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With net income of $2.95 per share reported for the first quarter of 2014, The Travelers Companies Inc. (TRV - Analyst Report) has successfully managed to keep its positive surprise streak alive. The property and property casualty insurer’s earnings outperformed the Zacks Consensus Estimate by 38%. Moreover, earnings improved 28% year over year.

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

Shares of Travelers gained about 0.14% in the pre-market session, indicating that the market has taken this release positively.

Behind the Headlines

Net written premiums of Travelers during the quarter were $5.87 billion, up 5% year over year. The improvement stemmed from inclusion of The Dominion of Canada General Insurance Company (Dominion) within Financial, Professional & International Insurance coupled with higher net written premiums in Business Insurance. However, lower net written premiums in Personal Insurance were a partial offset.

Net investment income of Travelers improved 9.8% year over year to $736 million during the quarter. The upside was attributable to strong returns in non-fixed income portfolio.

Total revenue of Travelers in the quarter under review was $6.71 billion, improving 6% from the comparable year-ago period. Revenues surpassed the Zacks Consensus Estimate of $6.38 billion.

Travelers posted underwriting gains of $791 million, improving 31% year over year. Combined ratio improved 280 basis points (bps) year over year to 85.7% in the reported quarter. The improvement was owing to higher underlying underwriting margins and higher net favorable prior-year reserve development, somewhat offset by higher catastrophe losses.

Segment Update

Business Insurance: Net written premium increased 1% year over year to $3.30 billion in the quarter, largely driven by higher renewal rate.

Combined ratio improved 170 bps year over year to 87.7%, owing to higher underwriting margins.

Operating income increased 11% year over year to $653 million, attributable to improved underlying underwriting gains and higher net investment income. However, lower net favorable prior-year reserve development and higher catastrophe losses limited the upside.

Financial, Professional & International Insurance: Net written premium in the quarter under review improved 47% year over year to $950 million, 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 150 bps year over year to 83.8% in the quarter.

Operating income improved 20% year over year to $195 million driven by better underlying underwriting gains in Bond & Financial Products, the inclusion of Dominion and higher net favorable prior-year reserve development.

Personal Insurance: Net written premium descended 4% year over year to $1.62 billion.

Combined ratio improved 580 bps year over year to 83.6% in the first quarter, largely driven by higher net favorable prior-year reserve development and higher underlying underwriting margins.

Operating income was $268 million, up 36% year over year. The upside came on the heels of higher net favorable prior year development, higher underlying underwriting gains and higher net investment income.

Dividend and Share Repurchase

Travelers spent $705 million to buy back 8.5 million shares during the quarter. The company has $4.109 billion remaining under its authorization.

Additionally, the board of Travelers approved a 10% increase in dividend to 55 cents, payable on Mar 31, 2014 to shareholders of record as of Mar 10, 2014. The recent approval marks the 10th straight year of increase with a CAGR of 9.6%

Our Take

Travelers has successfully carried forward its trend of delivering positive earnings surprises. This marks the seventh 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.

It is also worth noting that Travelers’ new lower cost, lower-priced Auto insurance product Quantum 2.0 helped in writing new business.

Furthermore, the company’s inorganic story seems impressive. 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. This, along with dividend hikes, bolsters shareholder value.

Travelers presently carries a Zacks Rank #3 (Hold). Other top-ranked property & casualty insurers worth reckoning are Alleghany Corporation (Y - Snapshot Report), RenaissanceRe Holdings Ltd. (RNR - Analyst Report) and ACE Limited (ACE - Analyst Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on TRV
Read the Full Research Report on ACE
Read the Full Research Report on RNR
Read the Full Research Report on Y

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