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Dow 30 Profile: The Travelers Companies
Travelers (TRV - Free Travelers Stock Report) is a Dow-30 component and a leading provider of commercial property/casualty insurance and asset management services. It is also a leading underwriter of homeowners and automobile insurance through independent agents. Like most other corporations, Travelers started from somewhat less-impressive beginnings, being formed in its latest configuration by two separate insurance companies that merged in 2004.
Saint Paul Fire and Marine Insurance was founded on March 5, 1853, in St. Paul Minnesota, serving local customers who were having a difficult time getting claims payments in a timely manner from insurance companies on the East Coast of the United States. Alexander Wilkin became the company’s first and youngest president, being elected to that position at the age of 34. St Paul paid its first claim in 1855. The company survived the Panic of 1857 by markedly downsizing its operations and later reorganizing itself into a stock company (as opposed to its prior status of a mutual company). Soon thereafter, it flourished, and expanded rapidly throughout the United States. St Paul significantly boosted its size and scope by merging with USF&G in 1998.
Travelers was founded in 1864 in Hartford, Connecticut. The company was formed through an off-hand transaction of only two cents. The two-cent transaction occurred on March 24, 1864, when a Hartford businessman, James Batterson, met a local banker, James Bolter, in the post office. Bolter had heard that Batterson and several townsmen were organizing a company for the purpose of introducing accident insurance to North America. Bolter said that he was on his way home for lunch and wondered how much Batterson would charge him to be insured for that trip. Batterson quoted two cents and tucked the two pennies into his vest pocket. Bolter walked the four blocks to his home without mishap. This two-cent “premium” is a souvenir treasured by the company Mr. Batterson founded, Travelers.
The company officially began doing business on April 1, 1864 while Civil War in the United States was raging. Batterson was head of Travelers for more than a third of the company’s first century before he passed away in 1901, leaving behind a group of well-qualified people. The company is noted for introducing the automobile policy, airline coverage, and a policy for space travel.
In the 1990s, the insurer went through a series of mergers and acquisitions. In 1993, it bought Primerica. Two years later, it was renamed The Travelers Group, and in 1996, it purchased Aetna’s property and casualty insurance business. In 1998, the Travelers Group merged with Citicorp to form Citigroup (C). However, the synergies between the banking and insurance arms did not work out as well as planned. Hence, Citigroup spun off Travelers’ Property and Casualty business into a subsidiary in 2002. A few years later Citigroup sold Travelers’ life and annuity arm to MetLife.
The Current Structure
In 2004, St. Paul and Travelers merged and took the name St. Paul Travelers, with the company headquartered in St. Paul, Minnesota. The name was subsequently changed to The Travelers Companies in 2007.
The company has field offices in every state in the U.S., as well as operations in the United Kingdom, Ireland, Singapore, China, and Canada. The company has about 14,000 independent agents and brokers that provide service to its clients. The company is made up of several divisions. The Personal Insurance segment offers home, auto, and other insurance products for individuals; the Business Insurance unit provides a broad array of property and casualty insurance and related services; and the Financial, Professional & International insurance unit includes the surety, crime, and financial liability businesses.
Remaining An Industry Heavyweight
The company has the wherewithal to be a competitive player in the insurance market for years to come, in our view. Travelers underwriting margin has been in positive territory since 2006 and we look for this trend to continue, given the company’s stringent underwriting standards. The insurer looks closely at the profit potential of the policies that it underwrites, rather than just adding new business to boost the top line. Indeed, loose underwriting standards were the primary reason the insurance industry was in the doldrums during the mid- to-late 1990s. Management not only looks at the pricing structure of the polices that it covers, but also at the terms & conditions, which are equally important when evaluating risk/return prospects. Travelers also keeps a good amount of funds in prudent reserves, which means that the likelihood of reserve-strengthening charges (which curtail earnings) is relatively low.
What’s more, Travelers might well continue to generate a good amount of income through its investment portfolio. This line item has trended higher since 2008, and we look for this to continue based on a couple of key factors. First, net premiums earned are likely to increase, thanks to an improving macroeconomic landscape, coupled with new business opportunities and price increases in some segments. That should result in a higher invested asset base. What’s more, bond yields might well increase from their current depressed levels, as the Federal Reserve Bank probably tightens its monetary policy going forward. Travelers has a conservative investment bent, which means that not only is its investment income-to-total investment ratio fairly consistent over time, but it also has fewer soured investments on its ledger.
The company experienced some bumps in the road following the acquisitions of USF&G and the merger between St Paul’s and Travelers. We feel that this was due, at least partially, to the immense size of those two transactions, which made for some assimilation concerns at first. Nevertheless, it has made it through the transitions in good shape. We believe that the company’s immense size, healthy balance sheet, strong cash flow, and solid management place it in a favorable competitive position moving forward. Due to management’s strict underwriting discipline, Travelers stock held up relatively well during the recent recession. We expect management to continue its conservative underwriting and investing policies, which should interest risk-averse investors. A healthy balance sheet and a solid dividend payout add to its appeal as well.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.