It has been about a month since the last earnings report for The Travelers Companies, Inc. (TRV - Free Report) . Shares have lost about 1.1% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is TRV due for a breakout? 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 Q1 Earnings Miss Estimates, Revenues Beat
The Travelers Companies, Inc.’s first-quarter 2018 core income of $2.46 per share missed the Zacks Consensus Estimate of $2.68 by 8.2%. However, the bottom line improved 13.9% year over year.
This year-over-year increase in earnings can be attributed to higher net favorable prior-year reserve development along with a solid underlying underwriting gain. Moreover, lower income tax expenses, driven by the reduced U.S. corporate income tax rate also contributed to the upside. However, a benefit of $39 million in the prior-year quarter from the settlement of prior-year tax matters, partially offset this upside. Nonetheless, the bottom line was boosted by share buybacks.
Behind the Q1 Headlines
Total revenues of Travelers rose nearly 5% from the year-ago quarter to $7.3 billion. Also, the top line beat the Zacks Consensus Estimate of $7.2 billion.
Net written premiums displayed a 5.1% year-over-year increase to $6.8 billion owing to growth in each business segment, namely Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.
Net investment income slid 1.1% year over year to $603 million on lower private equity returns. Increase in fixed income returns due to higher average level of fixed maturity investments as well as short-term interest rates, led to this downside.
Travelers reported an underwriting gain of $258 million, up 22.3% from the year-ago quarter. Combined ratio improved 50 basis points (bps) year over year to 95.5% owing to higher net favorable prior-year reserve development and a benefit derived from catastrophe loss. However, a higher underlying combined ratio partially offset this improvement.
At the end of the first quarter, statutory capital and surplus was $20.5 billion and the debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 23.4%. This was within the company’s target range of 15-25%. Adjusted book value per share was $84.54, up 3.7% year over year.
Travelers’ Business Insurance unit reported net written premiums of $3.9 billion, up 3.6% year over year. A continued strong retention, an improved renewal premium change and a solid new business led to this upside.
Combined ratio deteriorated 110 bps year over year to 97.5% due to higher underlying combined ratio as well as catastrophe loss. However, higher net favorable prior-year reserve development partially offset this downside.
Segment income of $452 million grew 2.3% on the back of lower segment income before income taxes, which was more than offset by decreased income tax expense.
Bond & Specialty Insurance: Net written premiums rose 5.5% year over year to $574 million, primarily driven by improved domestic surety premiums, a sustained solid retention plus an increased new business in domestic management liability.
Combined ratio improved 470 bps year over year to 74.7% owing to lower underlying combined ratio as well as catastrophe loss along with higher net favorable prior-year reserve development.
Segment income improved 19.3% year over year to $173 million, attributable to higher segment income before income taxes, partially offset by higher income tax expense.
Personal Insurance: Net written premiums increased 7.6% year over year to about $2.3 billion.
Combined ratio improved 210 bps year over year to 97.5%, backed by a higher net favorable prior-year reserve development and a benefit derived from catastrophe loss, partially offset by a higher underlying combined ratio.
Segment income surged 44.9% to $129 million, attributable to higher segment income before income taxes, partially offset by higher income tax expense.
Dividend and Share Repurchase Update
The property & casualty (P&C) insurer returned total capital of $598 million to shareholders in the reported quarter. This included a buyback of 2.8 million shares worth $401 million. The company is now left with shares worth $4.2 billion for repurchase under its existing authorization at the end of the first quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to two lower.
At this time, TRV has a subpar Growth Score of D, a grade with the same score on the momentum front. However, 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 C. 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.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, TRV has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.