Travelers (NYSE: TRV) is scheduled to report its fiscal Q3 2021 results on Tuesday, October 19. We expect Travelers to top the earnings and revenue expectations. The insurance giant surpassed the street expectations in the last quarter, with revenues increasing by 17% y-o-y to $8.7 billion. The growth was because of 10% y-o-y growth in total premiums and a 2x jump in net investment income. While the premiums in bond & specialty and personal insurance segments witnessed strong growth, business insurance premiums (up 4% y-o-y) suffered due to the negative impact of lower premiums in the preceding twelve months. Further, its profitability numbers improved in the quarter partially due to the revenue growth and partially due to lower total claims & expenses as a % of revenues. We expect the same trend to continue in the third quarter as well.
Our forecast indicates that Travelers’ valuation is $164 per share, which is 5% above the current market price of close to $156. Our interactive dashboard analysis on Travelers’ Earnings Preview has more details.
(1) Revenues expected to edge past the consensus estimates
Travelers’ revenues for full-year 2020 were $32 billion – just above the year-ago period. This was due to slower growth in premiums and a 10% drop in net investment income.
- TRV generates approximately 90% of the total revenues from premiums. The growth rate of the premiums slowed down to just 3% y-o-y in 2020, due to the impact of the Covid-19 crisis. It was because of no growth in the business insurance, which contributes more than half of the total premiums. The unit suffered due to a 12% y-o-y drop in the workers’ compensation insurance, which drives a big chunk of its revenues. Further, the trend continued in the first quarter and second quarter. While, the company reported a 10% y-o-y increase in the total premiums in Q2 driven by a 17% jump in personal insurance and a 12% rise in bond & specialty insurance, the business insurance still posted a meager 4% growth. We expect the same trend to continue in the third quarter as well.
- Net investment income (NII) is crucial for the profitability of any insurance company. TRV posted a 10% y-o-y drop in NII in 2020 due to the lower interest rate environment. That said, the NII increased 15% and 205% in the first and second quarters respectively. The unusual growth in the second quarter was driven by higher income in other investment portfolios and growth in total investable assets, partially offset by interest rate headwinds. We expect the same momentum to continue in the third quarter.
- Overall, we expect Travelers’ revenues to touch $34.1 billion for FY2021.
Trefis estimates Travelers’ fiscal Q3 2021 revenues to be around $8.38 billion, 2% above the $8.22 billion consensus estimate. We expect the personal and bond & specialty insurance premiums and net investment income to drive the third-quarter results.
Moving forward, we expect the total premiums to see some improvement over the coming months, with a recovery in the economy. Further, the investable assets are likely to maintain their growth trajectory in FY2021. However, low interest rates will likely offset some of its positive effects on the net investment income. Our dashboard on Travelers’ revenues offers more details on the company’s operating segments along with our forecast for the next two years.
2) EPS is likely to beat the consensus estimates
Travelers Q3 2021 adjusted earnings per share (EPS) is expected to be $2.15 per Trefis analysis, almost 10% above the consensus estimate of $1.95. The company reported an adjusted net income of $2.7 billion in 2020 – up 3% y-o-y. The figure increased 22% y-o-y to $733 million in the first quarter of 2021, which continued in the second quarter – and grew from -$40 million to $934 million. The growth was partially driven by higher revenues and partially due to lower expenses as a % of revenues. We expect the expenses to slightly increase in the third quarter.
Going forward, we expect Travelers’ net income margin in FY2021 to remain around the same level as the previous year, leading to an adjusted net income of $2.9 billion – up 7% y-o-y. It will likely result in an EPS of $11.65.
(3) Stock price estimate 5% higher than the current market price
We arrive at Travelers’ valuation, using an EPS estimate of around $11.65 and a P/E multiple of close to 14x in fiscal 2021. This translates into a price of $164, which is 5% above the current market price of around $156.
Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year
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