Is Travelers Stock Fairly Priced?

Travelers’ stock (NYSE: TRV) has gained roughly 6% YTD, as compared to the 14% drop in the S&P500 index over the same period. Further, at its current price of $165 per share, it has an upside potential of 6% to its fair value of $175 – Trefis’ estimate for Travelers’ valuation. The insurance giant surpassed the street expectations in the second-quarter results, with revenues increasing 5% y-o-y to $9.1 billion. It was mainly driven by an 11% rise in the net written premiums, partially offset by a 14% drop in the net investment income. While the premiums figure primarily benefited from growth in business and personal insurance segments, the net investment income suffered due to lower returns from private equity partnerships. That said, the net income decreased 41% y-o-y to $551 million despite positive growth in the top line. It was due to an unfavorable increase in claims and expenses as a % of revenues from 87% to 93%. 

The company’s top line grew 9% y-o-y to $34.8 billion in FY 2021. It was driven by growth in both the premiums and the net investment income (NII). While the insurance premiums followed the same trend in the first half of 2022 (up 11% y-o-y), the net investment income witnessed a decline. Overall, the firm posted total revenues of $17.95 billion in the first two quarters of 2022 – up 6% y-o-y. Further, the net income has decreased 6% y-o-y to $1.57 billion due to higher expenses as a % of revenues. 

Moving forward, we expect the net investment income to see some improvement over the subsequent quarters because of higher interest rates. Notably, the Federal Reserve has increased the benchmark interest rates four times in the year. On similar lines, total premiums are likely to continue their growth trajectory over the subsequent quarters. Altogether, Travelers revenues are forecast to touch $37.17 billion in FY2022. Additionally, TRV’s adjusted net income margin is likely to be around 8.6%, leading to an adjusted net income of $3.18 billion and an annual EPS of $13.32. This coupled with a P/E multiple of 13x will lead to the valuation of $175.

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[1] Month-to-date and year-to-date as of 9/13/2022
[2] Cumulative total returns since the end of 2016

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