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Traveler's Profit Fell 30%, Yet More Optimistic About Commercial Lines

Source: WSJ

Posted on 25 Jan 2011

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Property/casualty insurer Travelers Cos. reported that fourth-quarter profit fell 30% to $894 million, beating analysts' expectations. And while the results were down, Chief Executive Jay Fishman said the company had grown "more optimistic" about the commercial insurance sector, an area where many in the industry have previously suggested insurers may be facing trouble.

Net income of $1.95 a share was off from $2.36 a share the same period a year earlier as realized investment gains declined and the company pulled less from reserves. Operating income, which excludes some investments, dropped to $1.89 a share from $2.12 a share on the smaller benefit from reserves and an increase in catastrophe claims.

Analysts surveyed by Thomson Reuters expected operating earnings of $1.67 a share. Three months ago, the company said fourth-quarter operating results would be $1.36 to $1.56 a share—though Travelers' own estimate excluded any forecast of changes in its reserves.

The effects of such changes can be substantial. In the fourth quarter, the insurer reduced its estimate of the cost of claims from prior years by $228 million after taxes. In the fourth quarter of 2009, the so-called prior-year development was $328 million.

In a potential signal about the broader insurance industry, Travelers said that for the first time since the third quarter of 2008, its existing commercial clients—primarily small and mid-sized businesses—had more to insure in the latest quarter, which helped increase the value of policies sold by about 1% to $5.23 billion.

Commercial insurers have been reporting that clients have been buying less coverage since the start of the financial crisis. That decline in demand mayhave contributed to a long decline in commercial insurance rates.

A reversal, if repeated by other insurers, could be one step toward ending the so-called "soft market" for business insurance. Past "hardening" in the market has often come only after insurers have endured significant losses.

Mr. Fishman said in a statement Tuesday the "pricing environment was modestly better than in the third quarter" for Travelers' commercial coverage, suggesting rates fell by less than they had previously.

"We are encouraged by a number of positive changes in the operating environment during the fourth quarter," he said in the statement. "Given recent experience, we are more optimistic about an improvement in the operating environment in 2011 than we were in previous quarters. We anticipate that exposures," or the amount insured, "will improve from 2010 levels, and we are hopeful that the pricing environment will continue to improve."

Still, Mr. Fishman said 2011 underwriting margins would likely shrink company-wide, as they did in 2010. The company had an underwriting profit of $303 million across all its business units in the fourth quarter, compared with $540 million a year earlier.

In Travelers' smaller unit that sells coverage to consumers, the company reported it was insuring more drivers and homeowners even as it was raising prices.

Catastrophe claims rose to $55 million from $10 million as the number of severe weather events across the U.S. increased substantially. Data from the National Oceanic and Atmospheric Administration show tornadoes nearly doubled and hailstorms more than tripled. Disasters included October's violent storms in the Southwest and the "snowpocalypse" that struck the Northeast in late December.

Investment income in the quarter fell 1.4% to $644 million, and realized investment gains fell to $30 million from $130 million. The realized investment results suffered in comparison since Travelers a year earlier pocketed gains from the sale of a portion of its stake in an insurance-services company called Verisk Analytics Inc. Travelers sold off most of the rest of the stake in the third quarter.

Travelers repurchased about $1.6 billion of its common stock in the quarter, bringing the insurer's buybacks to about $5 billion for 2010. That's well above the prior year's $3.3 billion, when firms were holding tight to capital as the financial crisis played out.

The board of directors authorized a new $5 billion share buyback program, in addition to the $1.5 billion remaining under the previous authorization as of Dec. 31.