Travelers Q2 Blows Past Expectations

Travelers entered the quarter carrying an umbrella and left it carrying one of earnings season’s biggest surprises. The property-and-casualty insurer reported second-quarter net income of $2.21 billion, up 46% from a year earlier, while core income increased 44% to $2.16 billion. Core earnings of $10.04 per share nearly doubled the $5.42 analysts expected, and core return on equity reached 24.9%. Shares surged 9.2% Friday to an all-time closing high of $368.98 and were indicated modestly higher early Monday, as investors rewarded a company that converted more manageable catastrophe losses, disciplined underwriting and higher investment income into a profit downpour.

Travelers did not escape the weather, but it did avoid the kind of catastrophe losses that can wash out an insurer’s quarter. Pretax catastrophe losses dropped to $518 million from $927 million a year earlier and landed well below expectations. Travelers’ underwriting gain jumped to $1.74 billion from $1.02 billion, while its combined ratio improved to 83.6% from 90.3%. Its underlying combined ratio, which excludes catastrophe losses and prior-year reserve development, also improved to 84.1% from 84.7%, showing that the quarter’s strength reached beyond the lighter catastrophe burden. A ratio below 100% means the insurer spent less on claims and operating expenses than it earned in premiums.

Travelers also received a substantial contribution from its investment portfolio. Pretax net investment income increased 14% to $1.07 billion as a higher portfolio yield and growth in invested assets continued to lift investment income. Favorable prior-year reserve development rose to $578 million from $315 million, while a 7% reduction in the diluted weighted-average share count helped core earnings per share grow faster than total core income. The company returned nearly $1.6 billion to shareholders during the quarter, including $1.31 billion through repurchases. The caution is that reported net written premiums remained essentially flat at $11.53 billion, although they increased 2% after excluding the Canadian operations Travelers divested earlier this year. Net written premiums grew 14% in Bond and Specialty Insurance, while declining 8% in Personal Insurance as reported and 4% excluding the divestiture.

That adds up to an impressive quarter without making every part of the earnings surge repeatable. Catastrophe losses and reserve releases will not cooperate on command, but Travelers did not rely solely on either one—underlying underwriting profitability improved, investment income climbed and substantial repurchases magnified the per-share result. Investors cannot count on clear skies every quarter, but an 84.1% underlying combined ratio shows Travelers has more than good weather working in its favor.

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