Investment Income, Lower Catastrophe Losses Lift Travelers’ Earnings
The Travelers Companies (NYSE:TRV) announced third quarter earnings on Tuesday, October 21, reporting a 6% year-over-year jump in net income to $919 million. Operating income improved from $673 million in the previous quarter to $894 million after declining 18% year-over-year during the last quarter. This was due to a rise in investment income as well as lower catastrophe-related losses during the quarter. [1] However, the combined ratio – the ratio of claims to premiums – was 90% in the third quarter compared to 88.1% a year ago, owing to higher-weather related losses. Total revenues of about $6.9 billion were up 7% year-over-year, fueled by a 7% increase in net written premiums over the previous year. Total net written premiums for the quarter were just over $6 billion, largely driven by the acquisition of Dominion in November 2013. [2]
Discover’s stock closed at $94 on Tuesday, up more than a percentage point on the back of the profitable quarter. We have a price estimate of $107 for the company’s stock and are in the process of updating our model to account for the latest results.
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Income From Investments Provides Boost
At the end of the third quarter, the company’s invested assets totaled about $74 billion. About 93% of these assets are invested in fixed maturity and short-term investments, with the rest in equities, real estate and other products. [3]
Net investment income shot up by 9% compared to the previous year to $719 million. Income from fixed maturities declined to $552 million from $571 million a year ago due to lower long-term investment yields. The company reported an average pretax yield on investments of 4% compared to 3.7% a year ago.
Business Insurance
The Business Insurance division reported a combined ratio of 95.2% compared to 92.7% a year ago, as operating income declined 2% year-over-year to $552 million. Premiums earned increased by 10% year-over-year, but the division was impacted by higher non-catastrophe weather-related losses. [4]
Personal Insurance
Operating income for the Personal Insurance division – which covers homeowners and automobile insurance – declined by 9% year-over-year to $239 million due to an increase in catastrophe-related losses and a 2% decline in premiums earned. [3] The combined ratio for the division increased to 86.1% from 84.7% in the third quarter of 2013. Net premiums written in the automobile insurance increased from $828 million in the third quarter of 2013 to $849 million in 2014, driven by new business growth led by Quantum 2.0 product. On the other hand, homeowners’ insurance witnessed a 2% year-over-year decline in net premiums during the quarter.
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