At $153, Travelers Stock Has Limited Upside

[Updated 12/10/2021] Travelers Valuation Update

Travelers stock (NYSE: TRV) has gained 9% YTD, and at its current price of $153 per share, it is trading 6% below its fair value of $163 – Trefis’ estimate for Travelers’ valuation.  The insurance giant topped the consensus estimates in the third-quarter 2021 results, with the total revenues increasing by 6% y-o-y to $8.8 billion. The revenues improved due to a 15% y-o-y increase in the net investment income, followed by a 6% growth in the total premiums. The premiums benefited from an 8% rise in personal insurance and a 3% increase in the business insurance segments. Despite the revenue growth, the net income declined 20% y-o-y to $662 million. It was because of an increase in total claims & expenses as a % of revenues from 88% to 91% in the quarter.

The firm posted $32 billion in full-year 2020 revenues, which was just ahead of the 2019 figure. While the net investment income (NII) decreased 10% y-o-y in the year, the growth rate of total premiums was also down. This was mainly due to the Covid-19 crisis and the economic slowdown. That said, the company has seen some recovery in the first nine months of 2021 – cumulative nine months revenues increased 9% y-o-y to $25.8 billion. It was primarily driven by a 48% y-o-y jump in the net investment income, coupled with a 6% rise in the total premiums. The NII benefited from higher income from other investments, which includes private equity, hedge fund, and real estate partnerships, partially offset by lower interest rates. We expect the same trend to continue in the fourth quarter of the year, enabling Travelers revenues to touch $34.8 billion in FY2021. Additionally, the net income margin is likely to see a slight improvement in the year, leading to a net income of $3 billion. Its EPS figure is likely to remain around $12.40, which coupled with a P/E multiple of just above 13x, will lead to the valuation of $163.

[Updated 09/02/2021] Travelers Stock Is Trading Close To Its Intrinsic Value

Travelers stock (NYSE: TRV) has gained 13% YTD, and at its current price of $159 per share, it is trading 3% below its fair value of $164 – Trefis’ estimate for Travelers’ valuation.  The insurance giant recently released its second-quarter 2021 results, surpassing the street expectations for revenues and earnings. It reported total revenues of $8.7 billion – up 17% y-o-y, mainly driven by a 2x increase in net investment income and 10% y-o-y growth in total premiums. The increase in net investment income was solely due to higher revenue from other investments, which involves private equity, hedge fund, and real estate partnerships. This growth was partially offset by a slight drop in income from fixed-maturity investments and short-term securities due to interest rate headwinds. While each of the three segments reported an increase in premiums, business insurance premiums grew a meager 4% y-o-y due to the negative impact of lower premiums in the preceding twelve months, driven by a decline in new business volume. Further, the company reported strong profitability numbers in the quarter – net income increased from -$40 million to $934 million. This was partially because of the revenue growth and partially due to lower total claims & expenses as a % of revenues.

The company reported $32 billion in revenues for 2020 – marginally ahead of the 2019 figure. This was due to a 10% drop in net investment income, which suffered due to the lower interest rate environment. Further, the growth rate in premiums declined in the year, due to the impact of the Covid-19 crisis. However, Travelers posted positive growth in the total premiums and net investment income over the first and second quarters. The net investment income benefited from higher income in the other investment portfolio and growth in total investable assets. On a similar note, total premiums improved in all three segments – business insurance, bond & specialty insurance, and personal insurance. That said, we expect the premiums to see some more recovery over the subsequent quarters. Further, the net investment income will likely improve due to growth in investable assets, partially offset by lower interest rates. Overall, Travelers revenues are likely to remain around $34.1 billion in FY2021. Additionally, the net income margin is likely to remain around the same level as the year-ago figure. The company is likely to report an EPS of around $11.65 in FY2021. This coupled with a P/E multiple of close to 14x, will lead to the valuation of $164.

[Updated 06/01/2021] Travelers Stock Is Fairly Priced

Travelers stock (NYSE: TRV), the property and casualty (P&C) insurance giant, gained roughly 14% – increasing from about $140 at the beginning of 2021 to around $160 currently, inching ahead of the S&P500, which grew 12% over the same period. The benchmark S&P Insurance Select Industry Index has made strong gains since the start of 2021 and the rise in Travelers stock confirms the same trend.

There were two main factors behind this: First, the approval of the $1.9 trillion stimulus package. Second, fast-paced Covid-19 vaccination drive in the U.S – 50.5% of the U.S population has received at least one dose of vaccine. The above reasons support the prospects of a strong economic recovery, which will likely help both the earned premiums and the investment income.

But is this all there is to the story? 

Not quite, despite the recent gains, Trefis estimates Travelers’ valuation to be around $162 per share – slightly above the current market price – based on a key opportunity and one risk factor.

The opportunity we see is an improved trajectory for Travelers’ revenues over the subsequent quarters. Travelers reported revenues of $32 billion in the full year 2020 – marginally above the year-ago figure. It could be attributed to lower growth in premiums (3% y-o-y) as compared to the CAGR of 5% over 2016-2019. The growth rate was low due to stagnant growth in the business insurance segment, which contributes roughly 52% of the total earned premiums. Further, the net investment income decreased by 10% y-o-y due to the interest rate headwinds. Notably, the interest rates have suffered due to the zero-rate policy of the Federal Reserve in response to the Covid-19 crisis. 

The insurance giant posted better than expected results in the recently released first-quarter FY2021 results. It reported revenues of $8.3 billion – up by 5% y-o-y. This increase could mainly be attributed to a 15% y-o-y gain in net investment income, which benefited from higher average investments, partially offset by a lower interest rate environment. Further, total premiums in the quarter were 2% higher than the year-ago period. While the business insurance premiums continued to suffer in the quarter, growth in bond & specialty and personal insurance premiums was able to offset the decline. That said, the low-interest rates are likely to stay for some more time. However, growth in investment assets is expected to offset some of the impacts of lower rates on net interest income. Further, with recovery in the economy, business insurance premiums are likely to see some improvement in FY2021, boosting the total earned premiums figure. Overall, the TRV’s revenues are expected to touch $33.6 billion in the year.

The net income margin is likely to see a slight increase in FY2021, which is likely to improve TRV’s profitability figures for the year – EPS will likely improve from $10.52 to $11.65. The EPS of $11.65, coupled with the P/E multiple of just below 14x will lead to a valuation of around $162.

Finally, how much should the market pay per dollar of Travelers’ earnings? Well, to earn close to $11.65 per year from a bank, you’d have to deposit about $1165 in a savings account today, so about 100x the desired earnings. At Travelers’ current share price of roughly $160, we are talking about a P/E multiple of just below 14x, which is appropriate.

That said, insurance is a risky business right now. While growth is likely, change in current market sentiment can harm the near-term outlook. What’s behind that?

TRV, like other insurance companies, is dependent on the income from investment of insurance premiums for its profitability – It has around $84.4 billion in invested assets (as per FY 2020 data). Hence, any further worsening of the economic conditions or a sudden jump in the Covid-19 case count can lead to a further decline in investment yields. Additionally, deterioration in the economic scenario will likely harm the insurance premiums as well, as people are more focused on near-term survivability in the time of crisis. To sum things up, we believe that Travelers stock is marginally undervalued and offers limited upside. 

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[1] Month-to-date and year-to-date as of 12/10/2021
[2] Cumulative total returns since 2017

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