Travelers Cos., the lone property/casualty insurer in the Dow Jones Industrial Average, said second-quarter profit climbed 85 percent as price increases helped improve margins.
Net income increased to $925 million, or $2.41 a share, from $499 million, or $1.26, a year earlier, the New York-based insurer said today in a statement. Operating profit, which excludes some investment results, was $2.13 per share, beating the $1.59 average estimate of 24 analysts surveyed by Bloomberg.
Travelers has raised prices for coverage as low interest rates pressure income from its bond portfolio and severe weather increases claims. Chief Executive Officer Jay Fishman, 60, has emphasized his strategy to charge some customers more to help the insurer achieve “mid-teens” return on equity.
“Pricing is a big issue right now,” Paul Newsome, an analyst at Sandler O’Neill & Partners LP, said in an interview before results were announced. “It’s important because it ultimately translates into margin expansion.”
The insurer advanced 0.7 percent to $86 at 7:55 a.m. before the start of normal trading in New York. The stock had climbed 19 percent this year through yesterday, matching the advance of the 30-company Dow.
Travelers made 5.7 cents for every premium dollar it collected in the quarter, compared with spending $1.01 a year earlier. Catastrophes costs fell to $340 million before tax from $549 million a year earlier.
U.S. property insurers faced claims in the second quarter from a May tornado that leveled an Oklahoma City suburb and killed at least 24 people. The storm probably cost the industry $2 billion to $3.5 billion, according to an estimate from catastrophe modeler Risk Management Solutions Inc.
Policy sales fell by less than 1 percent $5.82 billion the company’s price increases hurt the premiums it collected in its personal insurance business. Its commercial insurance divisions fared better as rate increases helped boost sales by about 1 percent in both the business insurance and financial, professional and international insurance segments.
“We are very pleased with the pricing levels we achieved,” Fishman said in the statement. “However, given the environment of low interest rates and volatile weather patterns, we will continue to seek higher margins.”
The insurer it is targeting $140 million in annual cost reductions at an auto unit, Travelers said today in a regulatory filing. The plan is expected to be fully implemented in 2015 and will result in $16 million of costs, $10 million of which will count against earnings in the three months ending Sept. 30, according to the filing.
The Federal Reserve has held its benchmark lending rate near zero since December 2008 to help stimulate the U.S. economy. The central bank also expanded its balance sheet to more than $3.5 trillion by buying bonds. The efforts lowered borrowing costs for governments, companies and individuals, and hurt investors that rely on fixed-income securities.
Treasury yields rose last month after Chairman Ben S. Bernanke indicated the Fed may begin tapering that program later this year and end it in mid-2014. He has since said that the pace will hinge on the performance of the economy.
Travelers’ book value per share, a measure of assets minus liabilities, fell to $66.65 from $68 at the end of March as its fixed-income portfolio pared some unrealized gains.
The insurer’s results were helped by a $59 million payout tied to a legal dispute and $63 million from the resolution of a tax matter.
Fishman is also looking to build Travelers’ business outside the U.S. Last month, he struck a deal to buy Dominion of Canada General Insurance Co. from E-L Financial Corp. for about $1.1 billion. The transaction will give Fishman’s company more auto, personal property and commercial customers in Canada.
Editors: Dan Kraut, Peter Eichenbaum