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Travelers (TRV) Up 4.5% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Travelers (TRV - Free Report) . Shares have added about 4.5% 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 catalysts.

Travelers Q2 Earnings and Revenues Beat, Rise Y/Y

Travelers Companies reported second-quarter 2021 core income of $3.45 per share, which beat the Zacks Consensus Estimate of $2.35. The bottom line rebounded from the year-ago loss of 20 cents. The improvement was primarily driven by higher net investment income, lower catastrophe losses, higher net favorable prior year reserve development and a higher underlying underwriting gain.

Behind Q2 Headlines

Travelers’ total revenues increased 17% from the year-ago quarter to $8.6 billion, primarily due to higher premiums and net investment income. Moreover, the top-line figure beat the Zacks Consensus Estimate of $8.3 billion.

Net written premiums increased 11% year over year to $8.1 billion driven by continued strong renewal rate change and retention across all the segments.

Net investment income increased nearly threefold year over year to $682 million, primarily due to increase in income in non-fixed income investment portfolio.

Travelers witnessed underwriting gain of $324 million, which marked a rebound from the year- ago loss of $280 million, driven higher business volumes.  Combined ratio improved 840 basis points (bps) year over year to 95.3 due to lower catastrophe losses and higher net favorable prior year reserve development.

At the end of the second quarter, statutory capital and surplus were $22.8 billion. Debt-to-capital ratio (excluding after-tax net unrealized investment gains included in shareholders’ equity) was 20, within the company’s target range of 15-25.

Adjusted book value per share was $103.88, up 13% year over year. Core return on equity was 13.7%, better than negative 0.8% in the year-ago quarter.

Segment Update

Business Insurance: Net written premiums increased 5% year over year to about $4 billion, benefiting from reflecting strong renewal premium change and retention, as well as higher new business levels.

Combined ratio improved 1180 bps year over year to 95.3 attributable to lower catastrophe losses, a lower underlying combined ratio and net favorable prior year reserve development.

Segment income of $643 million rebounded from the year-ago loss of $58 million.  The improvement was driven by higher net investment income, lower catastrophe losses, higher underlying underwriting gain and net favorable prior year reserve development.

Bond & Specialty Insurance: Net written premiums rose 16% year over year to $854 million, reflecting strong retention and renewal premium change in management liability.

Combined ratio improved 1570 bps year over year to 78.1 due to net favorable prior year reserve development in the current quarter compared to net unfavorable prior year reserve development in the prior-year quarter, a lower underlying combined ratio, and lower catastrophe losses.

Segment income more than doubled year over year to $187 million, primarily due to net favorable prior year reserve development, a higher underlying underwriting gain and higher net investment income.

Personal Insurance: Net written premiums of $3.3 billion increased 16% year over year due to solid performance at Domestic Automobile and Domestic Homeowners and Other.

Combined ratio improved 160 bps year over year to 99.7 due to lower catastrophe losses and higher net favorable prior year reserve development, partially offset by a higher underlying combined ratio.

Segment income of $121 million increased more than twelve-fold year over year, primarily driven by lower catastrophe losses, higher net investment income and higher net favorable prior year reserve development, partially offset by a lower underlying underwriting gain.

Dividend and Share Repurchase Update

This property & casualty insurer returned $625 million in the reported quarter. It bought back shares worth $401 million. The company’s board also approved a 88 cents per share quarterly dividend. The dividend will be paid out on Sep 30 to shareholders of record at the close of business as of Sep 10, 2021. 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Travelers has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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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