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The Travelers Companies Inc. (TRV - Analyst Report) reported operating net earnings of $2.35 per share in the third quarter of 2013, surpassing the Zacks Consensus Estimate of $1.99 per share. Moreover, results improved 5.9% from $2.22 per share in the year-ago quarter. Operating income of $883 million improved 1.8% in the reported quarter.

The outperformance was driven by improvement in underlying underwriting gains. However, lower net investment income and lower net favorable prior-year reserve development limited the upside. Lower share count also boosted the bottom line.

Including net realized investment losses of $19 million or 5 cents per share, Travelers Companies reported net income of $864 million or $2.30 per share, comparing favorably with net income of $864 million or $2.21 a share in the year-ago quarter.  Net income in the year-ago quarter included net realized investment losses of $3 million.

Operational Update

Net written premiums of Travelers during the quarter were $5.7 billion, which inched up 0.2% year over year. The slight improvement stemmed from higher net written premiums in Business Insurance and Financial, Professional & International Insurance, that were mostly offset by lower net written premiums in Personal Insurance.

Net investment income of Travelers Companies decreased 9% year over year to $657 million during the quarter. The downside was attributable to lower reinvestment rates in the fixed income portfolio and lower real estate partnership returns in the non-fixed income portfolio.

Travelers Companies posted underwriting gains of $595 million, up 1.6% from the prior-year quarter. Combined ratio improved 140 basis points (bps) year over year to 88.9% in the reported quarter. The improvement was due to higher underwriting margins, partially offset by lower net favorable prior-year reserve development and slightly higher catastrophe losses.

Total revenues of Travelers Companies in the quarter under review were $6.45 billion, which slipped 0.9% from the year-ago period. Revenues, however, surpassed the Zacks Consensus Estimate of $6.3 billion.

Segment Update

Business Insurance: Net written premium increased 2% year over year to $3.03 billion in the quarter, largely driven by higher renewal rate.

Combined ratio improved 30 bps year over year to 93%, owing to higher underwriting margins, but was partly offset by lower net favorable prior-year reserve development and higher catastrophe losses.

Operating income slid 3% year over year to $526 million in the third quarter of 2013, attributable to lower net investment income, higher catastrophe losses and lower net favorable prior-year reserve development, partially offset by higher underlying underwriting gains.

Financial, Professional & International Insurance: Net written premium in the quarter under review improved 6% year over year to $770 million, primarily reflecting higher volumes in construction surety and renewal rate increases in management liability in Bond & Financial Products, as well as higher new business volumes in International.

Combined ratio deteriorated 30 bps year over year to 83.2% in third-quarter 2013, attributable to lower net favorable prior-year reserve development and lower underlying underwriting margins, partially offset by lower catastrophe losses.

Operating income declined 11% year over year to $160 million due to higher losses, lower net favorable prior-year reserve development and lower net investment income.

Personal Insurance: Net written premium descended 5% year over year to $1.91 billion, primarily due to lower new-business volumes.

Combined ratio improved 500 bps year over year to 84.7% in the third quarter of 2013, largely driven by higher underwriting margins and lower catastrophe losses, partially offset by lower net favorable prior-year reserve development.

Operating income was $262 million, up 27% over year-ago quarter. The upside was driven by higher underlying underwriting gain, partially offset by lower net favorable prior year reserve development and lower net investment income.

Dividend and Share Repurchase

Travelers Companies spent $800 million to buy back 9.7 million shares during the quarter. The company has $759 billion remaining under its authorization.

The board of directors of Travelers Companies authorized an additional $5.0 billion of share repurchases. It paid $185 million in dividend in the reported quarter.

Additionally, the board of Travelers Companies approved a dividend of 50 cents, payable on Dec 31, 2013 to shareholders of record as of Dec 10, 2013.

Performance of Other Property and Casualty Insurers

RLI Corporation (RLI - Analyst Report) reported third-quarter 2013 operating earnings of $1.40 per share. The result surpassed both the Zacks Consensus Estimate of 95 cents by 47% as well as the year-ago level of $1.02 by 37.2%.

W.R. Berkley Corp. (WRB - Analyst Report) reported third-quarter earnings of 77 cents per share, 5 cents per share ahead of the Zacks Consensus Estimate. Earnings were also up 26.2% year over year.

Our Take

Travelers Companies continues with its trend of delivering positive earnings surprises. The reported quarter marked the fifth consecutive quarter of positive surprise aided by sustained improvement in underwriting results. Travelers Companies noted that written rate gains continued to exceed expected loss cost trends in 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.

Its inorganic story also seems impressive. The acquisition of The Dominion of Canada General Insurance Company (expected to culminate in fourth quarter of 2013) is a testimony of Travelers’ prudent investment strategy, wherein the company strives to expand in attractive and growing markets outside the United States.

Travelers Companies’ continuous share buyback strategy has a positive impact on earnings per share and bolsters shareholder value.

Travelers presently carries a Zacks Rank #2 (Buy). Among other property & casualty insurers carrying a favorable Zacks Rank #1 (Strong Buy), Montpelier Re Holdings Ltd. (MRH - Analyst Report) is supposed to report its third-quarter results on Oct 28.

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