UPDATE: Travelers 2Q Profit Down 9.5% On Midwest Storms Claims

Record claims costs from storms in the Midwest caused profit to fall 9.5% at Travelers Cos. (TRV), while the poor economy forced the insurer the pare back the high end of its estimate for full year results.

Smaller insurers including Cincinnati Financial Corp. (CINF) and Hanover Insurance Group Inc. (THG) had already warned shareholders about the cost of the natural disasters that struck the country in the quarter. Brutal hailstorms plagued Oklahoma, while thunderstorms hit Michigan, Ohio and Illinois. And Tennessee was immersed under record floodwaters that swamped the Grand Ole Opry.

But some analysts seem to have underestimated the impact of those events on Travelers, which insures cars, homes and businesses nationwide. The firm reported operating profit of $1.39 a share, missing the $1.49 consensus among analysts polled by Thomson Reuters.

The company's $439 million in catastrophe costs was the most for the insurer in any second quarter since it took its current form after a merger in 2004. That follows a similar record set in this year's first quarter. The company's combined ratio, the percentage of premiums paid out as claims, grew to 95.2% from 93.2% in the same period a year earlier.

The result may cause investors to re-evaluate their assumptions for second-quarter earnings of other insurers with a nationwide reach, such as Allstate Corp. (ALL) and Hartford Financial Services Group Inc. (HIG). Analyst Meyer Shields of Stifel Nicolaus had already warned his clients before Travelers released results that Allstate was "most at risk for higher-than-expected cat[astrophe] losses."

The economy has also put a damper on Travelers' results. Smaller-than-expected premium increases on its commercial customers prompted Travelers to reduce the top end of its forecast for full-year operating profit. The company now expects to earn $5.20 to $5.45 a share, compared with the $5.20 to $5.55 a share it gave at the start of the year.

Still, there were silver linings in the stormy second-quarter result. The value of policies sold in the quarter rose 1.5% from a year earlier to $5.69 billion despite the economic headwinds. And net investment income rose 16% to $762 million. Book value, a measure of assets minus liabilities, climbed 4.1% in three months to $55.67.

And some investors may be cheered by the increase in both net and operating income per share. Both figures rose on a per share basis despite the topline result. The company's aggressive repurchasing of its own shares--it bought $2.8 billion of its stock this year--caused the favorable comparison to a year earlier.

The company has repurchased 36% of its outstanding shares since the second quarter of 2006. It has $3.7 billion remaining under its current buyback program.

Travelers' second-quarter disaster costs are dwarfed by the company's highest third-quarter loss. The Atlantic hurricane season reaches its peak in the third quarter, and insurers can end up paying for the havoc those powerful storms bring. Forecasters have predicted this year's season will be an active one. The company's revised guidance assumes $364 million in pre-tax disaster costs for the remainder of the year.

-By Erik Holm, Dow Jones Newswires; 212-416-2892; erik.holm@dowjones.com

(John Kell contributed to this article.)

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