Buffett's TRV Holding
"18: Travelers Companies (TRV) Percent of Warren Buffett’s Portfolio: 0.2%
Dividend Yield: 2.5% Forward P/E Ratio: 11.3x (as of 11/15/18)
Sector: Financials Industry: Property and Casualty Insurance
Dividend Growth Streak: 14 years
Travelers is actually a competitor to Berkshire Hathaway's Geico business, which Buffett has studied closely since 1951. The company insures over 6 million customers, with business and specialty insurance lines accounting for over 65% of net written premiums.
Buffett loves the insurance industry's business model. Specifically, property and casualty insurers like Travelers collect money upfront when they sell a new policy. However, until claims are made, they don't have to pay the money back.
In the meantime, this pool of money can be invested in stocks and bonds to earn a return. So long as the insurer is skilled at risk management, in theory it should mint money.
Travelers certainly fits the bill and has proven to be a disciplined operator over the years. Throughout the last five years the firm's average combined ratio (incurred losses and expenses divided by earned premiums) sits below 100% in both its commercial and personal insurance lines, meaning they turned a profit on average before taking investment gains into account. With such impressive scale, including being the only carrier with a top five market position in all major commercial product lines,
Travelers also benefits from the vast amounts of claim data it can crunch to better price its policies. The firm can also meet more of its customers' needs, gaining greater wallet share and efficiencies.
Thanks to these advantages, management targets a mid-teens return on equity over time, which is about double the industry average. However, the underwriting cycle is notoriously cyclical due to its high competitive intensity; anyone with enough capital can sell an insurance policy.
Travelers has shown great discipline by pulling back on growth when the industry's policy terms are unfavorable, helping preserve its profitability. Simply put, Travelers possesses many of the qualities Buffett likes in a business.
TRV's stock declined more than 15% from its January 2018 high through early July, providing an opportunity for Berkshire to initiate a position.
The property and casualty insurance industry faced tough times last year due to an unusually high number of natural catastrophes, but Berkshire's ground-level visibility and conviction to put some money to work in Travelers suggests better times could be ahead. https://www.simplysafedividends.com/intelligent-income/posts/4-warren-buffett-s-dividend-portfolio