(Bloomberg) -- Travelers Cos., the lone property-casualty insurer in the Dow Jones Industrial Average, said quarterly profit slipped 18 percent to its lowest since 2012 as costs tied to natural disasters rose while income from investments fell.
Second-quarter net income declined to $664 million, or $2.24 a share, from $812 million, or $2.53, a year earlier, New York-based Travelers said Thursday in a statement. Operating profit was $2.20 a share, beating the $2.04 estimate of 23 analysts surveyed by Bloomberg.
“Higher catastrophe losses, including the Fort McMurray wildfires” in Canada, hurt results, the insurer said in the statement.
Global catastrophe costs have climbed across the industry this year, including claims from the wildfires and U.S. storms. Travelers counts the U.S. as its largest market and expanded in 2013 with the purchase of Dominion of Canada General Insurance. While the company typically generates more than $800 million of net income a quarter, profit was just $304 million in the last three months of 2012 when Superstorm Sandy lashed the Eastern U.S.
Also, low interest rates in recent years have squeezed investment income from insurers’ portfolios, which are dominated by bonds. Yields of the safest debt fell further after U.K. voters decided in June to leave the European Union. Income from alternative holdings has also slumped. The company has posted three straight declines in quarterly profit, pressuring Chief Executive Officer Alan Schnitzer, who took over late last year for longtime leader Jay Fishman.
|Catastrophe costs
Return on equity slipped in the second quarter to 10.9 percent, from 13.3 percent a year earlier. Travelers’ book value, a measure of assets to liabilities, rose to $85.73 a share from $82.65 at the end of March. The company repurchased $550 million of its shares in the quarter.
Travelers posted a combined ratio of 93.1, meaning it retained 6.9 cents of every premium dollar, after claims and expenses. That worsened from a ratio of 90.8 in the second quarter of 2015. Catastrophe costs rose to $222 million from $143 million a year earlier.
Policy sales advanced 2.9 percent to $6.35 billion. The insurer charged domestic business insurance customers 2.1 percent more at renewal in the three months ended June 30. That compares with a 2.4 percent increase in the first quarter.
The gain from reserves widened to $288 million pretax from $207 million a year earlier. Insurers regularly reassess the money they’ve set aside for future claims and can reduce or increase the amount based on their expectation of losses.
|Private equity
Net investment income declined to $442 million, from $503 million a year earlier. The contribution from the holdings outside of bonds fell by more than half to $38 million on lower returns from private equity and real estate partnerships.
Travelers is headed for its eighth-straight annual advance in New York trading, tied for the longest streak in the 30-company Dow average. The company climbed 3.7 percent from Dec. 31 through Wednesday, compared with the 6.7 percent gain in the Dow.
Private equity generated “a few million dollars, and we would have expected about $50 million pretax,” Chief Investment Officer Bill Heyman said on an earnings conference call Thursday.
Low interest rates have squeezed investment income at insurers, an industry that holds trillions of dollars in assets, mostly in bonds, to back obligations to policyholders. While hedge funds offered the potential for better returns, those holdings have faltered in recent periods, pushing insurers such as American International Group Inc., MetLife Inc. and Lincoln National Corp. to shift to property bets or private equity. Travelers said real estate partnership returns were also lower in the second quarter.
“Hedge funds were below what we expected, but positive,” Heyman said. “And the big variable was private equity, where the portfolio was almost flat.”
Travelers fell 1.1 percent to $115.74 as of 11:23 a.m. in New York trading. That narrowed its advance for the year to 2.6 percent, trailing the 6.6 percent gain of the 30-company Dow average.
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