It has been about a month since the last earnings report for The Travelers Companies, Inc. (TRV – Free Report) . Shares have added about 2.9% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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 Q2 Earnings Miss, Revenues Beat Estimates
Travelers’ second-quarter 2017 core income of $1.92 per share missed the Zacks Consensus Estimate of $2.07 by 7.2%. Also, the bottom line deteriorated 12.7% year over year.
This year-over-year decline in earnings can be attributed to high levels of catastrophe and non-catastrophe weather-related losses caused by the significant U.S. tornado and hail activity. The storm activity had a significant impact on Personal Insurance, affecting results in both home and auto. However, the increased net investment income partially offset the downside. Also, the bottom line was boosted by share buybacks.
Behind the Q2 Headlines
Total revenue of Travelers improved nearly 5.9% from the year-ago quarter to $7.2 billion. Revenues surpassed the Zacks Consensus Estimate of $6.9 billion.
Net written premiums displayed a record 4.6% year-over-year increase to $6.6 billion due to growth in each of the business segments – Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.
Net investment income grew approximately 8.9% year over year to $598 million owing to higher private equity returns. This improvement however, was partially offset by a decrease in fixed income returns due to lower reinvestment rates available in the market.
Travelers’ underwriting gains plummeted 55.4% to $173 million. Combined ratio deteriorated 360 basis points (bps) year over year to 96.7% due to higher underlying combined ratio, wider catastrophe losses and lower net favorable prior-year reserve development.
At the end of the second quarter, statutory capital and surplus was $20.61 billion and the debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 23.3%. This was within the company’s target range of 15–25%.
Adjusted book value per share was $82.71, up 6.6% year over year.
Travelers’ Business and International Insurance unit reported net written premiums of $3.5 billion, up 2.1% year over year. A continued strong retention and an improved renewal premium change led to the upside.
Combined ratio came in at 96.5%, remaining unchanged year over year.
Segment income of $429 million rose 7% owing to higher net investment income and a slightly higher underlying underwriting gain. However, the upside was partially offset by higher catastrophe losses.
Bond & Specialty Insurance: Net written premiums increased 4.9% year over year to $598 million, primarily driven by strong retentions and higher renewal premium change in the Domestic business, as well as a rise in management liability in the United Kingdom and contract surety in Canada.
Combined ratio deteriorated 1420 bps year over year to 68.7% due to lower net favorable prior-year reserve development, partially offset by a lower underlying combined ratio and lower catastrophe losses.
Segment income plunged 24.2% year over year to $163 million due to lower net favorable prior-year reserve development.
Personal Insurance: Net written premiums increased 8.5% year over year to about $2.5 billion.
Combined ratio deteriorated 630 bps year over year to 104.1% due to a higher underlying combined ratio, no net unfavorable prior-year reserve development when compared with net favorable prior-year reserve development in the year-ago quarter as well as higher catastrophe losses.
Segment income of $12 million plummeted 87.4% due to lower underlying underwriting gain and wider catastrophe losses. However, this downside was partially offset by higher net investment income.
Dividend and Share Repurchase Update
The property & casualty (P&C) insurer returned a total capital of $676 million to shareholders in the reported quarter. This included a buyback of 3.8 million shares worth $475 million in the reported quarter. The company is now left with shares worth $5.2 billion for repurchase under its existing authorization at the end of the second quarter.
The company’s board declared a quarterly dividend of 72 cents per share in the reported quarter, payable on Sep 29, 2017 to shareholders of record at the close of business as of Sep 8, 2017.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.
The Travelers Companies, Inc. Price and Consensus
At this time, the stock has a poor Growth Score of F, however its Momentum is doing a bit better with a D. However, 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 D. If you aren’t focused on one strategy, this score is the one you should be interested in.
The company’s stock is suitable solely for value based on our styles scores.
While estimates have been moving downward, the magnitude of the revision is net zero. Interestingly, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.