Travelers Companies Inc. posted a higher-than-expected quarterly profit and the largest publicly traded U.S. property insurer said there were early signs businesses were finally willing to spend more on insurance.
Despite deep-seated pessimism about pricing and competition among property and casualty insurers worldwide in 2011, Travelers said things were actually looking up, with pricing “modestly better” in the fourth quarter than the third.
“Given some of the trends we saw in the fourth quarter we are somewhat more optimistic than we were a few months ago,” Chief Executive Jay Fishman said on a conference call.
The effect of the weak economy on businesses appears to be bottoming out, Travelers COO Brian MacLean added, and the market is more receptive to the company starting to charge more for coverage.
That perspective is in sharp contrast to most analysts, who have said they expect little from property insurers this year given decade-low pricing, heavy competition among carriers with excess capital and the ongoing effects of a weak economy.
Valuations reflect that, with most major property insurers currently trading for less than book value. At the peak of the cycle the sector usually trades for two times book.
“It’s hard to say how much of that is the company being positive,” Morningstar analyst Drew Woodbury said of the outlook, adding that there are few obvious catalysts for pricing to improve.
Travelers reported a fourth-quarter net profit of $894 million, or $1.95 per share, compared with a year-earlier profit of $1.29 billion, or $2.36 per share. In the fourth quarter of 2009, Travelers benefited from reserve releases and lower catastrophe losses, making the comparison with the most recent quarter more difficult. Net investment income also fell slightly year-on-year, as low interest rates hurt the company’s fixed income portfolio.
On an operating basis, Travelers said it grew policies in force in both homeowners and auto insurance, and premiums to renew policies rose. The company also wrote more business insurance and continued to retain existing customers.
Combined ratios creeped higher in the fourth quarter and the full year. Travelers GAAP combined ration was 90.6 in the fourth quarter and 93.2 for the full year. Both were slightly worse than the 83.4 combined ratio Travelers posted in the fourth quarter of 2009, and the 89.2 it had for 2009.
The quarterly rise in the combined ratio was fueled by a decrease in reserve development and a hail and wind storm in Arizona that added about $70 million in pre-tax catastrophe losses, Travelers said.
Operating earnings, which exclude investment gains and losses, were $1.89 per share. Analysts polled by Thomson Reuters I/B/E/S on average expected earnings of $1.67 per share. That estimate had moved somewhat lower in the last month on fears about weak pricing and catastrophe exposures.
“There was not too many surprises … a little bit less negative than expected,” Woodbury said.
Travelers, like most property insurers, had predicted catastrophe losses in the fourth quarter would be typically mild. But analysts feared that severe storms, including flooding in California and a blizzard in the Northeast, might disrupt those forecasts.
That was not the case for Travelers, though. The company said catastrophe losses were $55 million after tax, compared with its late October forecast of $90 million. Its biggest exposure in the quarter was to hail and wind storms in Arizona.
(Reporting by Ben Berkowitz; Editing by Derek Caney, Matthew Lewis, Dave Zimmerman)
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