Travelers Beats in Q3, Raises Outlook

| About: The Travelers (TRV)

Operating earnings of The Travelers Companies (NYSE:TRV) for the third quarter of 2010 were $1.81 per share, surpassing the Zacks Consensus estimate of $1.44 by 37 cents. Results compare favorably with operating earnings of $1.61 in the prior-year quarter. Operating income was $858 million, down 6.1% from $914 million in second-quarter 2009.

Including net realized investment losses of $147 million or 30 cents per share, Travelers reported a net income of $1.005 billion or $2.11 per share, compared with $935 million or $1.65 per share in the third quarter of 2009. The prior-year quarter realized net investments gain of $21 million or 4 cents per share.

Solid underwriting results across segments as well as lower shares outstanding aided he better-than-expected performance.

After-tax decrease in underwriting gain along with after-tax decrease in net investment income led to a decline in net income. However, net income per share increased year over year due to a lower number of shares outstanding at the end of the quarter.

Net written premiums of Travelers during the quarter totaled $5.5 billion, up 2% from $5.6 billion in the second quarter of 2009, largely attributable to higher net written premiums in Business Insurance and Personal Insurance. However, decrease in net written premiums in Financial, Professional & International Insurance was a partial offset.

Net investment income of Travelers declined 3.7% year over year to $735 million during the quarter due to lower reinvestment rates in the fixed income portfolio.

Travelers’ underwriting gain declined to $476 million in the quarter from $524 million from the prior-year quarter reflecting a higher combined ratio of 90.6% compared with 89.7% in third-quarter 2009. A decrease in net favorable prior year reserve development, partially offset by a decrease in catastrophe losses led to an increase in the combined ratio.

Total revenue in the quarter under review was $6.5 billion, up 2% year-over-year. Results also surpassed the Zacks Consensus estimate of $6.2 billion.

Segment Update

Business Insurance: Net written premium increased 2% year over year to $2.7 billion in the quarter. Combined ratio increased to 92.1% from 86.5% in third-quarter 2009, mainly due to a decrease in net favorable prior year reserve development, partially offset by a decrease in catastrophe losses. Operating income decreased 18.7% year-over-year to $543 million attributable to lower underwriting gain as well as lower net investment income.

Financial, Professional & International Insurance: Net written premium declined 7% year-over-year to $808 million in the quarter. Combined ratio decreased to 76.9% from 88.7% in third-quarter 2009, driven by an increase in net favorable prior year reserve development. Operating income increased 26.9% year-over-year to $212 million driven by an increase in underwriting gain, partially offset by a decrease in net investment income.

Personal Insurance: Net written premium improved 8% year-over-year to $2.0 billion in the quarter. Combined ratio decreased to 93.1% from 95.2% in third-quarter 2009. Operating income increased 12.8% year-over-year to $168 million, largely due to an increase in underwriting results, partially offset by a decrease in net investment income.

Dividend and Share Repurchase

Travelers paid a dividend of $169 million during third-quarter 2010.

Travelers spent $600 million during the third quarter of 2010 to buy back 11.8 million shares. The company is left with the approval to buy back another $3.1 billion worth of shares.

Since the initial share repurchase program in the second quarter of 2006, Travelers repurchased 260 million common shares at a total cost of $12.9 billion.

Full-Year 2010 Guidance

Management expects pretax Catastrophe losses of $1.170 billion, including $140 million for fourth quarter 2010. After-tax Catastrophe losses are estimated at $765 million, or $1.58 per share, including $90 million or 20 cents per diluted share for the back half of 2010.

Management expects to spend $4.5 to $5.0 billion to buy back shares.

Management expects average invested assets (excluding net unrealized investment gains and losses) after taking into account dividends and share repurchases to decrease by low single digit.

Number of diluted shares outstanding at year-end is projected at 485 million.

Taking into account these factors, management raised the earnings guidance to a range of $5.75 to $5.95 per share from $5.20 to $5.45 previously.

Travelers focuses on enhancing its shareholder value through dividend and share buyback, which continues to positively impact both its earnings per share as well as return on equity. Based on a high retention rate, favorable renewal rate changes, favorable prior year reserve development and prudent underwriting practice, Travelers is poised to perform better going forward.

However, a lackluster economy, restricted premium growth and significant exposure to asbestos and environmental claims keep us on the sideline. We thus maintain our “Neutral” recommendation on Travelers. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.