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The Travelers Companies (TRV - Analyst Report) reported operating earnings of $1.89 per share in the first quarter, surpassing the Zacks Consensus Estimate of $1.55 by 34 cents. Results were also ahead of $1.22 earned in the prior year quarter. Operating income was $826 million, up 31% from $631 million in the first quarter of 2010.

Higher underwriting gains, favorable resolution of prior-year tax matters, lower catastrophe losses and lower outstanding shares helped the company to post improved results.

Including net realized investment gains of $13 million or 3 cents per share, Travelers reported a net income of $839 million or $1.92 per share compared with $647 million or $1.26 per share in the first quarter of 2010. The prior-year quarter realized a net investment gain of $16 million or 3 cents a share.

Operational Update

Net written premiums of Travelers during the quarter increased 4% year over year to $5.437 billion, largely attributable to higher net written premiums in Business Insurance as well as Personal Insurance. However, decrease in net written premiums in Financial, Professional & International Insurance was a partial offset.

Net investment income of Travelers improved 3% year over year to $779 million during the quarter largely attributable to strong results in the non-fixed income portfolio.

Travelers’ underwriting gain surged to $249 million in the quarter from $80 million in the prior-year quarter reflecting a lower combined ratio of 94.7% compared with 96.4% in first quarter 2010. Lower catastrophe losses, partially offset by a decrease in net favorable prior-year reserve development led to the overall improvement in combined ratio.

Total revenue in the quarter under review was $6.278 billion, up 3% year over year. The results also surpassed the Zacks Consensus Estimate of $6.136 billion.

Segment Update

Business Insurance: Net written premium increased 7% year over year to $3.02 billion in the quarter.

Combined ratio deteriorated to 94.9% from 91.4% in first quarter 2010, mainly due to a decrease in net favorable prior-year reserve development, partially offset by a decrease in catastrophe losses.

Operating income increased 6.5% year over year to $604 million in the first quarter of 2011 attributable to higher underwriting gain as well as higher net investment income.

Financial, Professional & International Insurance: Net written premium declined 8% year over year to $624 million in the quarter. Combined ratio improved to 95.3% from 98.9% in first-quarter 2010, driven by an increase in net favorable prior-year reserve development as well as a decrease in catastrophe losses.

Operating income increased 39% year over year to $120 million driven by an increase in underwriting gain.

Personal Insurance: Net written premium improved 3% year over year to $1.793 billion in the quarter. Combined ratio decreased to 94.2% from 102.9% in the first-quarter of 2010 largely driven by an increase in net favorable prior-year reserve development and a decrease in catastrophe losses.

Operating income increased nearly threefold to $170 million, largely due to an increase in underwriting results.

Dividend and Share Repurchase

The board of directors of Travelers declared a dividend of 41 cents per share, an increase of 14% from 36 cents paid in the prior-year quarter.

Travelers also bought back 18.9 million shares for $1.1 billion during the quarter.

Our Take

Travelers focuses on enhancing shareholder value through dividends and share buybacks, which continues to positively impact its earnings per share. Based on a high retention rate, favorable renewal rate changes, favorable prior-year reserve development and prudent underwriting practice, Travelers is poised to perform better going forward. Also, pricing environment is expected to improve.

We thus maintain our “Neutral” recommendation on Travelers. 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 selected international markets. It competes with Hartford Financial Services Group Inc. (HIG - Analyst Report) and W.R. Berkley Corporation (WRB - Analyst Report).

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