Is Travelers Fairly Valued?
The Travelers Companies (NYSE: TRV) has shown signs of strength in recent years. The company saw its revenue grow by 4.6% in 2017, driven mainly by growth in the Personal Insurance and Business Insurance segments. The company’s combined ratio improved across segments, and the company benefited from higher renewal rates and improved pricing, which boosted earned premium growth. However, the company’s EPS declined sharply from $10.28 in 2016 to $7.33 in 2017 because of higher catastrophe losses due to hurricanes in the third quarter and the California wildfires.
We expect the company to see modest growth in 2018, largely due to organic growth in premiums. Additionally, the company should benefit from strong underwriting results. The stock price soared after the earnings release but has returned back to the previous levels of around $137. So, is this price sustainable? Our valuation dashboard suggests that the current market price may be a bit cheap. Below we discuss how we estimate Travelers’ valuation. Detailed steps to arrive at our price estimate and the revenue calculations are outlined in our interactive dashboard, and you can modify our assumptions to arrive at your own price estimate for the company.
We have a price estimate of $147 for Travelers, which is ahead of the current market price. This is based on revenue projections of about $30 billion. We expect pricing increases in the Automobile category and Policy-In-Force (PIF) growth in the Homeowners category to drive the growth in the Personal Insurance segment. Also, 97.3% of the company’s fixed income portfolio is in investment grade, which helps the company to generate stable investment income, and we expect this to continue in the coming years. Furthermore, with commercial property insurance potentially set to rise in 2018, largely due to catastrophes in 2017, Travelers should experience moderate growth in the Business Insurance segment.
2017 was an extraordinary year given the number of catastrophes were unusual, and this hurt the company’s margins. However, we expect margins to bounce back in 2018 on the back of strong underwriting results. We forecast net income of about $3.3 billion, or EPS of about $11.82. Finally, using our estimated P/E multiple of 12.4 gives us $147 as a fair price estimate.
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