Monday, October 25, 2010

Travelers Companies (TRV) 3Q Earnings

On Thursday October 21, The Travelers Companies Inc. (TRV) beat the consensus estimate of $1.51 when they reported third-quarter earnings per share of $2.11, up from $1.65 in the same period last year. TRVs quarterly Revenue of 6.48 Billion, net written premiums of 5.46 Billion, and net income of 1.005 Billion, all topped their respective 2009 figures of 6.33 billion, 5.34 billion, and 935 million. The combined ratio rose slightly to 90.6% but remained on the profitable side of the 100% benchmark. TRV also increased their full year EPS target range to $5.75 - $5.95, surpassing the $5.69 per share analysts had forecasted. This was the solid quarter TRV needed to restore investor confidence after missing estimates in their last two attempts.

The EPS increase outpaced the growth of the core business because net income included a one time, after tax, gain of $133 million, catastrophe claims were much lower than normal, and the number of outstanding shares decreased by 92 million.

Travelers CEO and Chairman Jay Fishman characterized the situation this way, "While current profitability across our diversified commercial insurance businesses is solid, the general economic environment continues to present challenges. Reinvestment yields are low by historical standards and exposure and pricing remain flat."

UASBIG will continue to hold TRV, but we are currently investigating the capital allocation strategies of TRV and their competitors. TRV returns a high percentage of excess capital to shareholders through dividends and stock repurchases, but they might be compromising their long term health by not expanding their core business. 94% of their operations take place in the ultracompetitive, and economically challenged domestic market, while the remaining 6% is spread over the equally demanding markets in Canada, the United Kingdom, and the Republic of Ireland. The opposite approach is being taken by some competing Property and Casualty companies. They are using excess capital to expand into the developing Asian and South American markets. At this point it is unclear which strategy is more prudent, but UASBIG will continue to monitor the situation.


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