TRV Stock – is Traveler’s Stock a Good Buy in 2019? $TRV

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.

11 thoughts on “TRV Stock – is Traveler’s Stock a Good Buy in 2019? $TRV

  1. Thank-you for presenting and interpreting the relevant metrics for an insurance company. It's interesting to see the different metrics used to evaluate valuations for companies in different sectors and industries. I looked at AFL to see impact on catastrophe and was surprised to see that its earnings did not show a big dip in 2011. With its heavy Japan exposure, I expected its earnings to dip due to the 3/11 earthquake and tsunami.

  2. How do I invest in Jimmy? I currently have zero dollars in any stocks and am just watching YouTube while I work to get educated on how it works and if it’s right for me. I absolutely love your channel! I’ve watched the videos of ppl with 100k-200k subs that also have good info but are also trying to sell a course I will never buy. Not hating cause they are trying make bank. I just want good info and breakdowns so I can learn for when I do decide to get in. More ppl should be coming to this channel for the quality of the content. Keep doing what you do, I will watch every video and recommend it to anyone with interest in the stock market

  3. This company does show up in my screeners that I run. Overall PPCIan also die an head to head with CB. He went for CB.

    Overall I haven't looked into this company too much yet, but it might be good for a dividend portfolio. The have increased it for almost 10 years I believe.

  4. You have done a video on the ETF, I want to know, I never purchase them. I only get the regular stocks but how do they pay day dividends is it on 6 months or every year. I know the regular stocks is every 3 months. I was just wondering about they payout!

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