The Travelers Companies Inc. (TRV) posted operating earnings of $3.07 per share in the fourth quarter of 2014, outperforming the Zacks Consensus Estimate by 21%. Earnings improved 14.6% year over year.
The outperformance came on the back of higher net favorable prior-year reserve development and increased underlying underwriting gain. Lower net investment income and an increase in other expense limited the upside.
Including net realized gains of 4 cents, net income was a record $3.11 per share, up 15% year over year.
Shares gained 1.47% in the pre-market session, reflecting the outperformance.
Behind the Headlines
Net written premiums of Travelers during the quarter were $5.8 billion, up 4% year over year. The improvement came from the inclusion of The Dominion of Canada General Insurance Company (Dominion) within Financial, Professional & International Insurance and domestic business insurance growth in Business Insurance.
Net investment income of Travelers declined 9.3% year over year to $637 million. The downside was due to lower reinvestment rates in the fixed income portfolio and lower returns in the non-fixed income portfolio.
Total revenue of Travelers was $6.8 billion, up 1% from the comparable year-ago quarter. Revenues surpassed the Zacks Consensus Estimate of $6.6 billion.
Travelers’ underwriting gains increased 26% year over year to $866 million. Combined ratio improved 270 basis points (bps) year over year to 85% on higher net favorable prior-year reserve development and lower catastrophe losses. Underlying combined ratio improved 100 bps on the back of benefits of earned pricing that exceeded loss cost trends.
Full-Year 2014 Review
Operating income of $10.55 per share surpassed the Zacks Consensus Estimate by 5.3% and increased 12% year over year.
Net income improved 10% year over year to an all-time high of $10.70 per share. Travelers benefited from solid underwriting and better investment results, as well as by returning excess capital to shareholders. Results included 15 cents of net realized investment gains.
Revenues of $27.2 billion surpassed the Zacks Consensus Estimate of $26.4 billion and improved 4% year over year.
Segment Update
Business and International Insurance: Net written premium increased 6% year over year to $3.6 billion in the quarter, largely driven by higher domestic business insurance and the inclusion of Dominion.
Combined ratio improved 170 bps year over year to 89.8% owing to lower catastrophe losses and higher net favorable prior-year reserve development.
Operating income of $630 million declined slightly due to lower net investment income.
Bond & Specialty Insurance: Net written premium in the quarter under review fell 5% year over year to $525 million.
Combined ratio improved 1,400 bps year over year to 49.7% in the quarter on higher prior-year reserve development and lower catastrophe losses.
Operating income increased 24% year over year to $216 million attributable to higher underwriting gains.
Personal Insurance: Net written premium inched up 1% year over year to $1.7 billion on increased new business from the company’s new auto product, Quantum 2.0.
Combined ratio improved 160 bps year over year to 85.3% on better underlying combined ratio.
Operating income was $242 million, up 2% year over year on higher underwriting gains.
Dividend and Share Repurchase
Travelers spent $1 billion in buying back 9.7 million shares during the quarter with the full-year tally reaching 35.8 million shares repurchased for $3.3 billion. The company has about $1.5 billion remaining under its authorization.
Additionally, the board of Travelers announced a dividend of 55 cents. This dividend will be paid on Mar 31, 2015 to shareholders of record as of Mar 10.
Travelers returned $4.068 billion to its shareholders in 2014.
Our Take
Lower catastrophe loss favoring higher underwriting gains aided the bottom line. However, a soft interest rate environment dampened investment results.
Nonetheless, the company continues to witness higher written rate gains than expected, exceeding loss cost trends across all segments.
High retention rate, pricing gains, positive renewal rate changes, and a strong capital position are among the other positives, which will likely support Travelers Companies’ growth going forward.
Travelers’ lower cost, lower-priced Auto insurance product Quantum 2.0 is gaining momentum.
Furthermore, Travelers’ inorganic story seems impressive as acquisitions continue to be significantly accretive to its results.
Travelers also remains committed to enhance its shareholder value.
Zacks Rank
Currently, Travelers carries a Zacks Rank #2 (Buy). Investors interested in the property and casualty industry can also consider The Allstate Corporation (ALL), The Chubb Corporation (CB) and Arch Capital Group Ltd. (ACGL). Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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