ in Investments +↑ in Short‐Term Securi es +↑ in Other Investments +↑ in Investment income accrued +↑ in Premiums Receivable +↑ in Reinsurance recoverables +↑ in Ceded unearned premiums +↑ in Deferred Acquisi on Costs +↑ in Contractholder Receivables +↑ in Other Assets ‐ Uses of Cash FCFE (Formal) Equity Economic Profit (EP) Model Net Income Beginning TSE ROE Rₑ Equity Economic Profit (EP)
3,622 3,216 1,426 2,116 2,052 2,151 2,200 2,269 2,309 346 (553) 18 (406) (96) (1,596) (10) (2,297)
84 (454) (139) 6 60 (1,996) (11) (2,450)
(6) (157) (18) 131 181 288 (68) 351
(574) 4 2 234 9 2,346 ‐ 2,020
(55) 51 4 (52) 54 (1,701) ‐ (1,698)
(290) 111 21 9 237 (2,398) ‐ (2,310)
19 93 3 18 198 1,150 ‐ 1,481
81 (18) 11 80 (38) (989) ‐ (872)
44 85 19 43 182 (1,389) ‐ (1,015)
38 4,644 (370) (424) 2 (483) (1,416) (25) (16) (553) (438) 959 366
(27) (2,959) 764 (106) (34) 26 (1,297) (103) 24 (454) 22 (4,144) 4,910
27 1,452 (2,022) 501 (23) 233 (337) 15 4 (157) 248 (59) 1,836
34 1,482 (529) 814 14 87 (32) (8) ‐ (185) 42 1,719 2,417
(60) (1,152) 10 609 (9) 44 105 (15) ‐ (214) 43 (640) 993
(57) 917 10 (0) 6 (475) 601 (4) ‐ (633) 44 408 (566)
28 251 10 (609) (0) 95 89 (6) ‐ 73 44 (24) 3,705
30 597 12 (0) 10 104 319 (5) ‐ 80 45 1,191 206
32 (84) 14 609 3 98 548 (20) ‐ (144) 46 1,101 193
3,622 3,216 1,426 2,116 2,052 2,151 2,200 2,269 2,309 25,319 27,415 25,475 24,477 23,818 24,548 27,028 25,891 28,259 14.31% 11.73% 5.60% 8.64% 8.61% 8.76% 8.14% 8.77% 8.17% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 1,622 1,050 (587) 182 170 212 64 224 76
Travelers Companies Inc Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models Key Inputs: CV Growth Cost of Equity ROE Fiscal Years Ending Dec. 31
1.75% 7.90% 8.17% 2012E
2013E
2014E
2015E
2016E
2017E CV
DCF Model FCFE (Simple) Net Income ROE Periods to Discount Discount Factor DCF V(e ) Less: ESOP Sh. Out Target Po Today's Po
2774 2116 8.643% 1 1.079 2571 26010 196 415.80 $ 62.08 $ 63.49
1323 2052 8.614% 2 1.164 1136
‐329 2151 8.764% 3 1.256 ‐262
3336 2200 8.138% 4 1.356 2461
‐98 2269 8.765% 5 1.463 ‐67
486 2309 8.171% 5 1.463 20170
FCFE (Formal) Net Income ROE Periods to Discount Discount Factor DCF V(e ) Less: ESOP Sh. Out Target Po Today's Po
2417 2116 8.643% 1 1.079 2240 25686 195.99 415.80 $ 61.30 $ 62.70
993 2052 8.614% 2 1.164 853
‐566 2151 8.764% 3 1.256 ‐451
3705 2200 8.138% 4 1.356 2733
206 2269 8.765% 5 1.463 141
193 2309 8.171% 5 1.463 20170
EP Model EP Net Income Beginning TSE ROE Periods to Discount Discount Factor PV EP PV of EP V(e ) Shares Outstanding Less: ESOP Target Po Today's Po
182 2116 24477 8.64% 1 1.079 168 1533 26010 415.80 195.99 $ 62.08 $ 63.49
170 2052 23818 8.61% 2 1.164 146
212 2151 24548 8.76% 3 1.256 169
64 2200 27028 8.14% 4 1.356 47
224 2269 25891 8.77% 5 1.463 153
76 2309 28259 8.17% 5 1.463 850
Travelers Companies Inc Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31 Key Assumptions CVg of EPS CV ROE Cost of Equity DDM (Future Cash Flows) EPS DIV Payout Ratio Rentention Ratio Periods to Discount Discount Factor Discounted CF's Intristic Value Target Price Future Cash Flows P/E Multiple EPS(next period) Future Stock Price
2012E
2013E
2014E
2015E 2016E CV 2017E CV
1.75% 8.17% 7.90%
$ 5.12 $ 5.08 $ 5.40 $ 6.26 $ 6.54 $ 6.79 1.749 1.85394 2.002255 2.262548 2.601931 5.337818 34.14% 36.50% 37.10% 36.12% 39.79% 65.86% 63.50% 62.90% 63.88% 60.21% 1 2 3 4 5 5 1.079 1.164 1.256 1.356 1.463 1.463 $ 1.62 $ 1.59 $ 1.59 $ 1.67 $ 1.78 $ 59.33 $ 67.59 $ 69.12 11.7109 $ 5.12 $ 59.99
Travelers Companies Inc Relative P/E, PEG, and P/B ****4/4/2012 Yahoo! Finance Ticker Company ACE ACE Limited CB The Chubb Corporation ALL Allstate PGR Progressive Corp HIG Hartford Financial Service XL XL Group plc CINF Cincinnati Financial Group
Price $ 73.07 $ 69.83 $ 32.55 $ 22.89 $ 20.96 $ 21.25 $ 34.35
EPS 2012E $7.55 $5.76 $3.69 $1.56 $3.38 $1.86 $1.51
EPS 2013E $7.65 $5.96 $4.04 $1.69 $3.74 $2.16 $1.44 Average
P/E 12 9.7 12.1 8.8 14.7 6.2 11.4 22.7 12.2
P/E 13 9.6 11.7 8.1 13.5 5.6 9.8 23.9 11.7
Est. 5yr Gr. 10 7.92 9.13 8 7.73 10.0 5.0
P/B 12 0.98 1.22 0.87 2.36 0.4 0.7 1.1 0.97
PEG 12 0.97 1.53 0.97 1.83 0.80 1.14 4.55 1.8
PEG 13 0.96 1.48 0.88 1.69 0.73 0.98 4.77 1.8
BVequity
TRV Implied Value: Relative P/E (EPS12) Relative P/E (EPS13) PEG Ratio (EPS12) PEG Ratio (EPS13) P/B 12
0 $ 59.99
5.12 5.08 11.7 11.8
$ 62.69 $ 59.62 $ 54.48 $ 52.90 $ 56.06
5.805438 57.67495 2.0 2.0
Travelers Companies Inc Key Management Ratios
Fiscal Years Ending Dec. 31 Liquidity Ratios Current Ratio
2010
2011
2012E
2013E
2014E
2015E
2016E
41.13%
38.66%
36.95%
38.49%
39.53%
38.65%
40.38%
13.66%
11.48%
10.60%
11.34%
11.37%
10.82%
11.50%
11.73%
5.60%
8.64%
8.61%
8.76%
8.14%
8.77%
3.06%
1.36%
2.00%
1.95%
2.05%
2.08%
2.12%
3.129
3.281
3.449
3.277
2.891
3.075
2.787
24.22%
23.40%
22.48%
23.38%
25.70%
24.54%
26.41%
8.289
3.694
2.908
2.987
3.161
3.227
3.272
12.81%
5.60%
8.16%
7.86%
8.07%
8.11%
8.21%
17.15%
5.31%
10.60%
10.21%
10.48%
10.53%
10.66%
32.20%
32.20%
32.06%
32.06%
32.06%
32.06%
32.06%
61.64%
73.68%
65.10%
65.75%
65.52%
65.51%
66.47%
93.84%
105.88%
97.17%
97.81%
97.58%
97.57%
98.53%
(Current Assets/Current Liabilities)
Cash Ratio [(Cash+available for sale securities)/Current Liabilities]
Activity or Asset‐Management Ratios ROE (NI/Beg. TSE)
ROA [(NI+Interest Expense)/Total Asset]
Financial Leverage Ratios Debt Equity Ratio [(Debt+PV Op Leases)/TSE)
Equity to Assets (TSE/Total Assets)
Interest Coverage Ratio (Net Income/Interest Expense)
Profitability Ratios Profit Margin (Net Income/Revenue)
Operating Margin (EBT/Revenue)
Expense Ratio [(Underwriting Expense‐Fee Income)/Premiums Earned]
Loss Ratio [(Claim and Claim Adj Exp/Premiums Earned)]
Combined Ratio (Expense Ratio+Loss Ratio)
Travelers Companies Inc Key Assumptions of Valuation Model ***All numbers in millions unless noted Ticker Symbol Current Share Price Fiscal Year End Pre‐Tax Cost of Debt Beta Risk‐Free Rate Equity Risk‐Premium Cost of Equity Policy Growth 2012 Policy Growth 2013 Policy Growth 2014 Policy Growth 2015 Policy Growth 2016 Policy Growth 2017 EPS average CV Growth Rate Stock Price (DCF Simple)
TRV 59.19 Dec. 31 5.81% 0.783098 3.35% 5.81% 7.90% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 5.611859 1.75% $ 63.49
Marginal Tax Rate Investment Income as % of Earned Premiums Fee Income as % of Earned Premiums Other Revenue as % of Earned Premiums Other Operating Revenue as % of Earned Premiums Claims & claim adj. expenses as % of Total Policies SG&A as % of Earned Premiums
23.00% 13.30% 1.48% ‐0.06% 0.62% 14.03% 15.93%
Best
$ 63.49 Worst 0.50% 0.75% 1.00% 1.25% 1.50% CV Growth 1.75% Rate 2.00% 2.25% 2.50% 2.75% Best 3.00%
0.68 68.53 68.89 69.27 69.68 70.14 70.63 71.17 71.76 72.41 73.14 73.95
0.7 67.31 67.62 67.96 68.33 68.72 69.15 69.63 70.14 70.71 71.34 72.04
0.72 66.13 66.40 66.70 67.02 67.36 67.74 68.15 68.60 69.09 69.63 70.24
0.74 64.99 65.23 65.48 65.76 66.06 66.38 66.73 67.12 67.54 68.01 68.52
‐3.25% 48.91 50.45 51.97 53.49 55.00 56.49 57.97 59.45 60.91 62.36 63.80
‐2.25% 50.37 51.90 53.43 54.95 56.45 57.94 59.42 60.89 62.35 63.80 65.24
‐1.25% 51.80 53.34 54.86 56.38 57.88 59.37 60.85 62.31 63.77 65.21 66.64
‐0.25% 53.22 54.75 56.27 57.78 59.28 60.77 62.24 63.71 65.16 66.59 68.02
0.82 60.78 60.89 61.02 61.15 61.29 61.45 61.61 61.79 61.99 62.20 62.44
0.84 59.81 59.90 59.99 60.09 60.20 60.32 60.45 60.59 60.74 60.91 61.09
0.86 58.86 58.93 59.00 59.07 59.15 59.24 59.33 59.44 59.55 59.66 59.80
Policy Growth 2013 0.75% 1.75% 2.75% 54.61 55.98 57.32 56.14 57.50 58.85 57.66 59.02 60.36 59.17 60.52 61.86 60.66 62.01 63.34 62.14 $ 63.49 64.81 63.61 64.96 66.27 65.07 66.41 67.71 66.51 67.84 69.15 67.95 69.27 70.56 69.36 70.68 71.96
3.75% 58.64 60.16 61.67 63.16 64.64 66.11 67.56 68.99 70.42 71.82 73.22
4.75% 59.94 61.45 62.95 64.44 65.91 67.37 68.81 70.24 71.66 73.05 74.44
5.75% 61.21 62.72 64.21 65.69 67.16 68.61 70.04 71.46 72.86 74.25 75.62
13.75% 56.24 57.29 58.35 59.40 60.46 61.51 62.56 63.62 64.67 65.73 66.78
14.00% 56.74 57.80 58.85 59.90 60.96 62.01 63.07 64.12 65.18 66.23 67.28
Return on Business Insurance Policies 14.25% 14.50% 14.75% 15.00% 15.25% 57.25 57.75 58.25 58.76 59.26 58.30 58.80 59.31 59.81 60.31 59.35 59.86 60.36 60.87 61.37 60.41 60.91 61.42 61.92 62.42 61.46 61.97 62.47 62.97 63.48 62.52 63.02 $ 63.52 64.03 64.53 63.57 64.07 64.58 65.08 65.59 64.63 65.13 65.63 66.14 66.64 65.68 66.18 66.69 67.19 67.69 66.73 67.24 67.74 68.24 68.75 67.79 68.29 68.80 69.30 69.80
15.50% 59.76 60.82 61.87 62.93 63.98 65.04 66.09 67.14 68.20 69.25 70.31
15.75% 60.27 61.32 62.38 63.43 64.48 65.54 66.59 67.65 68.70 69.76 70.81
13.00% 110.44 107.35 104.43 101.66 99.04 96.54 94.17 91.91 89.76 87.70 85.73
13.25% 101.33 98.49 95.80 93.26 90.85 88.55 86.37 84.30 82.32 80.43 78.62
Claim Expense as % of Total Policies CV 13.50% 13.75% 14.00% 14.25% 14.50% 92.22 83.10 73.99 64.88 55.77 89.63 80.76 71.90 63.04 54.18 87.18 78.55 69.92 61.30 52.67 84.86 76.45 68.05 59.65 51.25 82.66 74.47 66.28 58.08 49.89 80.56 72.58 $ 64.59 56.60 48.61 78.58 70.78 62.98 55.19 47.39 76.68 69.07 61.45 53.84 46.23 74.88 67.44 60.00 52.56 45.12 73.15 65.88 58.61 51.33 44.06 71.51 64.39 57.28 50.16 43.05
14.75% 46.66 45.32 44.05 42.84 41.70 40.62 39.59 38.61 37.68 36.79 35.94
15.00% 37.55 36.45 35.42 34.44 33.51 32.63 31.80 31.00 30.24 29.51 28.82
13.23% 66.73 66.38 66.03 65.68 65.33 64.98 64.63 64.28 63.93 63.58 63.23
13.43% 66.36 66.01 65.66 65.31 64.96 64.61 64.26 63.91 63.56 63.21 62.86
Claim Adj Exp 12 As % of Total Policies 13.63% 13.83% 14.03% 14.23% 14.43% 65.99 65.62 65.24 64.87 64.50 65.64 65.27 64.89 64.52 64.15 65.29 64.92 64.55 64.17 63.80 64.94 64.57 64.20 63.82 63.45 64.59 64.22 63.85 63.47 63.10 64.24 63.87 $ 63.50 63.13 62.75 63.89 63.52 63.15 62.78 62.40 63.54 63.17 62.80 62.43 62.06 63.19 62.82 62.45 62.08 61.71 62.84 62.47 62.10 61.73 61.36 62.49 62.12 61.75 61.38 61.01
14.63% 64.13 63.78 63.43 63.08 62.73 62.38 62.03 61.68 61.33 60.98 60.64
14.83% 63.76 63.41 63.06 62.71 62.36 62.01 61.66 61.31 60.96 60.61 60.26
Worst Worst
Return on Personal Insurance Policies
Best
$ 63.49 53.50% 53.75% 54.00% 54.25% 54.50% 54.75% 55.00% 55.25% 55.50% 55.75% 56.00%
13.50% 55.73 56.79 57.84 58.90 59.95 61.01 62.06 63.11 64.17 65.22 66.28 Best
Best
MRP
Worst
$ 63.49 4.80% 5.00% 5.20% 5.40% 5.60% 5.80% 6.00% 6.20% 6.40% 6.60% 6.80%
12.75% 119.55 116.21 113.05 110.06 107.23 104.53 101.97 99.52 97.19 94.97 92.85 Best
$ 63.49 Best 13.03% 13.23% 13.43% 13.63% Claim Adj 13.83% Exp 13 As % 14.03% of Total 14.23% Policies 14.43% 14.63% 14.83% Worst 15.03%
13.03% 67.10 66.75 66.40 66.05 65.70 65.35 65.00 64.65 64.30 63.95 63.60
Worst
0.8 61.78 61.92 62.08 62.24 62.42 62.61 62.82 63.04 63.29 63.56 63.85
Worst
$ 63.49 Worst ‐3.25% ‐2.25% ‐1.25% ‐0.25% 0.75% Policy 1.75% Growth 2014 2.75% 3.75% 4.75% 5.75% Best 6.75%
Beta 0.76 0.78 63.88 62.82 64.09 62.99 64.31 63.17 64.54 63.37 64.80 63.59 65.08 $ 63.82 65.38 64.07 65.70 64.35 66.06 64.65 66.46 64.97 66.89 65.34
0.88 57.95 57.99 58.04 58.09 58.14 58.20 58.26 58.32 58.39 58.47 58.56 Best
6.75% 62.46 63.96 65.45 66.92 68.38 69.82 71.24 72.65 74.04 75.42 76.78 Best
16.00% 60.77 61.83 62.88 63.93 64.99 66.04 67.10 68.15 69.21 70.26 71.31 Worst
15.25% 28.44 27.59 26.80 26.04 25.32 24.65 24.00 23.38 22.80 22.24 21.71 Worst
15.03% 63.39 63.04 62.69 62.34 61.99 61.64 61.29 60.94 60.59 60.24 59.89
Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.
Important disclosures appear on the last page of this report.
