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Traveler's slides 7%; Important support comes into play

AInvestFriday, Jul 19, 2024 2:59 pm ET
1min read

Travelers reported Q2 earnings of $2.51 per share, significantly beating the Consensus of $2.01 by $0.50. However, revenues for the quarter rose 11.7% year-over-year to $11.28 billion, slightly missing the consensus of $11.35 billion. The company experienced substantial catastrophe losses of $1.5 billion pre-tax, up slightly from $1.48 billion in the prior year quarter, impacting overall performance.

Shares of Traveler's fell 7% in reaction to the results. Th primary driver was the heavy catastrophe losses which we discuss below. The stock is set to test key support at the $200 level which also happens to include the 200-day moving average ($201). The 50-weekly lies just below at $196. This will be must hold territory for the Dow component.

Key drivers for the strong EPS included an improvement in the underlying loss ratio across all segments, with a 100bps beat in Business Insurance (BI) and better-than-expected net favorable prior year reserve development (PYD), particularly in Personal lines. Net investment income also exceeded expectations, driven by alternative investments. Despite the catastrophe losses, the underlying combined ratio improved by 3.4 points to 87.7%, showcasing robust underwriting performance.

Travelers' net income for Q2 was $534 million, with core income at $585 million, both reflecting substantial year-over-year increases. This growth was driven by higher underlying underwriting gains, increased net favorable PYD, and improved net investment income, partially offset by higher catastrophe losses. The consolidated combined ratio improved by 6.3 points to 100.2%, thanks to a better underlying combined ratio and favorable PYD.

The company achieved record net written premiums of $11.1 billion, an 8% increase, with growth seen in all three segments. Business Insurance saw net written premiums rise by 7% to $5.5 billion, supported by a strong renewal premium change of 10.1% and high retention rates. Bond & Specialty Insurance grew net written premiums by 8%, driven by excellent retention in management liability and strong production results in the surety business.

Net investment income increased 24% pre-tax over the prior year quarter, mainly due to strong returns from the fixed income portfolio and higher private equity partnership returns. The fixed income portfolio benefited from higher average yields and growth in fixed maturity investments, while the non-fixed income portfolio's returns were buoyed by favorable private equity performance, generally reported on a one-quarter lagged basis.

Despite strong core performance and a positive outlook, shares of Travelers fell by 7.2% following the earnings release. The market reaction was influenced by the high catastrophe losses and the slightly missed revenue expectations. Nevertheless, the company's robust underlying fundamentals and strategic growth in premiums and investments position it well for future resilience and profitability.

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