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Travelers (TRV) Up 7.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Travelers (TRV - Free Report) . Shares have added about 7.5% 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 drivers.

Travelers Q3 Earnings and Revenues Beat Estimates

The Travelers Companies reported third-quarter 2020 core income of $3.12 per share, which beat the Zacks Consensus Estimate of $2.91. The bottom line surged 118.2% year over year.

The improvement was primarily driven by net favorable prior year reserve development, higher underlying underwriting gain and higher net investment income. However, higher catastrophe losses were partial offsets.   

Behind Q3 Headlines

Travelers’ total revenues increased 3% from the year-ago quarter to $8.3 billion, primarily due to higher premiums and net investment income. Moreover, the top-line figure beat the Zacks Consensus Estimate of $8 billion.

Net written premiums increased 3% year over year to $7.8 billion attributable to higher premiums written at Personal Insurance and Bond & Specialty Insurance.

Net investment income increased 7.9% year over year to $671 million pre-tax, primarily due to increase in income in non-fixed income investment portfolio.
    
Travelers witnessed underwriting gain of $339 million against underwriting loss of $149 million in the year-earlier period. Combined ratio deteriorated 660 basis points (bps) year over year to 94.9%, primarily due to net favorable prior year reserve development and lower underlying combined ratio partially offset by higher catastrophe losses.

At the end of the third quarter, statutory capital and surplus were $21.23 billion. Debt-to-capital ratio (excluding after-tax net unrealized investment gains included in shareholders’ equity) was 22.7%, within the company’s target range of 15-25%.

Adjusted book value per share was $94.89, up 2% from 2019 end. Core return on equity was 13.5%, expanding 700 bps year over year.

Segment Update

Personal Insurance: Net written premiums of $3.2 billion increased 8% year over year due to solid performance at Agency Automobile and Agency Homeowners and Other.

Combined ratio improved 1160 bps year over year to 86.4% due to higher net favorable prior year reserve development and a lower underlying combined ratio, partially offset by higher catastrophe losses.

Segment income of $392 million increased nearly three-fold from the year-ago quarter’s level, primarily driven by higher net favorable prior year reserve development and a higher underlying underwriting gain, partially offset by higher catastrophe losses.

Bond & Specialty Insurance: Net written premiums rose 4% year over year to $754 million, primarily driven by continued strong retention and increased levels of renewal premium change in management liability.

Combined ratio deteriorated 600 bps year over year to 89.3% due to higher underlying combined ratio, lower net favorable prior year reserve development and higher catastrophe losses.
 
Segment income dropped 17.3% year over year to $115 million primarily due to a lower underlying underwriting gain. The underlying underwriting gain benefited from higher business volumes.

Business Insurance: Net written premiums decreased 1% year over year to about $3.8 billion. The benefits of continued strong retention and higher renewal rate changes were more than offset by reduced exposure and decrease in new business volume, both due to COVID-19 and related economic conditions.
 
Combined ratio improved 470 bps year over year to 102.3% due to lower net unfavorable prior year reserve development, a lower underlying combined ratio and lower catastrophe losses.
 
Segment income more than doubled to $365 million.  The upside was due to lower net unfavorable prior year reserve development, higher underlying underwriting gain, increase in net investment income and lower catastrophe losses.   

Dividend and Share Repurchase Update

This property & casualty insurer returned $218 million in the reported quarter. There were no share repurchases in the current quarter and thus $1.361 billion remained under its authorization. The company’s board approved a quarterly dividend of 85 cents per share. The dividend will be paid out on Dec 31 to shareholders of record at the close of business as of Dec 10, 2020. 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 7.76% due to these changes.

VGM Scores

Currently, Travelers has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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