Travelers Plunges Most in Dow as Profit Falls on Catastrophes

Jul 22, 2014 9:38 am ET

July 22 (Bloomberg) -- Travelers Cos. fell the most in the Dow Jones Industrial Average after reporting second-quarter profit that missed analysts’ estimates on catastrophe costs.

The insurer slumped 4 percent to $91.42 at 9:35 a.m. in New York, the biggest drop since 2011. Second-quarter profit fell 26 percent to $683 million, the New York-based insurer said today in a statement. Operating profit, which excludes some investment results, was $1.93 a share, 14 cents below the 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. Some of those pricing gains have slowed, putting additional pressure on the property and casualty insurer.

“Travelers is a disciplined company, and defensive stock,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., wrote in a note to clients today. “But after three years of cyclical margin expansion, we believe margins are peaking, future earnings growth will slow and, given recent stock momentum, we expect Travelers is likely to lag in the coming year.”

Catastrophes cost Travelers $436 million in the quarter before tax and net of reinsurance, compared with $340 million a year earlier. The prior period also benefited from realized investment gains and tax and legal settlements.

Claims Jump

Hail and windstorms pounded the U.S. from the Rocky Mountains to the Tennessee Valley in June, causing a spike in insurance claims, broker Aon Plc said. More than 300 tornadoes hit the U.S. last month, compared with 125 a year earlier. Allstate Corp., the largest publicly traded U.S. auto and home insurer, has said second-quarter catastrophes cost $936 million before taxes.

Travelers’ book value, a measure of assets minus liabilities, rose to $75.32 per share from $73.06 at the end of March, as the company bought back stock.

In June, Fishman highlighted how his strategy of charging some customers more for coverage and repurchasing shares boosted return on equity, leading to Travelers’ out-performance over other financial-services stocks. The comments may have been meant to persuade shareholders that the insurer was an attractive investment, even as a looming increase in interest rates stand to benefit banks and life insurers more, said Charles Sebaski, an analyst at BMO Capital Markets.

Fed Rate

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, Sebaski said. 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 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.

Travelers’ net investment income rose to $695 million from $687 million a year earlier. Returns on private-equity investments helped mitigate lower reinvestment rates in its fixed-income portfolio, the company said.

Fishman expanded in Canada last year by buying auto insurer Dominion of Canada General Insurance Co. from E-L Financial Corp. The acquisition helped increase policy sales to $6.16 billion from $5.82 billion a year earlier.