The Travelers Companies (TRV) reported earnings of $2.22 per share in the third quarter of 2012, outshining the Zacks Consensus Estimate of $1.61 per share. Results surged 181% from 79 cents earned in the year-ago quarter. Operating income in the reported quarter was $867 million, improving 161% year over year.
Lower catastrophe losses and sturdy underwriting results fueled the outperformance.
Including net realized investment losses of $3 million or 1 cent, the company reported net income of $864 million or $2.21 per share, comparing favorably with net income of $333 million or 80 cents a share. The year-ago quarter included net realized investment gains of $1 million.
Operational Update
Net written premiums during the quarter were $5.7 billion, almost flat with the year-ago level.
Net investment income increased 4.6% year over year to $722 million during the quarter, largely attributable to better performance at non-fixed income portfolio.
Travelers posted underwriting gain of $327 million, rebounding from a loss of $185 million in the year-ago quarter. Combined ratio improved 1420 basis points year over year to 90.3% in the reported quarter. The improvement stemmed from lower catastrophe losses and higher underwriting margins.
Total revenue in the quarter under review was $6.5 billion, increasing 2% year over year, driven by the augmentation in premiums earned and 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 $2.96 billion in the quarter, largely driven by increases in renewal rate change.
The combined ratio improved 1210 basis points year over year to 103%, mainly due to elevation in underwriting margins and decrease in catastrophe losses.
Operating income augmented to $543 million in the third quarter of 2012 from $294 million in the year-ago quarter, attributable to improvement in underwriting results driven by better underwriting margins and lower catastrophe losses.
Financial, Professional & International Insurance: Net written premium in the quarter under review declined 10% year over year to $729 million.
The combined ratio deteriorated 400 basis points year over year to 80.2% in third quarter 2012, attributable to lower net favorable prior year reserve development, partially offset by higher underlying underwriting margins.
Operating income descended 14.7% year over year to $180 million, attributable to lower underwriting gain.
Personal Insurance: Net written premium skidded 2% year over year to $2 billion, primarily due to lower new business volumes in Automobile.
The combined ratio improved 2530 basis points year over year to 89.7% in the third quarter of 2012, largely driven by lower catastrophe losses and higher net favorable prior year reserve development.
Operating income of $206 million reversed the loss of $108 million in the year-ago quarter largely due to lower catastrophe losses and higher net favorable prior year reserve development.
Dividend and Share Repurchase
Travelers spent $350 million to buyback 5.4 million shares in the quarter. The company also paid $179 million in dividends.
Additionally, the board approved a quarterly dividend of 46 cents, to be paid on December 31, to the shareholders of record as of December 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.
We have a Neutral recommendation on The Travelers Companies. The quantitative Zacks # 2 Rank (short-term Buy rating) for the company indicates upward boost on the shares over the near term.
Hartford Financial Services Group Inc. (HIG), which competes with Travelers, is scheduled to release its third quarter results on November 1 after the bell while W.R. Berkley Corporation (WRB) is scheduled to release its third quarter results on October 22 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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