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Storm Losses Pummel Travelers' Earnings

Third-quarter earnings decline 82% on due mostly to catastrophe losses primarily caused by Hurricanes Ike, Gustav and Dolly.

Travelers Insurance


Wednesday reported $682 million in catastrophe losses during the third quarter, driving earnings down 82% compared to the same period last year. The company earned $214 million for the quarter compared to $1.2 billion a year ago. The catastrophe losses were primarily caused by Hurricanes Ike, Gustav and Dolly.

Chairman and CEO Jay Fishman stated that "the losses from these storms were consistent overall with our risk models and pricing assumptions and, given our size, storm losses such as these will occur from time to time."

Contributing to the earnings decline was a $137 million, or 19%, year-over-year decrease in investment income coupled with the $208 million underwriting loss. Offsetting the decline was a $210 million favorable prior-year reserve development indicating that the company had set aside more reserves than it ultimately needed to pay claims and thus was able to release the excess reserves.

As a result, earnings came to only 36 cents a share for the quarter, significantly below the consensus estimate of $1.26. The company lowered its annual per-share-earnings guidance to a range of $4.90-$5.10, down from its previous range of $5.55-$5.85 a share. Lowering the guidance was based on estimated full-year after-tax catastrophe losses of $1.04 billion, no additional prior-year reserve development and no significant change in average invested assets.

Despite the morning earnings report, Travelers stock is up about 4.5% at $37.98 -- possibly due to the relatively good news that the company only realized $116 million in investment losses for the quarter, its first reported investment loss this year. The realized loss was partially due to a $44 million impairment for investments in

Lehman Brothers


The company also stated that at the end of the quarter, it was not party to any credit default swaps and that it had curtailed its securities lending program. It has only $254 million in subprime/Alt-A mortgage-backed securities which represent only 9% of its total investment portfolio. Finally, with only $100 million in outstanding commercial paper, the company feels that the loss of access to this market has minimal effect.

However, it did report $818 million in unrealized investment losses, which do not come through earnings but reduce the amount of shareholders' equity and statutory surplus.

With the property and casualty insurance industry in the midst of a soft market, net written premiums were down from the second quarter to $5.48 billion from $5.63 billion. Retention rates on renewal business remained at or above historical levels while pricing continued to decline in commercial accounts and "other business insurance."

Travelers' renewal pricing started to decline in the second quarter of 2007 for nearly all commercial lines continuing through the second quarter of this year, and now in the third quarter financial products, international and select accounts have leveled off, with only commercial accounts and other business insurance still declining 3% and 4% respectively.

Personal lines -- auto and homeowners insurance -- experienced renewal increases of 3% and 8% respectively, and retention levels remain at 83% and 86% respectively.

Travelers has 51 insurance subsidiaries each with Financial Strength Ratings in the B (Good) to C (Fair) range. Ratings issues financial strength ratings on each of the nation's 8,600 banks and savings and loans which are available at no charge on the

Banks & Thrifts Screener

. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the

Insurers & HMOs Screener


Look tomorrow for our take on Allstate's (ALL) earnings, which will be released after today's market close. And for more coverage from Ratings team, check out Ratings section.

Melissa Gannon is director of insurance and bank ratings for Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

In keeping with TSC?s Investment Policy, employees of Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Gannon cannot provide investment advice or recommendations, she appreciates your feedback;

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