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Travelers Cos Inc. reported a second-quarter profit on Thursday but missed Wall Street expectations, as the insurer’s catastrophe losses fell from a year before but were still higher than historical norms.
Travelers, a Dow Jones industrial average component, also said commercial insurance pricing had risen more than 7 percent in the quarter. The company was one of the first in the industry to push and sustain price increases after years of weakness. Prices also rose in personal and professional lines, and retentions were steady.
Last year marked a turning point, as the industry endured one of its worst years ever, driven domestically by record-breaking tornadoes.
This year has been somewhat more mild, and Travelers said after-tax catastrophe losses had fallen to $357 million in the second quarter from $1.09 billion a year earlier. Still, the figure was “considerably higher” than the company would have expected.
Travelers reported a net profit of $499 million, or $1.26 per share, compared with a year-earlier loss of $364 million, or 88 cents per share.
On an operating basis, Travelers earned $1.26 a share. Analysts polled by Thomson Reuters I/B/E/S had on average expected $1.35.
Because Travelers does not make forecasts, it is customary for the company’s earnings to differ substantially from Wall Street estimates. Over the prior eight quarters, according to Thomson Reuters data, the average difference – either positive or negative – between the company’s actual result and the mean estimate was almost 24 cents.
Travelers reported an underwriting loss for the second quarter as the disaster losses overwhelmed another quarter of reserve releases. Insurance analysts have been closely watching reserves, amid suspicions that companies were close to running out of excess reserves to release.
Despite the low interest rates, net investment income was nearly flat, as other investments offset weakness in the bond portfolio.
Travelers said that given the weak interest-rate environment and what it called “continuing unusual weather patterns,” it would keep pushing for rate increases and tighter terms on insurance policies, a strategy that has cost it some new business in recent quarters.
[Fishman said Travelers is very pleased with pricing trends across its businesses. In commercial lines, , renewal rate change exceeded 7 percent. He said that in financial, professional and international insurance, renewal rate change continued to improve from recent quarters. Notably, renewal rate change in management liability not only improved from recent quarters but also accelerated within the quarter. In personal insurance, renewal premium change, which includes changes in exposure, increased to 6 percent in agency auto and 11 percent in agency homeowners business.
“We remain committed to our strategy of improved profitability through actively and selectively seeking rate and improvements in terms and conditions given the persistent low interest rate environment and continuing unusual weather patterns,” said Fishman.
Operating income of $1.296 billion after tax increased $847 million from the prior year period primarily due to an $876 million after-tax increase in underwriting results, partially offset by a $46 million after-tax decrease in net investment income.
The underwriting gain in the current period reflected a GAAP combined ratio of 96.3 percent, as compared to 110.1 percent in the prior year period. This improvement of 13.8 points in the combined ratio was primarily due to a $1.137 billion pre-tax decrease in catastrophe losses (improvement of 10.6 points) and $120 million pre-tax increase in net favorable prior year reserve development (improvement of 1.1 points).
The current period underlying underwriting gain, which excludes net favorable prior year reserve development and catastrophe losses, reflected a GAAP combined ratio of 94.6 percent, as compared to 96.7 percent in the prior year period. This improvement of 2.1 points primarily resulted from earned rate increases outpacing loss cost trends as well as a lower level of large losses and non-catastrophe weather-related losses.]