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Travelers (TRV) Up 5.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Travelers (TRV). Shares have added about 5.5% in that time frame, underperforming 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 drivers.

Travelers’ Q4 Earnings & Revenues Surpass Estimates

Travelers fourth-quarter 2018 core income of $2.13 per share beat the Zacks Consensus Estimate of $1.98 by 7.6%. However, the bottom line deteriorated 6.6% year over year.

This year-over-year decline in earnings can be attributed to higher level of catastrophe loss and a decrease in net favorable prior-year reserve development. However, an increase in underlying underwriting gain as well as investment income partially offset this downside. The bottom line also drew benefits from lower U.S. corporate income tax rate and the impact of share buybacks.

Full-Year Highlights

For 2018, Travelers reported core income per share of $8.94, missing the Zacks Consensus Estimate by 1.1% but improving 22.8% year over year.

Total revenues of $30.3 billion topped the consensus mark by 1.2% and grew 4.8% year over year.

Behind the Q4 Headlines
 
Travelers’ total revenues rose nearly 4.6% from the year-ago quarter’s figure to $7.8 billion. The top-line figure also outpaced the Zacks Consensus Estimate of $7.7 billion.
 
Net written premiums displayed a 4.2% year-over-year improvement to $6.7 billion owing to growth in each business segment, namely Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.
 
Net investment income climbed 5% year over year to $630 million on higher average level of fixed maturity investments and solid income from the fixed income investment portfolio.

Travelers delivered an underwriting gain of $135 million, down 49.2% from the year-earlier period. Combined ratio deteriorated 200 basis points (bps) year over year to 97.5% due to higher catastrophe losses and lower net favorable prior-year reserve development. However, a lower underlying combined ratio partially offset this downside.

At the end of the fourth quarter, statutory capital and surplus were $20.5 billion and the debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 22.2%. Notably, this was within the company’s target range of 15-25%. Adjusted book value per share was $87.27, up 4.7% year over year.

Segment Update
    
Travelers’ Business Insurance unit reported net written premiums of $3.5 billion, up 2.8% year over year. This upside can be driven by a continued strong retention, an improved renewal premium change and a rise in new business.
 
Combined ratio deteriorated 1080 bps year over year to 99.4% due to greater catastrophe losses, higher underlying combined ratio and lower net prior-year reserve development.
 
Segment income of $391 million plunged 38.6% from the year-ago quarter’s level.
 
Bond & Specialty Insurance: Net written premiums rose 8.4% year over year to $657 million, primarily backed by growth in surety premiums, a sustained solid retention and stronger new business in management liability.
 
Combined ratio improved 1890 bps year over year to 64.8% owing to lower underlying combined ratio and higher net favorable prior-year reserve development. However, more massive catastrophe losses partially offset this upside.

Segment income surged 96.4% year over year to $220 million.

Personal Insurance: Net written premiums increased 5% year over year to about $2.5 billion.

Combined ratio improved 610 bps year over year to 102.6%, riding on lower catastrophe losses, higher net favorable prior-year reserve development as well as lower underlying combined ratio.

Segment income of $32 million came in against the segment loss of $50 million in the comparable quarter last year.

Dividend and Share Repurchase Update

The property & casualty (P&C) insurer returned total capital of $375 million to its shareholders in the reported quarter. This included a buyback of 1.4 million shares worth $170 million. The company is now left with $3.3 billion shares for repurchase under its existing authorization at the end of the fourth quarter.

The company’s board approved a quarterly dividend of 77 cents per share in the quarter under review. The dividend is payable Mar 21, 2019 to shareholders of record at the close of business as of Mar 11, 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Travelers has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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. It's no surprise Travelers has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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