Why Is Travelers (TRV) Down 5.7% Since Last Earnings Report?
A month has gone by since the last earnings report for Travelers (TRV). Shares have lost about 5.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Travelers 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 catalysts.
Travelers Q2 Earnings Meet Estimates, Revenues Miss
The Travelers Companies, Inc. reported second-quarter 2020 loss of 20 cents per share, which matched the Zacks Consensus Estimate. The company had reported earnings of $2.02 per share in the year-ago quarter. The difference was due to higher catastrophe losses, lower net investment income and lower net favorable prior year reserve development, partially offset by higher underlying underwriting gain (i.e., excluding net prior year reserve development and catastrophe losses). COVID-19 and related economic conditions had a modest net impact on underwriting results in the quarter.
Behind the Q2 Headlines
Travelers’ total revenues decreased 5.4% from the year-ago quarter to $7.4 billion, primarily due to lower premiums, net investment income, fee income and other revenues. Moreover, the top-line figure missed the Zacks Consensus Estimate by 4.6%
Net written premiums decreased 1% year over year to $7.3 billion primarily due to the impact of the pandemic on insured exposures in the commercial businesses and the auto refund program in Personal Insurance, which was largely offset by strong renewal rate change in all three segments. Excluding premium refunds provided to personal automobile customers in response to COVID-19 and related economic conditions, net written premiums grew 2%.
Net investment income decreased 59% year over year to $268 million pre-tax, primarily due to loss of $234 million from non-fixed income investment portfolio and lower income from the fixed income investment portfolio. Travelers witnessed underwriting loss of $280 million against underwriting gain of $74 million in the year-earlier period. Combined ratio deteriorated 530 basis points (bps) year over year to 103.7%, primarily due to higher catastrophe losses and lower net favorable prior year reserve development partially offset by a lower underlying combined ratio.
At the end of the second quarter, statutory capital and surplus were $20.6 billion. Debt-to-capital ratio (excluding after-tax net unrealized investment gains included in shareholders’ equity) was 23.2%, within the company’s target range of 15-25%. Adjusted book value per share was $92.01, down 0.8% from 2019 end. Core return on equity was (0.8%) against 9.2% in the year-ago quarter.
Personal Insurance: Net written premiums of $2.8 billion decreased 1% year over year due poor performance at Agency Automobile. Excluding premium refunds provided to personal automobile customers, net written premiums increased 6%.
Combined ratio deteriorated 110 bps year over year to 101.3% due to higher catastrophe losses, largely offset by lower underlying combined ratio and higher net favorable prior year reserve development. Segment income of $10 million decreased 88.6% from the year-ago quarter’s level primarily due to higher catastrophe losses and lower net investment income, partially offset by higher underlying underwriting gain and higher net favorable prior year reserve development.
Bond & Specialty Insurance: Net written premiums rose 3% year over year to $734 million, primarily backed by continued strong retention and increased levels of renewal premium change in management liability.
Combined ratio deteriorated 1890 bps year over year to 93.8% due to net unfavorable prior year reserve development compared to net favorable prior year reserve development in the prior year quarter, higher underlying combined ratio and higher catastrophe losses. Segment income dropped 58.6% year over year to $72 million primarily due to net unfavorable prior year reserve development compared to net favorable prior year reserve development in the prior-year quarter, lower underlying underwriting gain and lower net investment income.
Business Insurance: Net written premiums decreased 3% 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 exposures and decrease in new business volume, both due to COVID-19 and related economic conditions.
Combined ratio deteriorated 600 bps year over year to 107.1% due to higher catastrophe losses and no net prior year reserve development against net favorable prior year reserve development in the prior-year quarter, partially offset by a lower underlying combined ratio. Segment loss was $58 million against segment income of $351 million in the prior-year quarter. The downside was due to lower net investment income, higher catastrophe losses and no net prior year reserve development against net favorable prior year reserve development in the prior year quarter, partially offset by a higher underlying underwriting gain.
Dividend and Share Repurchase Update
The property & casualty insurer returned $218 million in the reported quarter. There were no share repurchases in the current quarter. The company’s board approved a quarterly dividend of 85 cents per share. The dividend will be paid out on Sep 30 to shareholders of record at the close of business as of Sep 10, 2020.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted 8.16% due to these changes.
At this time, Travelers has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, 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.
Travelers has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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