Why Is Travelers (TRV) Down 6.1% Since Last Earnings Report?

It has been about a month since the last earnings report for Travelers (TRV). Shares have lost about 6.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Travelers due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Travelers Q1 Earnings Lag Estimates, Revenues Rise Y/Y

Travelers’ first-quarter 2020 core income of $2.62 per share missed the Zacks Consensus Estimate by 9%. The bottom line deteriorated 7.4% year over year. The quarter benefited from improved net investment income, better premiums and operational excellence.

Behind the Q1 Headlines

Travelers’ total revenues rose nearly 3% from the year-ago quarter figure to $7.9 billion. However, the top-line figure missed the Zacks Consensus Estimate by 1.6%.

Record gross written premiums of $8.2 billion grew 4%, accounting for growth in all segments.

Net written premiums grew 4.1% year over year to $7.3 billion owing to growth in each business segment, namely Business Insurance, Bond & Specialty Insurance and Personal Insurance. Net investment income increased 29% year over year to $611 million.

Travelers witnessed underwriting gain of $288 million, down 107% from the year-earlier period. Combined ratio deteriorated 180 basis points (bps) year over year to 95.5% attributable due to higher catastrophe losses and lower net favorable prior year reserve development, partially offset by lower underlying combined ratio.

At the end of the first quarter, statutory capital and surplus were $20.808 billion and debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 21.9%. Notably, this was within the company’s target range of 15-25%.

Adjusted book value per share was $92.63, down 0.1% from 2019 end. Core return on equity was 11.5%, down 150 basis points (bps) year over year.

Segment Update

Personal Insurance: Net written premiums of $2.5 billion increased 8% year over year driven by strong performance at Agency Automobile, Agency Homeowners and Other business.

Combined ratio improved 190 bps year over year to 88.2% due to lower underlying combined ratio, partially offset by lower net favorable prior year reserve development and higher catastrophe losses.

Segment income of $336 million surged 58% from the year-ago quarter’s level driven by higher underlying underwriting gain, partially offset by lower net favorable prior year reserve development and higher catastrophe losses.

Bond & Specialty Insurance: Net written premiums rose 13% year over year to $663 million, primarily backed by continued strong retention, increased levels of renewal premium change, strong new business in management liability and continued strong production in surety.

Combined ratio deteriorated 480 bps year over year to 85.9% owing to a higher underlying combined ratio and lower net favorable prior year reserve development, partially offset by lower catastrophe losses.

Segment income dropped 16% year over year to $122 million on lower underlying underwriting gain.

Business Insurance: Net written premiums increased 1% year over year to about $4.2 billion.

Combined ratio deteriorated 410 bps year over year to 102.2%, attributable to higher catastrophe losses and a higher underlying combined ratio, partially offset by net favorable prior year reserve development in the current quarter compared to net unfavorable prior year reserve development in the prior-year quarter.

Segment income of $289 million was down 125% year over year due to higher catastrophe losses and a lower underlying underwriting gain, partially offset by net favorable prior year reserve development in the current quarter compared to net unfavorable prior year reserve development in the prior year quarter, and higher net investment income.

Dividend and Share Repurchase Update

The property & casualty insurer returned total capital of $681 million in the reported quarter. It repurchased 3.8 million shares worth $471 million. The company is now left with $1.36 billion worth shares for repurchase under its existing authorization at the end of the first quarter.

The company’s board approved a quarterly dividend of 85 cents per share, reflecting 4% increase from the prior payout. The dividend will be paid out on Jun 30, 2020 to shareholders of record at the close of business as of Jun 10, 2020.o-capital ratio (excluding after-tax net unrealized investment gains) was 21.9%. Notably, this was within the company’s target range of 15-25%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -11.55% due to these changes.

VGM Scores

Currently, Travelers has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second 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 these revisions 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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