The Travelers Companies (TRV) reported operating earnings of $2.01 per share in the first quarter of 2012, outperforming the Zacks Consensus Estimate of $1.52 per share. Reported results compared favorably with $1.89 in the prior-year quarter.
Operating income in the reported quarter was $801 million, compared with $826 million in the first quarter of 2011. The year-over-year decline was primarily due to lower net investment income.
However, lower share count due to share repurchases during the quarter aided the bottom line.
Including net realized investment gains of $5 million or 1 cent per share, Travelers reported net income of $806 million or $2.02 per share compared with $839 million or $1.92 per share in the first quarter of 2011. The prior-year quarter realized net investment gains of $13 million or 3 cents per share.
Operational Update
Net written premiums during the quarter edged up 1% year over year to $5.5 billion, largely attributable to pricing gains across its business segments.
Net investment income declined 4.7% year over year to $593 million during the quarter, largely attributable to lower reinvestment rates in the fixed income portfolio.
Travelers’ underwriting gain slipped to $248 million from $249 million in the year-ago quarter. Nevertheless, combined ratio improved 250 basis points year over year to 92.2% 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, up 2% year over year, driven by the increase in premiums earned, partially offset by decrease in net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.2 billion.
Segment Update
Business Insurance: Net written premium increased 3% year over year to $3.1 billion in the quarter.
The combined ratio improved 530 basis points year over year to 89.6%, mainly due to increase in net favorable prior-year reserve development and decrease in catastrophe losses.
Operating income increased 1.3% year over year to $612 million in the first quarter of 2012, attributable to higher underwriting gain, partially offset by lower net investment income.
Financial, Professional & International Insurance: Net written premium in the quarter under review declined 3% year over year to $604 million.
The combined ratio improved 750 basis points year over year to 87.3% in first-quarter 2012, driven by lower catastrophe losses and increase in net favorable prior-year reserve development.
Operating income jumped 24% year over year to $149 million based on an increase in underwriting gain.
Personal Insurance: Net written premium remained flat year over year at $1.8 billion.
The combined ratio deteriorated 360 basis points year over year to 97.8% in the first-quarter of 2012, largely driven by an increase in catastrophe losses coupled with the decrease in net favorable prior year reserve development.
Operating income plunged 36.5% year over year to $108 million, largely due to weak underwriting results as well as lower net investment income.
Dividend and Share Repurchase
Travelers spent $350 million to buyback 6 million shares in the quarter. The company also paid $162 million in dividends.
The board also approved a 12% increase in its quarterly dividend. The increased dividend of 46 cents will be paid on June 29 to the shareholders of record as of June 8.
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 practice and a strong capital position, Travelers is poised to perform better going forward.
However, exposure to significant catastrophic events remains a concern as it impacted results at Personal Insurance. Also, prevailing low interest rate environment keeps us on the sideline.
We have an Underperform 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 it first quarter results on May 2 after the bell and W.R. Berkley Corporation (WRB) with first quarter earnings release scheduled on April 23 after the bell.
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