Travelers Cos. Inc. said it would cut jobs and reduce prices of auto insurance, steps investors took as an indication that rates had risen too far and competition was increasing.
The company’s shares fell 4 percent by midday and shares of other insurers also fell.
“The concern is that Travelers was among the leaders pushing price increases, and now they are talking about lowering prices, so that has broader implications for the entire market,” Sandler O’Neill & Partners analyst Paul Newsome said.
The company, a Dow Jones Industrial Average component, is the first major insurer to report results and is seen as a bellwether for the industry.
The broader Dow Jones Insurance Index, which includes Travelers and peers such as Chubb Corp. and AIG , fell 3 percent.
Travelers had previously been able to hold on to customers and keep insurance pricing consistent across its businesses to offset perennially low interest rates.
But increasing competition has resulted in the company writing fewer policies, forcing it to resort to rate cuts.
The personal auto insurance business reported a 7 percent fall in written premiums during the second quarter as the company’s strategy to increase prices hurt income from premiums. The business contributed about 14 percent to the total premiums written during the quarter.
In a slide presentation for analysts, the company noted that the rate at which it raised premiums across businesses fell from that in the first quarter.
“Travelers reported a deceleration in its Business Insurance pricing in 2Q13 compared to 1Q13. While still positive, the market is taking it as the sign that the property and casualty rate improvements may have peaked,” BMO Capital Markets analyst Charles Sebaski said in an email to Reuters.
The company, however, said renewal rates at its business insurance unit were consistent with those in recent quarters.
“Given the environment of low interest rates and volatile weather patterns, we will continue to seek higher margins,” Chief Executive Jay Fishman said in a statement.
Travelers reported a strong second-quarter profit that blew past estimates for the fourth straight quarter, boosted by higher rates and lower claim payouts.
The company’s operating earnings of $2.13 per share was well above the average analyst estimate of $1.60, according to Thomson Reuters I/B/E/S.
Travelers’ earnings often differ substantially from Wall Street consensus as the company does not give forecasts.
Analysts’ estimates for the insurer’s per-share operating earnings ranged from $1.26 to $1.86 a share, according to Thomson Reuters StarMine.
“This appears to be a quality beat, not dependent on the favorable prior-period development,” BMO’s Sebaski said.
The company said it would cut 450 jobs and take a related restructuring charge of about $16 million, of which $10 million would be incurred in the current quarter.
The cost cutting will result in cumulative savings of $140 million by 2015, Chief Operating Officer Brian MacLean said on a conference call with analysts.
The company’s combined ratio, the percentage of premium revenue an insurer has to pay out in claims, fell to 94.3 percent from 100.5 percent last year. A combined ratio under 100 indicates an underwriting profit.
Travelers last month said it would pay about $1.1 billion to buy Dominion of Canada General Insurance Co to boost its presence in the Canadian market.
Travelers shares were trading down 3.6 percent at $82.33 on the New York Stock Exchange on Tuesday. Shares of Chubb and AIG were both down 2 percent. Allstate Corp fell 1 pct.
MacLean said during yeserday’s earnings conference call that his company will notify approximately 450 employees this week that their positions are being eliminated. The company will also reduce positions through attrition.
CEO Jay Fishman commented during the conference call that in personal insurance as in other lines the company has had the strategy of “improving profitability through higher pricing.”
But that is no longer effective in auto.
“What has become apparent to us in the auto insurance line is that the combination of the rapid adoption of the comparative rater technology in independent agent offices — which now is the source of a substantial amount of the quotes that we issue — and the changing consumer expectations for this product has impacted our new business volume meaningfully,” Fishman said.
He said that to improve profitability and to create long-term value, Travelers must have a more competitively priced product.
“By leveraging technology and taking other actions, we will make substantive changes to our business processes that we expect will allow us to meaningfully reduce cost without impacting service or quality,” he said. “Through these actions, we expect to be able to more competitively price our product and improve our profitability.”
Travelers said the personal insurance net written premiums of $1.907 billion for the second quarter represent a 5 percent decrease from a year ago. The company said the decline was mostly due to lower new business volumes in both automobile and homeowners and other — largely as a result of the company’s pricing strategy, increasing deductibles and other profitability improvement initiatives.
In the agency auto segment, which represents auto businesses sold through agents, brokers and other intermediaries and excludes direct to consumer, net written premiums for the latest quarter were $834 million, a 7 percent decline from a year ago.
Insurance Journal’s Young Ha contributed to this report.