Travelers Stock Rises Despite Losses. What It Says About Insurance Investing.

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Unusually high catastrophe losses left The

Travelers
,
a New York-based property and casualty insurer, in the red last quarter, but the stock rose nevertheless.

That underscores a misperception about insurance stocks. Investors aren’t betting on the weather and the damage it brings, which can fluctuate drastically from year to year even as climate change makes storms more intense. What matters is how insurers charge for and manage that risk over longer periods.

Although insurance companies’ balance sheets have been hammered by increasingly frequent and severe natural catastrophes in recent years, their stocks haven’t plunged. Insurance shares in the

S&P 500

index are down about 1% since the beginning of the year, but up by 13% from a year ago.

Investors aren’t losing faith in the group because insurers have been able to boost premium rates, taking in revenue that they will invest to cover future losses. Many have also been pulling out of risky markets, including California and Florida, where they couldn’t charge high enough rates to make profits, given the storms and wildfires that plague those states.

The Travelers (TRV) is an example of how it is playing out. On Thursday, the company reported a loss of $14 million in its second quarter, or seven cents per share, a sharp fall from the $551 million in income, or $2.27 per share, it recorded in the same quarter last year. 

The red ink was mainly due to higher catastrophe losses from “numerous severe wind and hail storms in multiple states,” according to the company. In the second quarter, the firm paid $1.5 billion in catastrophe damages, twice as much as the $746 million in the year-earlier period.

“We had six events surpassed the $100 million mark in Q2, the most ever for a single quarter since we began disclosing the table in 2013,” said CFO Daniel Frey on a call to discuss the results with investors.

Nevertheless, the stock gained 1.8% in Thursday trading as investors were more focused on the firm’s net written premiums, which grew 14% from last year to $10.3 billion.

Net written premiums—the amount collected minus payments for reinsurance—in the business insurance segment increased by 18%, partially driven by higher rates for renewed policies. And despite the higher prices, retention was strong at 88%, according to the firm. In the personal insurance line, net written premiums were 13% higher than in the year-earlier quarter.

“The fact that we were able to generate positive core income notwithstanding $1.5 billion of pre-tax catastrophe losses reflects the strength of our franchise and the resiliency of our underlying business model,” said Chairman and CEO Alan Schnitzer in a statement.

The Travelers isn’t alone. Despite higher-than-expected catastrophe losses, results for property and casualty insurers should remain “solid” in the second quarter, wrote UBS analyst Brian Meredith in a note last week. Meredith is forecasting $17 billion to $20 billion of catastrophe losses across the industry.

He particularly favors insurers with the capacity and willingness to increase their offerings of commercial property insurance, where the market is characterized by higher premiums, more stringent underwriting criteria, reduced capacity, and less competition among carriers. 

Meredith listed

Arch Capital

(ACGL),

American International

(AIG), HIG Insurance (HIG), and The Travelers as some of his favorites. He expects better-than-expected premium growth and underwriting margins from these names, saying that could help drive up earnings forecasts for 2023 and 2024.

Write to Evie Liu at [email protected]