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Why Is Travelers (TRV) Up 2.3% Since Last Earnings Report?

It has been about a month since the last earnings report for Travelers (TRV). Shares have added about 2.3% 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 Beats Q1 Earnings Estimates, Ups Dividend

The Travelers Companies reported first-quarter 2023 core income of $4.11 per share, which beat the Zacks Consensus Estimate of $3.64 and our estimate of $3.41. Shares gained 2.3% in the pre-market trading session to reflect the outperformance.

However, the bottom line decreased 2.6% year over year. The year-over-year decline reflects higher catastrophe losses and lower net favorable prior-year reserve development. However, a higher underlying underwriting gain and higher net investment income were partial offsets.

Behind Q1 Headlines

Travelers’ total revenues increased 10% from the year-ago quarter to $9.7 billion, primarily driven by higher premiums. The top-line figure however missed the Zacks Consensus Estimate of $9.8 billion. Net written premiums increased 12% year over year to a record $9.4 billion, driven by strong growth across all three segments. The figure was higher than our estimate of $8.9 billion.

Net investment income increased 4.1% year over year to $663 million, primarily due to higher income in the fixed-income investment portfolio. The figure was lower than our estimate of $683.7 million.

Catastrophe losses totaled $422 million, wider than $36 million pre-tax in the prior-year quarter. Catastrophe losses primarily resulted from severe wind and hail storms in multiple states.

Travelers witnessed an underwriting gain of $501 million, down 12.9% year over year.  The combined ratio deteriorated 410 basis points (bps) year over year to 95.4 due to higher catastrophe losses and lower net favorable prior-year reserve development, partially offset by a lower underlying combined ratio.

Core return on equity contracted 100 basis points to 14.5%. Adjusted book value per share of $116.55 increased 4% year over year. Leverage improved 130 basis points to 24. At the end of the quarter, statutory capital and surplus was $23.7 billion.

Segment Update

Business Insurance: Net written premiums increased 15% year over year to about $5.2 billion, benefiting from strong renewal premium change and retention as well as higher levels of new business. It beat our estimate of $4.5 billion. The combined ratio deteriorated 270 bps year over year to 93.6 due to higher catastrophe losses and lower net favorable prior-year reserve development, partially offset by a lower underlying combined ratio.

Segment income of $756 million increased 13% year over year, driven by higher underlying underwriting gain, partially offset by higher catastrophe losses and lower net favorable prior-year reserve development. The figure was higher than our estimate of $444.1 million.

Bond & Specialty Insurance: Net written premiums increased slightly year over year to $886 million, reflecting strong retention, new business and renewal premium change in management liability, as well as strong production in surety.  The figure was lower than our estimate of $909.2 million.
The combined ratio deteriorated 200 bps year over year to 80, attributable to a higher underlying combined ratio and higher catastrophe losses, partially offset by higher net favorable prior year reserve development.

Segment income of $207 million decreased 4.6.% year over year due to a lower underlying underwriting gain, partially offset by higher net favorable prior year reserve development and higher net investment income. The figure was higher than our estimate of $181.7 million.

Personal Insurance: Net written premiums of $3.4 billion increased 12% year over year, driven by higher pricing in both Domestic Automobile and Domestic Homeowners and Other. The figure was in line with our estimate. The combined ratio deteriorated 620 bps year over year to 101.5 due to higher catastrophe losses and a slightly higher underlying combined ratio, partially offset by higher net favorable prior year reserve development.

Segment income was $83 million, a drop from $225 million earned in the year-ago quarter due to higher catastrophe losses, partially offset by a higher underlying underwriting gain and higher net favorable prior year reserve development.

Dividend and Share Repurchase Update

This property & casualty insurer returned $680 million to shareholders in the first quarter. It bought back 2.5 million shares for $462 million in the reported quarter. The board also approved an 8% increase in its quarterly dividend to $1 per share, marking 19 consecutive years of dividend increase. The dividend will be paid out on Jun 30, 2023, to shareholders of record at the close of business on Jun 9, 2023. It also approved a $5 billion share buyback program. This is in addition to the $1.605 billion that remained from the previous authorizations as of Mar 31, 2023

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How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, 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 20% 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.

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