Hey YouTube.
I'm Jimmy in this video.
I'm going to walk through my analysis of
the traveler's company ticker symbol
TRV.
This is the 24th video in our series
where we're analyzing all 30 stocks
in the Dow Jones industrial average.
We're then going to take that analysis.
We're going to build three different portfolios
of value a dividend
and a growth. So the travelers company is an
insurance company that provides
products like commercial insurance
personal insurance
and casualty insurance to businesses
governments and people although businesses
are the biggest part of their business.
Now they're one of the biggest business insurance
providers in the United States.
They sell most of their policies through
their network of more than 10,000
independent brokers
and agencies.
Then they have three customer
centers and one hundred
and fifteen field offices.
Now generally they write the majority
of their premiums in the United States
about 95 percent of their premiums
come from the United States.
And the other 5 percent come from abroad.
Now their business is well spread
out with no one state
in the United States dominating where the premiums
come from. Now before we look too closely
at Travelers numbers let's look at the
insurance industry as a whole
because there is somewhat of a unique type of
business.
So here's how they make money.
The first thing that they do is they collect insurance
premiums from their customers.
Vaguely speaking they call this process
underwriting.
In the case of travelers their customers
tend to be a lot of businesses
and some people as well
but mostly businesses while
they collect these premiums
and then generally there are three things
that an insurance company will do
with the money that they collect.
The first thing that they do is they pay expenses
of the businesses those 115
locations I mentioned before.
Well that's an example of the type of expenses
that they would cover
with the premiums that they collect.
The second thing they do
with the money is that they pay out on
the policies that they owe.
So when a claim is filed in theory they
pay it out. That's obviously why we have insurance
you buy insurance so if something goes wrong you
get paid out for it.
Well then the final thing that they do
with the money is they invest it
and investing is a crucial
part of the way an insurance company
makes money. Okay.
Now we know what insurance companies do to make money.
Let's look at some industry specific
ratios.
The first one is called the combined ratio
and they called the combined ratio.
As you may have guessed because it combines
two ratios.
It combines the loss ratio
and the expense ratio.
This is what travel is loss ratio
looks like going back to 2009.
And as we could see the loss ratio
is a bit volatile
but generally it stays within this
area.
So in 2018 the loss
ratio is 67 percent.
This tells us that if traveler's
brought in one hundred dollars in
premiums well they would have paid out
sixty seven dollars in claims.
That's what the loss ratio is looking at how
much.
What percentage of the premiums they brought in
to they pay on claims the higher
this number the more they paid
out against the premiums that they brought
in. Now if we look at the jump from 2016
to 2017 will this increase
in expenses was due to an increase
in catastrophe losses.
OK. Simple enough.
So we as investors want this number
to be as low as possible.
Now if we add the expense ratio to this chart
what we could see at the expense ratio was actually
quite consistent.
And this is a good thing.
So for this ratio
what this tells us is that if you look at 2018
the expense ratio is about 30.
So now we know that for every hundred dollars
in premiums that the company brought in
while 30 dollars were paid out
in general business expenses
technically they call this underwriting
expenses. That's what travelers calls it.
But basically this means how much
does it cost for them to bring
in the premium dollars from all their customers.
Now when we push these ratios together what
we end up with is the combined ratio
and this is a great ratio to get
a quick look at Travelers effectiveness
as a manager of the insurance business
or you could use this for any insurance company for that
matter. And it's almost
as simple as if the ratio is
over 100 well the company
lost money on the insurance
part of their business because
they would have paid out more than 100 percent
of the premiums that they brought in
2011 is a good example of this.
And if we look at 2018
we could see that they had a combined ratio of about
97.
This tells us that their profitability
their profit margins for the insurance business
was about 3 percent which is one 100
minus to ninety seven in up
with a 3 percent profit margin.
Okay. Now into the investing portion of the business
so travelers has about 70 billion
dollars in insurance reserves.
Basically we could think of this as the money
that they keep the travels keeps
on hand that it may have to pay out
at some point.
Warren Buffett calls this the insurance
float well travelers
will invest this insurance
float and basically any
returns that they get on their investments
will be added to profits.
So even if the combined ratio
that we've looked at a moment ago
was above 100.
Well that doesn't necessarily mean that they lost
money. They could earned money from their investments.
And that could help make them profitable.
Now in our next video I'm actually going to dive
into this topic because
the concept of the insurance float is
one of the things that helped make Warren Buffett
the legend he is today.
So in the next video I'm going to dive into that.
But for now sticking
with travelers all we need to
really know is that the returns
that they get in their investments help add
to profits.
No I also think that this is going to travel as weaknesses
because frankly they don't seem
to be targeting a terribly high investment
return.
Almost half their money right now is invested in municipal
bonds. And personally
I think that they're missing a bit of an opportunity
to think.
I think that they could go after a bit
more aggressive returns
and that would help their overall profitability
but in their defense I recognize
that their investments are
safer
and you don't want to lose money
with that insurance float.
So I get where they're going I just think that they
have an opportunity to invest
a bit more aggressively.
Either way this leads to a revenue
chart that looks like this now we can
see that revenue has been gradually rising
over the past few years.
But when we switched to net income
margins well we could see that net
income margins have fallen over the
past few years.
And if we think back to the combination ratio
that we saw well we felt the combination
ratio was about ninety seven percent
in 2018.
That implies that the
in the insurance business profitability
was about 3 percent.
So of the 8 percent that
they generated in 2018 the bottom
part here.
Well this came from business operations
from the insurance business
and the remaining 5 percent
or so of that came from investments
and a large part of the declines
were due to the big payouts
in general were due to the big payouts that
travelers had to pay in catastrophe losses.
That has been true in the past few years they've had a few
bad years as far as that's concerned as far
as catastrophe losses are concerned.
So now this brings us to how we would typically value
an insurance company.
The most common way is to use price to
book value. This is the same on Warren Buffett
recommends currently travelers
is trading at about one point four times
their book value.
This one point four times is
in line with competitors
and in line with travelers own three
year average.
So if you're not familiar
with what book value is.
Well if you look at a balance sheet
and you take assets
and you subtract liabilities
would you end up with is shareholder equity
shareholder equity
and book value pretty much the same
thing. So book value
is literally the value on
the books. Now one thing to keep in mind
is that when we compare travelers
price to book value it's important
to compare it to other financial companies
specifically insurance companies
because if you look at the S&P 500 is
price to book value where we're trading at about
three times book value
right now.
But insurance companies are a drastically
different animal.
You can't really compare it to a tech company
or utility company.
So it's important that we use
price to book we don't compare it to the market we
compare to either the industry
or itself.
So price to book is good for an insurance
company and generally it's quite good
for any company
with very liquid assets such as
a financial institution.
So is travelers stock
a goodbye right now.
Well we know that their three
year average is 1.4x their One year average
is one point five X
and I would have trouble making a reasonable
case that it should be higher than the one point five
X. So I'd say we just go ahead
and use a one point five X so using
our most recent book value
and one point five times that book
value went up with a fair value of the stock of
about one hundred thirty dollars.
And if we use the insurance industry
average of 1.4x
Well we end up with a fair value of about one hundred
twenty one dollars given
that the current stock price is about one hundred twenty six
dollars it seems that the stock
is fairly valued at this current level.
But what do you think.
Do you think that travelers is a good buy
at this price.
Which of our portfolios do you think that travelers
stock belongs in let
me know what you think of the comments below.
And if you haven't done so already hit the subscribe
button. Thank you for sticking
with me all the way to the end of the video
and I'll see in the next video.