Catastrophe Costs Cause Travelers Profit to Fall 26% to $683M

By Noah Buhayar | July 22, 2014

Travelers Cos., the only property/casualty insurer in the Dow Jones Industrial Average, said second-quarter profit fell 26 percent on catastrophe costs.

Net income declined to $683 million, or $1.95 a share, from $925 million, or $2.41, a year earlier, the New York-based insurer said today in a statement. Operating profit, which excludes some investment results, was $1.93 a share, missing the $2.07 average estimate of 26 analysts surveyed by Bloomberg.

Chief Executive Officer Jay Fishman, 61, has sought to maintain profitability by charging some customers more for coverage as severe weather increased claims. Shareholders sometimes look past quarterly jumps in such costs, because insurers can boost rates as a result, according to Cathy Seifert, an analyst at Standard & Poor’s Capital IQ.

“Investors will accept catastrophe losses if they think that it is a catalyst for price increases,” she said by phone before results were announced. “Travelers has done a really good job with risk management.”

Tornadoes, hail and windstorms pounded the U.S. in June, costing the industry more than $1 billion, according to an estimate from broker Aon Plc. Allstate Corp., the largest publicly traded U.S. auto and home insurer, said second-quarter catastrophe losses were $936 million before taxes.

Travelers had climbed 5.2 percent this year through yesterday in New York, compared with the 2.9 percent advance by the 30-company Dow.

Share Comparison

Fishman has emphasized Traveler’s out-performance over other financial-services stocks, even as a looming increase in interest rates could make banks and life insurers more attractive to investors. In June, he highlighted how his strategy of charging some customers more for coverage and buying back stock boosted return on equity.

Federal Reserve policy makers may raise interest rates in 2015, ending more than five years of keeping short-term borrowing costs near zero.

An increase would have a more immediate benefit for banks, said Charles Sebaski, an analyst at BMO Capital Markets. Property-casualty insurers like Travelers will take years to roll over their bond portfolios into higher-yielding securities, he said.

Industrywide, the annualized yield on their investments slipped to 3.1 percent in the first quarter, the lowest level in almost five decades, according to a report from the Property Casualty Insurers Association of America and ISO, a unit of Verisk Analytics Inc.

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