Travelers Cos., one of the largest property-casualty companies in the U.S., said fourth-quarter net income fell 31% to $618 million, the result of declining investment income and a smaller benefit from its insurance reserves.
Underwriting income dropped 61% before taxes, resulting in a 30% decline in operating results. Operating profit of $609 million, or $1.48 a share, missed by five cents the consensus estimate among analysts surveyed by Thomson Reuters.
But Travelers executives said the underlying profitability of its business-insurance unit, its largest segment, is expected to improve beginning in the first half of 2012, as the company continues to push through price increases to counteract a rise in severe weather and a decline in interest rates that hurt results in 2011.
The company also is raising prices on home and auto coverage, albeit more slowly than on commercial clients, for now.
"While the bottom line financial results this year were less than we would have hoped, we couldn't be more pleased or more proud of our people when we look at the progress we've made to achieve improved returns, particularly given the difficult environment that continues to confront the U.S. economy," Chief Executive Jay Fishman said on a conference call Tuesday after the results were released.
The forecast of improved profitability will be welcome news for the commercial-insurance industry, which has suffered from years of declining rates, though it will certainly be less welcome to the companies that buy the coverage.
The price increases come as insurers have paid out billions in claims on natural disasters in the past year. In addition, insurers have struggled to earn worthwhile returns on their investment portfolios. In years past, insurers could count on their investments to make up some of the difference if they underpriced a policy, but ultralow interest rates mean the margin for error has shrunk.
Another factor likely to add upward pressure on rates is insurers' quarterly evaluations of their claims-paying reserves. The companies check their reserves against the amount they expect to pay out, moving funds from reserves to earnings if they think the reserves are higher than needed.
Analysts who track the industry have predicted that insurers will receive a much smaller benefit from the evaluations in the year ahead. At Travelers, the company in the fourth quarter pulled $126 million before taxes from the funds it had set aside to pay claims incurred in prior years. That is a 64% decline from the same period a year earlier and the sixth consecutive quarterly drop.
The value of policies sold in the quarter rose 0.5% to $5.26 billion, reflecting the price changes. Executives said rate increases for existing commercial clients exceeded 6%, compared with 3% in the third quarter. Price increases affecting all lines of coverage accelerated throughout the quarter and reached 10% in December, they said.
Chief Operating Officer Brian MacLean said underlying underwriting margins at the company's business-insurance unit would likely improve in the first half of 2012.
The underlying profit margin, which excludes catastrophe claims and adjustments to reserves, was 3.6 cents for every dollar the company collected in premiums in the quarter. That compares with 4.5 cents in the same period a year earlier.
"The rate on the business we are writing is up significantly in the past six months and is now meaningfully exceeding our current view of loss trends," Mr. MacLean said on the conference call.
To improve returns, executives said they were comfortable ceding some business to rivals who are willing to charge less.
"The tradeoff between return gains and retention is just fine," Mr. Fishman said.
The company also predicted better returns at its consumer unit in the year ahead.
Net investment income fell 16% to $541 million. The company said the decline was primarily driven by lower returns from the nonfixed-income portfolio in the quarter. Income from the fixed-income portfolio also decreased modestly.