Travelers Misses On Q1 Earnings, Enhances Investor Value

The Travelers Companies Inc. (TRV - Analyst Report) posted operating earnings of $2.53 per share in the first quarter of 2015, missing the Zacks Consensus Estimate by 1.2%. Earnings declined 14% year over year.

The results were affected by lower net investment income, the absence of a benefit from a change in state assessment law in the prior year and lower net favorable prior-year development.

Including net realized gains of 2 cents, net income was $2.55 per share, down 14% year over year.

Behind the Headlines

Net written premiums of Travelers during the quarter were $5.9 billion, almost flat year over year. The quarter experienced positive renewal premium changes across all segments and higher retention and new business volumes in Business and International Insurance and Personal Insurance. However, the impact of changes in the timing and structure of certain reinsurance treaties and the impact of changes in foreign currency exchange rates were partial offsets.

Net investment income of Travelers declined about 20% year over year to $592 million. The downside was due to lower private equity and fixed income returns.

Total revenue of Travelers was $6.6 billion, down 1% from the comparable year-ago quarter. Revenues were almost in line the Zacks Consensus Estimate.

Travelers’ underwriting gains decreased 22% year over year to $620 million. Combined ratio deteriorated 320 basis points (bps) year over year to 88.9% due to higher underlying combined ratio, lower net favorable prior-year reserve development and higher catastrophe losses. Underlying combined ratio deteriorated 210 bps due to an increase in the expense ratio.

Segment Update
Business and International Insurance: Net written premium increased 1% year over year to $3.8 billion in the quarter, largely driven by positive renewal premium changes, an increase in retention rates, and an increase in new business volumes.

Combined ratio deteriorated 410 bps year over year to 93.3% owing to a higher underlying combined ratio, lower net favorable prior-year reserve development and higher catastrophe losses (0.3 points).

Operating income of $515 million declined 26% due to lower net investment income and lower underlying underwriting gain.

Bond & Specialty Insurance: Net written premium of $478 million in the quarter under review was flat year over year.

Combined ratio deteriorated 750 bps year over year to 76.1% in the quarter due to lower net favorable prior year reserve development.

Operating income increased 19% year over year to $124 million attributable to lower net favorable prior-year reserve development and lower net investment income.

Personal Insurance: Net written premium remained almost flat year over year at $1.6 billion.

Combined ratio improved 10 bps year over year to 83.5% on an improvement in Agency Automobile.

Operating income was $252 million, down 6% year over year due to lower net investment income and a decline in other income.

Dividend and Share Repurchase

Travelers returned $850 million to its shareholders in the first quarter.

Travelers spent $672 million in buying back 6.3 million shares during the quarter. Dividend payout totaled $178 million.

Recently, the board of directors also approved a $5 billion worth share buyback. This is in addition to the $884 million that remained from previous authorizations as of Mar 31, 2015. The board also approved a dividend hike of 11% to 61 cents per share.

Our Take

A still soft interest rate environment remained a dampener in the quarter.

High retention rate, pricing gains, positive renewal rate changes, a strong product portfolio, strategic acquisitions  and a strong capital position are the positives, which will likely support Travelers Companies’ growth going forward.

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