Market Overview

Travelers Cat Loss Perpetrates Q2 Earnings Miss, Revenue Up

The Travelers Companies Inc. (NYSE: TRV) posted operating earnings of $1.93 per share in the second quarter, missing the Zacks Consensus Estimate by 13 cents. Earnings were also 9.4% lower year over year.
Higher-than-expected catastrophe losses were largely responsible for the underperformance. 


Behind the Headlines
Net written premiums of Travelers during the quarter were a record $6.2 billion, up 6% year over year. The improvement came from the inclusion of The Dominion of Canada General Insurance Company (Dominion) within Financial, Professional & International Insurance and higher net written premiums in Business Insurance. However, lower net written premiums in Personal Insurance were a partial dampener. 
Net investment income of Travelers improved 8% year over year to $695 million during the quarter. The upside was attributable to strong returns in private equity returns, partially offset by lower reinvestment rates in the fixed income portfolio.
Total revenue of Travelers was $6.71 billion, up 2% from the comparable year-ago period. Revenues surpassed the Zacks Consensus Estimate of $6.53 billion.
Travelers posted underwriting gains of $257 million, reflecting a decline of 8.5% year over year. Combined ratio deteriorated 80 basis points (bps) year over year to 95.1%. The deterioration stemmed from higher catastrophe losses and slightly lower net favorable prior-year reserve development. Underlying combined ratio improved 80 basis points driven by lower expense ratio.
Segment Update
Business Insurance: Net written premium increased 1% year over year to $3.1 billion in the quarter, largely driven by higher renewal rate.
Combined ratio improved 10 bps year over year to 92.1%, owing to the benefit of earned rate increases exceeding loss cost trends, partially offset by higher non-catastrophe weather-related losses.
Operating income declined 29% year over year to $409 million due to higher catastrophe losses, lower net favorable prior year reserve development and lower net investment income, as well as benefit in the prior-year quarter from favorable tax and legal settlements. Underlying combined ratio improvement as earned rate increases exceeded loss cost trends.
Financial, Professional & International Insurance: Net written premium in the quarter under review improved 38% year over year to $1.168 billion, primarily reflecting the inclusion of Dominion and higher net written premiums in both Bond & Financial Products.
Combined ratio improved 970 bps year over year to 76.6% in the quarter due to lower catastrophe losses, higher net favorable prior-year reserve development and higher underlying underwriting margins. Underlying combined ratio also showed improvement driven by lower reinsurance costs and the benefit of earned rate increases exceeding loss cost trends in Bond & Financial Products.
Operating income decreased 65% year over year to $254 million due to higher net favorable prior year reserve development, lower catastrophe losses and higher underlying underwriting gains, as well as higher net investment income.
Personal Insurance: Net written premium fell 1% year over year to $1.89 billion.
Combined ratio deteriorated 530 bps year over year to 99.8% due to lower net favorable prior year reserve development and higher catastrophe losses. Underlying combined ratio improved 20 bps attributable to lower expense ratio and the benefit of earned rate increases exceeding loss cost trends in both Automobile and Homeowners & Others.
Operating income was $75 million, down 47% year over year. The downside was due to lower net favorable prior-year reserve development and higher catastrophe losses.
Dividend and Share Repurchase
Travelers spent $876 million to buy back 9.5 million shares during the quarter with the year-to-date tally reaching 18 million shares bought back for $1.581 billion. The company has $3.234 billion remaining under its authorization.
Additionally, the board of Travelers announced a dividend of 55 cents. This dividend will be paid on Sep 30, 2014 to shareholders of record as of Sep 10. 
Travelers returned $1.066 billion to its shareholders in the quarter.
Our Take
Though Travelers missed the expectation and year-ago numbers, it witnessed written rate gains higher than expected 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 performance going forward.
It is also worth noting that Travelers' lower cost, lower-priced Auto insurance product Quantum 2.0 continues to attract new business.
Furthermore, Travelers's inorganic story seems impressive and acquisitions continue to significantly add to its results.
Travelers also remains committed to enhance its shareholder value. 
Travelers presently carries a Zacks Rank #2 (Buy). Among other property and casualty insurers, RLI Corp.'s (NYSE: RLI) second-quarter earnings matched the Zacks Consensus Estimate, while ACE Limited (NYSE: ACE) and Everest Re Group Limited (NYSE: RE) will reports their earnings later this week. 

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Posted-In: Earnings News


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