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The Travelers Companies (TRV - Analyst Report) reported operating earnings of 79 cents per share in the third quarter, lagging the Zacks Consensus Estimate by 20 cents. Results were far behind earnings of $1.81 in the prior year quarter. The operating income was $332 million, comparing unfavorably with earnings of $858 million in the third quarter of 2010.

The decline was primarily due to underwriting losses stemming from higher catastrophe losses.

Including net realized investment gains of $1 million, Travelers reported a net income of $333 million or 79 cents per share compared with earnings of $1.005 billion or $2.11 per share in the third quarter of 2010. The prior-year quarter realized net investment gains of $147 million.

Operational Update

Net written premiums during the quarter increased 4% year over year to $5.7 billion, largely attributable to gains in pricing across all its business segments and renewing Business Insurance customers purchasing more insurance.

Net investment income dropped 6% year over year to $690 million during the quarter largely attributable to lower reinvestment rates in the fixed income portfolio and lower average invested assets.

Travelers’ underwriting loss was $289 million in the quarter, plummeting from a gain of $476 million in the prior-year quarter reflecting a higher combined ratio of 104.5% deteriorating from 90.6% in the third quarter of 2010. Higher catastrophe losses coupled with the decrease in net favorable prior year reserve development led to the overall decline in the combined ratio.

Total revenue in the quarter under review was $6.4 billion, down 1% year over year, driven by the decrease in premiums earned, partially offset by  an increase in earned premiums. Revenue, however, surpassed the Zacks Consensus Estimate of $6.2 billion.

Segment Update

Business Insurance: Net written premium increased 7% year over year to $2.8 billion in the quarter.

Combined ratio deteriorated to 105.4% from 92.1% in the third quarter of 2010, mainly due to an increase in catastrophe losses and a decrease in net favorable prior year reserve development.

Operating income plummeted 46% year over year to $294 million in the third quarter of 2011 attributable to an underwriting loss in the quarter.

Financial, Professional & International Insurance: Net written premium of $808 million was flat compared to the prior year quarter.

Combined ratio improved to 76.2% from 79.6% in third-quarter 2010, driven by an increase in net favorable prior year reserve development, partially offset by the increase in catastrophes.

Operating income decreased 0.5% year over year to $211 million as increase in the underwriting gain was offset by lower net investment income.

Personal Insurance: Net written premium improved 2% year over year to $2.0 billion in the quarter.

Combined ratio deteriorated to 115.0% from 93.1% in the third-quarter of 2010 largely driven by an increase in catastrophe losses coupled with  the decrease in net favorable prior year reserve development.

Operating loss was $108 million, plummeting from a profit of $168 million, largely due to an underwriting loss in the quarter.

Dividend and Share Repurchase

Travelers paid out $173 million in dividends in the quarter.

Travelers also bought back 7.3 million shares for $375 million during the quarter. The company expects to buy back $1 billion worth of shares in the fourth quarter.

Our Take

Travelers focuses on enhancing shareholder value through continued share buybacks, which continue to have a positive impact on its earnings per share.

Based on a high retention rate, pricing gains, 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 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 select 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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