Travelers Companies, INC. (NYSE: TRV) sells property & casualty insurance. The company is divided into three business segments: business insurance; financial, professional and international insurance; and personal insurance, with its business insurance accounting for the majority of its revenue at about 54% of sales. The company earns its revenue primarily through its sales of insurance premiums or premiums earned- approximately 88% of TRV's revenue is attributed to premiums earned. In 2008, Travelers earned $24.5 billion in revenue, 5.9% less than 2007 because of increases in claims expenses and lower earnings from its investments.
Like other insurance companies, Travelers relies on investing its premium revenue to create a pool of assets (known as "claims loss provision" ) which it can use to pay out future claims. However, the company's earnings from its investments dropped 26% in 2008 because of the 2008 Financial Crisis. In particular, Travelers' investments are vulnerable to fluctuations in interest rates because the value of TRV's numerous bonds decrease as interest rates rise. Additionally, Travelers is susceptible to the accuracy of its catastrophe models as incorrect estimates may result in inadequate premiums to fund the necessary claims expenses. However, its combined ratio of 85.9% in 2008 beat the 104.7% average combined ratio of the overall property & casualty insurance industry. This means that on average, TRV's competitors paid more in claims expenses than they earned in 2008 while Travelers performed close to the top of the industry.
On June 1, 2009, it was announced that Travelers would replace Citigroup (C) on the Dow Jones Industrial Average (.DJIA) effective as of June 8th. The move restores insurance presence on the Dow following the removal of American International Group (AIG) in September 2008, which was replaced by Kraft Foods (KFT).
The Travelers Companies, Inc. sells property & casualty insurance products and services to businesses, government units, associations and individuals. Travelers earns revenue by selling insurance to policyholders who pay a premium in exchange for compensation for particular losses they may incur. The company divides its operations into 3 business segments: business insurance; financial, professional and international insurance; and personal insurance.
TRV earned $24.5 billion in revenue in 2008, a 5.9% decrease from 2007. From 2004 to 2007, however, Travelers' revenue grew by 15.4%. The company earns the majority of its revenue through premiums earned or sales of insurance premiums as about 88.2% of its 2008 revenue was attributed to premiums sales. Premiums Earned in 2008 totaled $21.58 billion, an increase of slightly less than 1% from 2007 because of increased sales in its financial, professional and international and personal insurance segments, which was partially offset by a 1% decline in premiums earned in TRV's business insurance segment. TRV's other significant revenue source is net investment income, or earnings from its investments. In 2008, the company earned $2.79 billion from its investments, a 26% drop from 2007 because of the global economic downturn. In particular, the value of TRV's portfolio declined because lower market values of its maturity investments as well as lower interest rates, which devalued the company's bonds.
As with all insurance companies, Travelers' primary operating expenses are its claims and claim adjustment expenses, which totaled $12.99 billion in 2008. These expenses relfect a 5% growth from 2007 associated with increases in the cost of catastrophes and weather-related losses in personal insurance during the year. In 2008, TRV operated at an 85.9% combined ratio, or operating expenses divided by premiums earned.
Overall, Travelers earned $2.92 billion in net income in 2008, 36% lower than 2007. This drop was primarily a result of lower revenue associated with significantly less income earned from net investments coupled with the increase in claims expenses in 2008.
Travelers' business insurance segment sells a range of property and casualty insurance to its clients primarily in the United States. The business insurance segment sells insurance through about 8,500 independent agencies and brokers throughout the U.S. In 2008, TRV's business insurance segment earned $13.5 billion in revenue, a 6.9% decrease from a year earlier. A 1% drop in premiums earned as well as a significant decline in net investment revenue contributed to the segment's decline in 2008. TRV divides its business insurance segment into six divisions:
Select Accounts: serve small businesses of generally less than 50 employees for property and casualty insurance products. Select accounts earned $2.75 billion in revenue in 2008, accounting for 24.6% of overall business insurance revenue.
Commercial Accounts: serve mid-sized companies of between 50 and 1,000 employees, offering property and casualty insurance products. In 2008, commercial accounts earned $2.5 billion in revenue, or 22.4% of overall business insurance revenue.
National Accounts: include casualty insurance products and services sold to large companies. In 2008, worker's compensation accounted for approximately 76% of sales to national accounts. National accounts contributed to 8.9% of the company's 2008 business revenue, earning $996 million during the year.
Industry-Focused Underwriting: sells insurance premiums targeted to particular industries including Construction, Technology, Public Sector Services, Oil and Gas, and Agribusiness. In 2008, the segment earned $2.4 billion in revenue or 21.4% of the company's overall business insurance revenue.
Target Risk Underwriting: serves unique insurance packages to specialized customers including companies or organizations that operate in the National Property and Ocean Marine industries. Target risk underwriting earned $1.6 billion in revenue in 2008, accounting for 14.2% of the segment's overall premium sales.
Specialized Distribution: includes insurance products and services sold through wholesale agents in markets typically not served by TRV's traditional agents. Specialized distribution accounted for 8.4% of the business insurance segment's 2008 revenue.
TRV's financial, professional and international insurance segment sells financial liability coverages and property and casualty insurance in the United States, United Kingdom, Ireland and Canada. In 2008, the segment earned $3.5 billion, about the same from a year earlier. However, the segment's operating income dropped by 4% during 2008 primarily because of an increase in the amount of large losses, particularly losses associated with catastrophes. The company divides this segment into two markets: bond and financial products and international.
Bond and Financial Products: provides customers with bond and insurance products as well as risk management services. The segment's services cover professional and management liabilities for a diverse group of customers including public and private corporations, not-for-profit organizations, lawyers, real estate agents, and so forth. Bond and financial products accounted for 64.2% of the segment's overall 2008 revenue, earning $2.2 billion in 2008.
International: sells international insurance products in the United Kingdom, Ireland, and Canada through Lloyds Banking Group (LYG). TRV earned $1.2 billion in revenue from selling international insurance in 2008.
TRV's personal insurance segment sells property and casualty insurance covering personal risks. In 2008, the personal insurance segment earned about $7 billion, a 2.3% increase from a year earlier. The primary coverages in personal insurance are automoblie and homeowners insurance, with each accounting for 52.3% and 47.7% of the segment's overall 2008 revenue, respectively.
TRV's catastrophe models have proven to be more accurate than many of its competitors. In 2008, TRV's combined ratio or claims expenses divided by premiums earned was 85.9%. The lower the combined ratio the better, as any ratio over 100% means that the insurer is paying out more than it is earning in revenue. Comparatively, the property & casualty insurance industry overall had a combined ratio of 104.7% in 2008. Additionally, TRV's most direct competitor Chubb (CB), operated at a combined ratio of 88.7% in 2008 meaning that Travelers' minimized its risk exposure more effectively than CB.
Because catastrophes usually incur large claims for its policyholders, TRV depends heavily on catastrophe modeling in order to make underwriting and reinsurance decisions. Essentially, Travelers uses catastrophe models to decide how much to charge for particular premiums to manage its exposure to catastrophic risks while earning a profit at the same time. For example, the company's hurricane model estimates that there is a 1% chance that TRV's loss from a single hurricane in a one-year time frame would exceed $1.3 billion, or approximately 5% of the company's common equity as of the end of its fiscal year 2008. Thus, the company will charge adequate premiums to ensure that it will be able to earn a profit even in the rare chance that a hurricane costing $1.3 billion in claims does occur. However, catastrophe models rely greatly on rather ambiguous judgments and assumptions that differ across insurance companies. As a result, catastrophe model estimates are subject to a high degree of uncertainty and actual losses from a catastrophic event may exceed the predetermined threshold loss amount.
Travelers' claims loss provision is more heavily invested in bonds than many of its competitors like Chubb (CB). Therefore, Travelers' investments are vulnerable to fluctuations in interest rates as TRV's bonds decrease in value as interest rates rise because its portfolio is comprised of 95% bonds. For example, Athough TRV's income from net investments declined 26% in 2008 largely because non-fixed maturity investments (private equity, hedge funds, and partnerships) fell due to the 2008 Financial Crisis, if the opposite scenario were true, that interest rates were rising due to a growing economy, TRV would see its bond portfolio suffer. Conversely, TRV's competitor Chubb (CB) has a more diversified portfolio, and as a result, its net investment income grew 2% in 2008.
Travelers primarily competes with other insurers that specialize in property & casualty insurance. Within the property & casualty insurance niche, Travelers competes directly with Chubb (CB), Loews (L), and CNA Financial (CNA) although other insurers like Allstate (ALL) operate business segments that compete with TRV's products. TRV is the largest insurer in terms of revenue in the property & casualty insurance industry and its combined ratio of 85.9% is one of the highest across the industry.
|Company||Premiums Earned (Millions)||Net Investment Income (Millions)||Total Revenue||Combined Ratio||Net Income (Millions) (Loss)|
|CNA Financial (CNA)||$7,151||$1,619||$7,799||109%||($251)|