The Travelers Companies (TRV) reported earnings of $1.26 per share in the second quarter of 2012, lagging the Zacks Consensus Estimate of $1.38 per share. Results rebounded from the loss of 88 cents incurred in the year-ago quarter.
Travelers missed the expectation due to catastrophe losses. Cat loss incurred by the company totaled $357 million or 90 cents per share arising from wind and hail storms in several regions of the United States.
Operating income in the reported quarter was $495 million, reversing the loss of $377 million in the second quarter of 2011. The year-over-year increase stemmed from underwriting margin improvement across all segments. Lower share count due to share repurchases during the quarter aided the bottom line.
Operational Update
Net written premiums during the quarter edged up 1% year over year to $5.87 billion, largely attributable to pricing gains across its business segments.
Net investment income declined 2.8% year over year to $593 million during the quarter, largely attributable to lower reinvestment rates in the fixed income portfolio.
Travelers’ underwriting loss narrowed to $0.05 million from $0.9 million in the year-ago quarter. Combined ratio improved 2450 basis points year over year to 100.5% in the reported quarter. The improvement stemmed from an increase in net favorable prior-year reserve development and decrease in catastrophe losses.
Total revenue in the quarter under review was $6.4 billion, flat with the year-ago quarter, driven by the increase in premiums earned, partially offset by decrease in net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.3 billion.
Segment Update
Business Insurance: Net written premium increased 5% year over year to $3 billion in the quarter, largely driven by increases in renewal rate change.
The combined ratio improved 1990 basis points year over year to 103%, mainly due to increase in net favorable prior-year reserve development and decrease in catastrophe losses.
Operating income increased to $362 million in the second quarter of 2012 from $11 million in the year-ago quarter, attributable to improvement in underwriting loss.
Financial, Professional & International Insurance: Net written premium in the quarter under review declined 4% year over year to $840 million.
The combined ratio improved 480 basis points year over year to 80% in second quarter 2012, driven by lower catastrophe losses. Operating income jumped 11% year over year to $182 million, based on an increase in underwriting gain.
Personal Insurance: Net written premium declined 3% year over year to $2 billion primarily due to lower new business volumes in both Automobile and Homeowners & Other.
The combined ratio improved 4070 basis points year over year to 104.8% in the second quarter of 2012, largely driven by decrease in catastrophe losses coupled with an increase in net favorable prior-year reserve development.
Operating income of $17 million reversed the loss of $471 million in the year-ago quarter largely due to an improvement in underwriting loss.
Dividend and Share Repurchase
Travelers spent $350 million to buyback 5.6 million shares in the quarter. The company also paid $181 million in dividends.
Additionally, the board approved a quarterly dividend of 46 cents, to be paid on September 28, to the shareholders of record as of September 10.
Our Take
Travelers’ continuous share buyback strategy has a positive impact on earnings per share and also bolsters shareholder value.
Based on a high retention rate, pricing gains, positive renewal rate changes, favorable prior-year reserve development, prudent underwriting practices and a strong capital position, Travelers is poised to perform better going forward. It also scores strongly with the credit rating agencies.
However, exposure to significant catastrophic events remains a concern as it weighed on the results. Also, the prevailing low interest rate environment keeps us on the sidelines.
We have a Neutral recommendation on The Travelers Companies. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
Based in New York, The Travelers Companies, through its subsidiaries, provides a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the United States and in select international markets. It competes with Hartford Financial Services Group Inc. (HIG), which is scheduled to release its second quarter results on August 1 after the bell and W.R. Berkley Corporation (WRB) with second quarter earnings scheduled to release on July 24 after the bell.
HARTFORD FIN SV (HIG): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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