It has been about a month since the last earnings report for Travelers (TRV - Free Report) . Shares have added about 2.5% in that time frame, underperforming 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' Q3 Earnings Miss Estimates, Decline Y/Y
The Travelers Companies’ third-quarter 2019 core income of $1.43 per share missed the Zacks Consensus Estimate of $2.38 by 39.9%. The bottom line declined 43.7% year over year.
Shares of the company fell 2.2% after it posted lower-than-expected earnings.
The year-over-year decline in earnings can largely be attributed to net unfavorable prior year reserve development, including the impact of an increasingly challenging tort environment. Underlying underwriting results benefited from 4% growth in earned premiums and expense management.
Behind the Q3 Headlines
Travelers’ total revenues rose 4% from the year-ago quarter to $8 billion.
Net written premiums grew 7% year over year to a record $7.6 billion owing to increase in each of the business segments, namely Business and International Insurance, Bond & Specialty Insurance and Personal Insurance.
Net investment income decreased 24% year over year to $622 million.
Travelers incurred underwriting loss of $149 million against underwriting income of $198 million in the year-earlier period. Combined ratio deteriorated 490 basis points (bps) year over year to 101.5%, attributable to net unfavorable prior year reserve development and a higher underlying combined ratio, partially offset by lower catastrophe losses.
At the end of the third quarter, statutory capital and surplus were $20.78 billion. Debt-to-capital ratio (excluding after-tax net unrealized investment gains) was 22%, within the company’s target range of 15-25%.
Adjusted book value per share was $90.09, up 3% from 2018 end.
Core return on equity was 6.5%, down 550 bps year over year.
Personal Insurance: Net written premiums of $2.9 billion increased 7% year over year driven by solid performance at Agency Automobile as well as Agency Homeowners and Other.
Combined ratio deteriorated 80 bps year over year to 98% due to higher underlying combined ratio, partially offset by lower catastrophe losses and higher net favorable prior year reserve development.
Segment income of $131 million declined 14.4% year over year owing to lower underlying underwriting gain.
Bond & Specialty Insurance: Net written premiums rose 13% year over year to $728 million, primarily backed by continued strong retention, increased levels of renewal premium change and strong new business in management liability and continued strong surety production.
Combined ratio deteriorated 1310 bps year over year to 83.3% owing to lower net favorable prior year reserve development and a higher underlying combined ratio, partially offset by lower catastrophe losses.
Segment income dropped 29.1% year over year to $139 million on lower net favorable prior year reserve development and lower underlying underwriting gain.
Business Insurance: Net written premiums increased 7% year over year to $3.9 billion, reflecting continued strong retention, higher renewal premium change and higher levels of new business.
Combined ratio deteriorated 640 bps year over year to 107.7% owing to higher net unfavorable prior year reserve development and a higher underlying combined ratio, partially offset by lower catastrophe losses.
Segment income of $179 million was down 60.2% year over year. The downside was due to higher net unfavorable prior year reserve development, lower net investment income and a slightly lower underlying underwriting gain, partially offset by lower catastrophe losses.
Dividend and Share Repurchase Update
The property & casualty insurer returned $590 million in the reported quarter. It repurchased 2.6 million shares worth $375 million. The company is now left with $2.161 billion worth of shares under its existing authorization.
The company’s board approved a quarterly dividend of 82 cents per share. The dividend will be paid out on Dec 31, 2019 to shareholders of record at the close of business as of Dec 10, 2019.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
Currently, Travelers has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
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.