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Travelers Limits Buybacks in the Wake of Costly Disasters

Source: WSJ - Erik Holm

Posted on 10 Jun 2011

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Marking the second quarter as Travelers' most expensive for catastrophes since Hurricane Katrina struck the U.S. in 2005, the insurer said it was slowing its share-buyback program after natural disasters cost the company about $1 billion over two months.

In a statement on Friday, Travelers said deadly tornadoes that plagued the U.S. in April and May combined with other disasters to cost Travelers about $1 billion to $1.05 billion. That's about equal to the amount the company spent on catastrophe claims for the past two years combined, and on par with the $1.01 billion in disaster costs Travelers incurred in the third quarter of 2005, when Hurricanes Katrina, Rita and Wilma combined to cause the insurance industry's worst quarter on record.

Travelers' disaster losses were concentrated in the company's business insurance and consumer insurance operations, the company said. The figures are after taxes and reinsurance.

Travelers said it now expects stock repurchases to be less than $250 million in the quarter. The company spent $1.4 billion on buybacks in the same period a year earlier. Disaster costs a year earlier were $285 million, which had, until now, been Travelers' highest ever second-quarter disaster tally.

The twisters that swept across the South and East Coast in late April were initially pegged by disaster-modeling company AIR Worldwide as the most expensive tornados on record. But the next series of tornadoes, which struck from Michigan to Texas in late May, may have been even worse. Together, AIR estimates the two events caused up to $12.5 billion in insured losses industrywide.

"Everything that we see suggests that these will eventually develop to the high end of the estimates that are in the public domain," Travelers Chief Executive Officer Jay Fishman said in a previously scheduled meeting with investors Friday. "With a billion dollars after tax for essentially two months, you can get a real sense of the devastating capacity of these storms."

The company's internal models called for catastrophe losses of about $450 million to $500 million after taxes for all of 2011, a number that "rose meaningfully" this year because of the company's recent experiences with tornadoes, he said.

While the hurricanes of 2004 and 2005 forced the insurance industry to boost its expectations of losses along the East Coast and Gulf of Mexico, the increasing severity of thunderstorms, hailstorms and tornadoes across the Midwest in more recent years has also caused many insurers to raise prices, increase deductibles and limit new sales.

Allstate Corp., the largest publicly traded home and auto insurer in the U.S., has been among the most vocal about its efforts to limit its losses. Yet the company warned last month it had about $1.4 billion in catastrophe costs for April. It hasn't yet given a figure for May.

Alfa Insurance, the second-largest insurer in Alabama, said last week it would drop about 73,000 customers to limit future losses. The company was severely affected by the April tornadoes, which caused extensive damage in the cities of Tuscaloosa and Birmingham.
The April storm "was unlike anything the insurance industry had anticipated, and it requires us to re-evaluate our current marketing and underwriting efforts," Alfa President Jerry Newby said in a statement.

Travelers announced its disaster costs Friday morning in advance of its investor day.

The company's full-year estimate of its underwriting margin, which excludes the effects of catastrophes, remains unchanged, Fishman said in a statement. In the second half of the year, the company said it now expects repurchases to be about $400 million above its operating income for the third and fourth quarters.