Travelers Q2 Underperforms due to Hailstorms

Travelers Companies Inc’s latest earnings missed Wall Street estimates due to an unprecedented number of weather-related claims. However, earnings rose as the company reported lower catastrophe losses and higher net investment income.

The New York based company reported 5% total revenue growth from $7.48 billion year-ago quarter to $7.83 billion.

Travelers’ net income grew 6% to $557 million, or $2.10 per share, compared to $524 million, or $1.92 per share, a year ago. Core income was $537 million, compared to $494 million prior year quarter. Core income of $2.02 per share dropped below the Zacks Consensus Estimate of $2.27 by 11%.

Net written premiums rose 4% to $7.45 billion, reflecting an increase in new insurance policies written and growth in all segments, namely Business Insurance, Bond & Specialty Insurance and Personal Insurance.

Net investment income jumped 8.9% year over year to $648 million. Income from fixed income investment portfolio increased due to a higher level of fixed maturity investments and higher interest rates. Private equity partnership returns were also higher than prior year quarter.

All components moved favourably for Travelers in the past two years.

Travelers, one of the biggest insurance sellers, provides insurance to auto, home and businesses in the United States. It is deemed to be a bellwether for the insurance industry.

Travelers emerged with growth in all segments this quarter due to lower catastrophe losses and higher net investment income. Catastrophe losses, net of reinsurance, declined 25% to $367 million before tax compared to last year’s $488 million.

This was partially offset by greater non-catastrophe weather-related losses and lower net favorable prior year reserve development.

“While catastrophe losses were lower than in the prior year quarter, all-in weather losses were modestly higher, due to higher non-catastrophe weather-related losses,” said Chairman and Chief Executive, Alan Schnitzer.

Travelers was hit with a surge of non-catastrophic claims in the second quarter due to strong winds and hailstorms that damaged properties and possessions. Claims grew 5.7% to $4.82 billion and caused underwriting gain to fall from $90 million prior year to $74 million.

“Non-cat(astrophic) weather losses were worse than what we would consider a normal level for the second quarter,” said Abbe Goldstein, Senior Vice President, Investor Relations in the second quarter’s earnings call.

The company reported a combined ratio of 98.4% in comparison to 98.1% previous year, an increase in 30 basis points (bps). A lower combined ratio, under 100%, indicates a higher underwriting profit.

S&P Global Market Intelligence reported that the insurance industry's combined ratio this quarter increased to nearly 99.9% from 98% a year before, narrowly avoiding losses. This time of the year is typically characterized by higher weather-related losses due to hailstorms and other severe storms.

In Business Insurance, segment income fell 8.8% to $351 million as a result of higher catastrophe losses, lower underlying underwriting gain and lower net favourable prior year reserve development, partially offset by higher net investment income. Net written premiums rose 6.7% from prior year quarter to $2.9 billion, due to continued strong retention and higher renewal premium charge.

In Bond & Specialty Insurance, segment income fell 14.7% to $174 million due to lower net favourable prior year reserve development. Net written premiums increased 9% year over year to $710 million, because of continued strong retention and new business in management liability and surety.

In Personal Insurance, segment income increased to $88 million from a negative income of $17 million previous year, benefiting primarily from lower catastrophe losses and higher net investment income. Net written premiums increased 6% to $2.9 billion year over year, fuelled by good performance from Agency Automobile and Agency Homeowners.

Travelers recently launched Every Second Matters, an event series aimed at young people to increase awareness of risks involved in distracted driving, in a bid to decrease automobile accidents.

This move is likely to counter automobile accident claims, and decrease current Personal Insurance combined ratio of 100.2%, the highest amongst the three business segments.

Write to Lee Wenxin at lee.wenxin@u.nus.edu