Travelers’ stock (NYSE: TRV) has gained roughly 14% YTD, as compared to the 13% drop in the S&P500 index over the same period. Further, at its current price of $178 per share, it has an upside potential of 4% to its fair value of $185 – Trefis’ estimate for Travelers’ valuation. The insurance giant recently released its first-quarter results, beating the consensus estimates for earnings but slightly missing the revenue expectations. It reported total revenues of $8.8 billion – up 6% y-o-y, primarily because of a 9% rise in the net earned premiums. This was due to a 10% increase in the personal insurance segment, followed by a 7% growth in the business insurance division. While the premiums drove growth in the quarter, it was partially offset by a 9% drop in the net investment income (NII). The NII suffered due to a year-on-year decrease in income from the non-fixed income investment portfolio driven by lower private equity partnership returns. Overall, the net income improved 39% y-o-y to $1 billion partly due to the revenue growth and partly due to lower total claims & expenses as a % of revenues.
The company’s total revenues improved 9% y-o-y to $34.8 billion in FY 2021. It was driven by a 6% growth in the total earned premiums and a 36% y-o-y jump in the net investment income (NII). Notably, the premiums grew in all the three divisions – personal, bond & specialty, and business insurance. The NII mainly benefited from higher private equity partnership returns, partially offset by a lower income from fixed maturity investments and short-term securities. In addition to the growth in the top line, the expense figure as a % of revenues declined from 90% to 87%. It resulted in a 36% y-o-y gain in the adjusted net income to $3.6 billion.
The Federal Reserve has already initiated the rate hike process in FY2022. Notably, it has increased the benchmark interest rates twice, first by a quarter percentage point followed by a 0.5 percentage point hike. Further, the central bank is anticipated to raise the rates multiple times in the year. This move will likely help the NII of Travelers. On a similar note, total premiums are likely to continue their growth trajectory over the subsequent quarters. All in all, the Travelers’ revenues are forecast to touch $37.1 billion in FY2022. Additionally, TRV’s adjusted net income margin is likely to be around 8.5%, leading to an adjusted net income of $3.2 billion and an annual EPS of $13.17. This coupled with a P/E multiple of 14x will lead to the valuation of $185.
|S&P 500 Return||1%||-13%||86%|
|Trefis Multi-Strategy Portfolio||1%||-16%||228%|
 Month-to-date and year-to-date as of 5/31/2022
 Cumulative total returns since the end of 2016