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The Travelers Companies Inc. (TRV - Analyst Report) has successfully managed to keep its positive surprise streak alive with its fourth-quarter and full year 2013 earnings results. The property and property casualty insurer reported operating net earnings of $2.68 per share in the fourth quarter of 2013, surpassing the Zacks Consensus Estimate by 23.5%. Moreover, earnings improved nearly fourfold on a year-over-year basis.

The outperformance was driven by improvement in underlying underwriting gains aided by benign catastrophe activities. Travelers also witnessed higher net investment income and higher net favorable prior-year reserve development. Lower share count also boosted the bottom line.

Shares of Travelers gained about 1.02% in the pre-market session, indicating that the market has taken this release positively.

Including net realized investment gains of 2 cents per share, Travelers reported net income of $2.70 per share, comparing favorably with net income of 78 cents a share earned in the year-ago quarter. Net income in the prior-year quarter included net realized investment gains of 6 cents.

Full-Year Highlights

For full year 2013, Travelers posted record earnings of $9.46 per share which climbed 52% year over year and surpassed the Zacks Consensus Estimate by 6.3%.

The top line came in at $26.2 billion, improving 2% year over year.

Operating return on equity was 15.5% versus 11.0% in 2012.

Operational Update

Net written premiums of Travelers during the quarter were $5.6 billion, up 5% year over year. The improvement stemmed from higher net written premiums in Business Insurance and Financial, Professional & International Insurance, that were partially offset by lower net written premiums in Personal Insurance. Acquisition of The Dominion of Canada General Insurance Company also boosted the results.

Net investment income of Travelers improved 1.9% year over year to $702 million during the quarter. The upside was attributable to higher private equity and real estate partnership returns in the non-fixed income portfolio, partially offset by lower reinvestment rates in the fixed income portfolio.

Total revenue of Travelers in the quarter under review was $6.737 billion, improving 4% from the comparable year-ago period. Revenues surpassed the Zacks Consensus Estimate of $6.29 billion.

Travelers posted underwriting gains of $689 million, rebounding from a loss of $338 million in the prior-year quarter. Combined ratio improved 1700 basis points (bps) year over year to 87.7% in the reported quarter. The improvement was due to lower catastrophe losses and higher net favorable prior year reserve development, partially offset by lower underlying underwriting margins.

Segment Update

Business Insurance: Net written premium increased 3% year over year to $2.87 billion in the quarter, largely driven by higher renewal rate.

Combined ratio improved 1460 bps year over year to 88.9%, owing to higher underwriting margins and lower catastrophe losses.

Operating income surged 94% year over year to $308 million, attributable to improved underwriting results driven by lower catastrophe losses and a higher underlying underwriting gain.

Financial, Professional & International Insurance: Net written premium in the quarter under review improved 29% year over year to $1.04 billion, primarily reflecting favorable change in a reinsurance program as well as continued strong retention rates and renewal rate increases in management liability along with accretion from the Dominion acquisition.

Combined ratio deteriorated 330 bps year over year to 85% in the quarter, attributable to lower catastrophe losses and higher net favorable prior-year reserve development, partially offset by lower underlying underwriting margins.

Operating income improved 31% year over year to $171 million due to better underwriting results driven by lower catastrophe losses and higher net favorable prior-year reserve development.

Personal Insurance: Net written premium descended 4% year over year to $1.72 billion, primarily due to lower new-business volumes.

Combined ratio improved 2830 bps year over year to 86.9% in the fourth quarter, largely driven by lower catastrophe losses and slightly higher net favorable prior-year reserve development, partially offset by lower underlying underwriting margins.

Operating income was $237 million, rebounding from the year-ago quarter operating loss of $114 million. The upside was driven by lower catastrophe losses.

Dividend and Share Repurchase

Travelers spent $1 billion to buy back 11.4 million shares during the quarter, taking the full year tally to $2.4 billion spent to repurchase 28.4 million shares. The company has $4.759 billion remaining under its authorization.

Additionally, the board of Travelers Companies approved a dividend of 50 cents, payable on Mar 31, 2014 to shareholders of record as of Mar 10, 2014.

Our Take

Travelers Companies has carried forward its trend of delivering positive earnings surprises. This marks the sixth consecutive quarter of a 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 new lower cost, lower-priced Auto insurance product Quantum 2.0 is also expected to improve volumes at attractive returns.

Furthermore, the company’s inorganic story seems impressive. The Dominion acquisition is a testimony of Travelers’ prudent investment strategy, wherein the company strives to expand in attractive and growing markets outside the United States. Net written premiums at the Financial, Professional & International Insurance, in the reported quarter, benefitted from the inclusion of Dominion.

Moreover, Travelers Companies’ consistent share buyback strategy has a positive impact on earnings per share and bolsters shareholder value. The company returned more than $3 billion to its shareholders in 2013.

Travelers presently carries a Zacks Rank #1 (Strong Buy). Other top-ranked property & casualty insurers carrying the same Zacks Rank – PartnerRe Ltd. (PRE - Analyst Report), White Mountains Insurance Group, Ltd. (WTM - Snapshot Report) and Platinum Underwriters Holdings Ltd. (PTP - Snapshot Report) are expected to report their earnings results in the first week of February.

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