Travelers (TRV) Up 2.9% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Travelers (TRV). Shares have added about 2.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Travelers due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Travelers Q3 Earnings & Revenues Beat Estimates, Up Y/Y
The Travelers Companies, Inc.’s third-quarter 2018 core income of $2.54 per share surpassed the Zacks Consensus Estimate of $2.22 by 14.4%. The bottom line also improved a whopping 179.1% year over year.
This year-over-year increase in earnings can be attributed to lower level of catastrophe loss and higher investment income. The bottom line benefited from lower U.S. corporate income tax rate as well and the impact of share buybacks.
Behind the Q3 Headlines
Travelers’ total revenues rose nearly 5.4% from the year-ago quarter’s figure to $7.7 billion. The top-line figure also outpaced the Zacks Consensus Estimate of $7.5 billion.
Net written premiums displayed a 6% year-over-year increase to $7.1 billion owing to growth in each business segment, namely Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.
Net investment income rose 9.9% year over year to $646 million on higher private equity returns. Increase in fixed income returns owing to higher average level of fixed maturity investments, higher long-term reinvestment rates as well as short-term interest rates led to this upside.
Travelers reported an underwriting gain of $198 million, which compared favorably with the year-ago quarter’s underwriting loss of $246 million. Combined ratio improved 660 basis points (bps) year over year to 96.6% on account of lower catastrophe losses, partially offset by lower net favorable prior-year reserve development and a slightly higher underlying combined ratio.
At the end of the third quarter, statutory capital and surplus was $20.5 billion and the debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 22.3%. Notably, this was within the company’s target range of 15-25%. Adjusted book value per share was $86.51, up 4.2% year over year.
Segment Update
Travelers’ Business Insurance unit reported net written premiums of $3.6 billion, up 6.2% year over year. This upside can be attributed to a continued strong retention, an improved renewal premium change and a rise in new business.
Combined ratio improved 920 bps year over year to 100.6%owing to lower level of catastrophe loss and a lower underlying combined ratio. However, net unfavorable prior-year reserve development partially marred this upside.
Segment income of $410 million skyrocketed 290.4% from the year-ago quarter’s level.
Bond & Specialty Insurance: Net written premiums rose 5.4% year over year to $644 million, primarily driven by improvement in surety premiums, a sustained solid retention plus record new business in management liability.
Combined ratio improved 750 bps year over year to 70.2% owing to higher net favorable prior-year reserve development and lower catastrophe losses. Nevertheless, slightly higher underlying combined ratio partially marred this upside.
Segment income soared 44.1% year over year to $196 million.
Personal Insurance: Net written premiums increased 5.9% year over year to about $2.8 billion.
Combined ratio improved 250 bps year over year to 97.2% driven by lower catastrophe losses and higher net favorable prior-year reserve development. However, this uptick was partially marred by higher underlying combined ratio.
Segment income surged 98.7% year over year to $153 million.
Dividend and Share Repurchase Update
The property & casualty (P&C) insurer returned total capital of $607 million to its shareholders in the reported quarter. This included a buyback of 3.1 million shares worth $400 million. The company is now left with shares worth $3.5 billion for repurchase under its existing authorization at the end of the third quarter.
The company’s board approved a quarterly dividend of 77 cents per share in the quarter under review. The dividend will be payable Dec 31, 2018 to shareholders of record at the close of business as of Dec 10, 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.65% due to these changes.
VGM Scores
At this time, Travelers has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Travelers has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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