Zacks_Analysts' Blog : Travelers Lags EPS, Beats on Rev. - Analyst Blog

The Travelers Companies (TRV) reported operating earnings of $1.48 per share in the fourth quarter, lagging the Zacks Consensus Estimate of $1.52 per share. Results were far behind earnings of $1.89 in the prior-year quarter. Operating income was $609 million, comparing unfavorably with $864 million in the fourth quarter of 2010.

The decline was primarily due to lower net investment income and lower underwriting gains stemming form lower net favorable prior-year reserve development.

Including net realized investment gains of $9 million or 3 cents per share, Travelers reported net income of $618 million or $1.51 per share compared with $894 million or $1.95 per share in the fourth quarter of 2010. The prior-year quarter realized net investment gains of $30 million or 6 cents per share.

Full year 2011operating earnings were $3.28 per share, 2 cents behind the Zacks Consensus Estimate. Operating income slumped $1.39 billion, from $3.04 billion in 2010.

Including net realized investment gains of $36 million or 8 cents per share, Travelers reported net income of $1.4 billion or $3.36 per share compared with $3.2 billion or $6.62 per share in 2010. The prior-year realized net investment gains of $173 million or 36 cents per share.

Operational Update

Net written premiums during the quarter increased 1% year over year to $5.26 billion, largely attributable to gains in pricing across its business segments. Full year net written premiums improved 3% year over year to $22.2 billion.

Net investment income dropped 16% year over year to $541 million during the quarter largely attributable to lower reinvestment rates in the fixed as well as non-fixed income portfolio. Full year net investment income declined 5.6% year over year to $2.3 billion.

Travelers’ underwriting gain was $115 million in the quarter, plummeting from $303 million in the prior-year quarter as the combined ratio deteriorated to 95.9% from 90.6% in the fourth quarter of 2010. Higher catastrophe losses coupled withthe decrease in net favorable prior-year reserve development led to the higher combined ratio.

Full year underwriting loss was $745 million, in stark contrast to a gain of $804 million in 2010. The combined ration was 105.1%, deteriorating from 93.2% in 2010.

Total revenue in the quarter under review was $6.37 billion, up 1% year over year, driven by the increase in premiums earned, partiallyoffset by decrease in net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.2 billion.

Full Year revenue also increased 1% year over year to $25.4 billion and outperformed the Zacks Consensus Estimate of $24.9 billion.

Segment Update

Business Insurance: Net written premium increased 1% year over year to $2.6 billion in the quarter.

The combined ratio deteriorated to 95.8% from 90.1% in the fourth quarter of 2010, mainly due to decrease in net favorable prior-year reserve development, partially offset by a decrease in catastrophe losses.

Operating income plummeted 28% year over year to $445 million in the fourth quarter of 2011 attributable to lower underwriting gain and lower net investment income.

Financial, Professional & International Insurance: Net written premium in fourth quarter of $791 million declined 5% over the prior-year quarter.

The combined ratio improved to 87.3% from 89.2% in fourth-quarter 2010, driven by an increase in net favorable prior-year reserve development, partially offset by the increase in catastrophes.

Operating income increased 1.3% year over year to $151 million due to an increase in underwriting gain.

Personal Insurance: Net written premium improved 2% year over year to $1.86 billion in the quarter.

The combined ratio deteriorated to 99.8% from 92.1% in the fourth-quarter of 2010 largely driven by an increase in catastrophe losses coupled with the decrease in net favorable prior-year reserve development.

Operating income was $77 million, dropping 22% from $99 million, largely due to weak underwriting results as well as lower net investment income.

Dividend and Share Repurchase

Travelers paid out $166 million in dividends in the quarter and $669 million for full year 2011.

Travelers also bought back 20.9 million shares for $1.2 billion during the quarter and 51.0 million shares for $2.9 billion in 2011.

The company is left with $3.6 billion worth of share buybacks.

The board also authorized a quarterly dividend of 41 cents to be paid on March 30, 2012, to shareholders of March 9, 2012.

Our Take

Travelers continues to focus on share buybacks that have a positive impact on earnings per share and bolster shareholder value.

Based on a high retention rate, pricing gains (which will help to deliver better underwriting margins in the first half of 2012), favorable renewal rate changes, favorable prior-year reserve development, prudent underwriting practice and a strong capital position, Travelers is poised to perform better going forward. The company also continues to score strongly with the credit rating agencies.

However, exposure to significant catastrophic events remains a concern as it continues to weigh on the results.

We retain our Neutral 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) and W.R. Berkley Corporation (WRB).