Dow Jones Industrial Average component Travelers (TRV) reported its second quarter 2014 earnings on July 22. The company is the third financial services company in the DJIA to report second quarter earnings following JPMorgan (JPM) and Goldman Sachs (GS).
For the second quarter total revenue was $6.785 billion with net income of $683 million and earnings per share of $1.95. Revenue was on track beating analysts’ estimate of $6.16 billion for the quarter. Earnings per share, however, were below analysts’ expectations of $2.07.
Interpretations of the company’s earnings results pointed to an increase in catastrophe losses as the main reason for the quarter’s earnings miss. Catastrophe losses accounted for $284 million or the equivalent of $0.82 per share, according to management’s earnings comments.
Catastrophe losses are a factor regularly accounted for by Travelers. The losses include claims made for damages from natural disasters and man-made events. In Travelers underwriting business catastrophe payouts were $436 million in the second quarter exceeding reserve developments of $183 million. Payouts were higher in the quarter primarily due to increased wind and hail activity as well as damages from winter storms.
In addition to catastrophe losses net realized investment income was down significantly from the second quarter 2013 which had an $87 million after-tax investment gain from options investments. The second quarter of 2013 also included a $122 million increase from favorable tax adjustments and legal settlements.
While catastrophe losses were higher and net investment income lower the firm’s revenue from premiums in its core businesses was strong. Business Insurance premiums gained 1% and Financial, Professional & International Insurance gained 38%. Personal Insurance premiums were below the one-year ago mark but still strong for the quarter at $1.893 billion versus $1.907 billion.
Following the company’s disappointing earnings report it ended the day at $91.63 down 3.81% versus the DJIA’s gain of 0.80%. It has a discounted cash flow valuation of approximately $98.62. Analysts have a high target of $97.53. While its second quarter earnings were a bit disappointing they showed the company’s volatility in regards to natural disasters and man-made events. However, even though its net investment realizations were down for the quarter its underwriting business appears to be steadily growing helping it to maintain its market share in the insurance marketplace. While there is upside potential for the financial services company investors should be cautious of its business volatility and quarterly business activities.