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Travelers (TRV) Up 7.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Travelers (TRV). Shares have added about 7.1% 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 drivers.

Travelers’ Q3 Earnings and Revenues Beat Estimates

The Travelers Companies, Inc. reported third-quarter 2022 core income of $2.20 per share, which beat the Zacks Consensus Estimate by 24.3%. The bottom line however decreased 15.4% year over year.

The quarter witnessed higher net written premiums, improved combined ratio and higher underwriting gain.

Behind Q3 Headlines

Travelers’ total revenues increased 6.8% from the year-ago quarter to $9.4 billion, primarily due to higher premiums and fee income. The top-line figure beat the Zacks Consensus Estimate by 2.5%.

Net written premiums increased 110% year over year to $9.2 billion, driven by increased new business, strong retention rates and positive renewal premium changes across all the segments.

Net investment income decreased 23% year over year to $593 million pre-tax, primarily due to a decrease in income from the non-fixed income investment portfolio.

Underwriting gain of $115 million increased 53.3% year over year in the reported quarter.  The combined ratio improved 40 basis points (bps) year over year to 98.2 due to net favorable prior-year reserve development and lesser impact from catastrophe losses. It was partially offset by a higher underlying combined ratio.

Total claims and expenses increased 9.4% year over year to $8.8 billion, primarily due to higher claims and claim adjustment expenses, amortization of deferred acquisition costs, general and administrative expenses and interest expense.

At the end of the third quarter, statutory capital and surplus were $23.4 billion. The debt-to-capital ratio (excluding after-tax net unrealized investment gains included in shareholders’ equity) was 21.8% and within the insurer’s target range of 15% to 25%.

Adjusted book value per share (excluding net unrealized investment gains/losses) was $111.90, up 7% year over year. Core return on equity was 7.9%, down 220 bps year over year.

Segment Update

Business Insurance: Net written premiums increased 9% year over year to about $4.4 billion. The upside was due to strong renewal premium change, strong retention and higher levels of new business. The combined ratio improved 120 bps year over year to 96.3 due to lower net unfavorable prior year reserve development and a lower underlying combined ratio. It was partially offset by higher catastrophe losses.

Segment income decreased 15.6% year over year to $471 million. The downside was due to lower net investment income and higher catastrophe losses. It was partially offset by lower net unfavorable prior year reserve development and a higher underlying underwriting gain.

Bond & Specialty Insurance: Net written premiums rose 8% year over year to $964 million, primarily driven by strong production in surety and strong renewal premium change, retention and new business in management liability. The combined ratio improved 860 bps year over year to 72.5 due to a lower underlying combined ratio and higher net favorable prior-year reserve development. It was partially offset by higher catastrophe losses.

Segment income improved 39.1% year over year to $242 million, primarily due to higher underlying underwriting gain and higher net favorable prior-year reserve development.

Personal Insurance: Net written premiums of $3.9 billion increased 13% year over year due to higher pricing in both Domestic Automobile and Domestic Homeowners and Other. The combined ratio deteriorated 260 bps year over year to 107.2 due to a higher underlying combined ratio and lower net favorable prior-year reserve development. It was partially offset by lower catastrophe losses.

Segment loss was $111 million after-tax wider than the segment loss of $2 million after-tax in the prior-year quarter. The loss increased primarily due to lower underlying underwriting results and lower net investment income. It was partially offset by lower catastrophe losses.

Dividend and Share Repurchase Update

This property & casualty insurer returned $722 million in the reported quarter. It bought back shares worth $501 million. It had about $2.5 billion of capacity remaining under its share repurchase authorization as of Sep 30, 2022. Travelers’ board also declared a regular quarterly dividend of 93 cents per share. The dividend will be paid out on Dec 30 to shareholders of record at the close of business as of Dec 9, 2022.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -5.19% due to these changes.

VGM Scores

Currently, Travelers has an average Growth Score of C, 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 B. 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.

Performance of an Industry Player

Travelers belongs to the Zacks Insurance - Property and Casualty industry. Another stock from the same industry, Progressive (PGR), has gained 7.7% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.

Progressive reported revenues of $13 billion in the last reported quarter, representing a year-over-year change of +9.9%. EPS of $0.49 for the same period compares with $0.14 a year ago.

For the current quarter, Progressive is expected to post earnings of $1.48 per share, indicating a change of +41% from the year-ago quarter. The Zacks Consensus Estimate has changed -4.6% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Progressive. Also, the stock has a VGM Score of A.


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