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The Travelers Companies (TRV - Analyst Report) reported earnings of $2.22 per share in the third quarter of 2012, outshining the Zacks Consensus Estimate of $1.61 per share. Results surged 181% from 79 cents earned in the year-ago quarter. Operating income in the reported quarter was $867 million, improving 161% year over year.

Lower catastrophe losses and sturdy underwriting results fueled the outperformance.

Including net realized investment losses of $3 million or 1 cent, the company reported net income of $864 million or $2.21 per share, comparing favorably with net income of $333 million or 80 cents a share. The year-ago quarter included net realized investment gains of $1 million.

Operational Update

Net written premiums during the quarter were $5.7 billion, almost flat with the year-ago level.

Net investment income increased 4.6% year over year to $722 million during the quarter, largely attributable to better performance at non-fixed income portfolio.

Travelers posted underwriting gain of $327 million, rebounding from a loss of $185 million in the year-ago quarter. Combined ratio improved 1420 basis points year over year to 90.3% in the reported quarter. The improvement stemmed from lower catastrophe losses and higher underwriting margins.

Total revenue in the quarter under review was $6.5 billion, increasing 2% year over year, driven by the augmentation in premiums earned and net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.3 billion.

Segment Update

Business Insurance: Net written premium increased 5% year over year to $2.96 billion in the quarter, largely driven by increases in renewal rate change.

The combined ratio improved 1210 basis points year over year to 103%, mainly due to elevation in underwriting margins and decrease in catastrophe losses.

Operating income augmented to $543 million in the third quarter of 2012 from $294 million in the year-ago quarter, attributable to improvement in underwriting results driven by better underwriting margins and lower catastrophe losses.

Financial, Professional & International Insurance: Net written premium in the quarter under review declined 10% year over year to $729 million.

The combined ratio deteriorated 400 basis points year over year to 80.2% in third quarter 2012, attributable to lower net favorable prior year reserve development, partially offset by higher underlying underwriting margins.

Operating income descended 14.7% year over year to $180 million, attributable to lower underwriting gain.

Personal Insurance: Net written premium skidded 2% year over year to $2 billion, primarily due to lower new business volumes in Automobile.

The combined ratio improved 2530 basis points year over year to 89.7% in the third quarter of 2012, largely driven by lower catastrophe losses and higher net favorable prior year reserve development.

Operating income of $206 million reversed the loss of $108 million in the year-ago quarter largely due to lower catastrophe losses and higher net favorable prior year reserve development.

Dividend and Share Repurchase

Travelers spent $350 million to buyback 5.4 million shares in the quarter. The company also paid $179 million in dividends.

Additionally, the board approved a quarterly dividend of 46 cents, to be paid on December 31, to the shareholders of record as of December 10.

Our Take

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

Based on a high retention rate, pricing gains, positive renewal rate changes, favorable prior-year reserve development, prudent underwriting practices and a strong capital position, Travelers is poised to perform better going forward. It also scores strongly with the credit rating agencies.

We have a Neutral recommendation on The Travelers Companies. The quantitative Zacks # 2 Rank (short-term Buy rating) for the company indicates upward boost on the shares over the near term.

Hartford Financial Services Group Inc. (HIG - Analyst Report), which competes with Travelers, is scheduled to release its third quarter results on November 1 after the bell while W.R. Berkley Corporation (WRB - Analyst Report) is scheduled to release its third quarter results on October 22 after the bell.

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