The Travelers Companies, Inc. (NYSE:TRV) is scheduled to announce earnings for the fiscal third quarter of 2012 on Thursday, 18th October. The property and casualty insurer reported a profit of $499 million in the second quarter, a significant improvement over the net loss of $364 million observed for the same period in 2011. A major reason for this improvement was a decline in catastrophe related losses due to severe tornadoes and hail storms that affected the Midwest and Southeast regions of the U.S.
Catastrophe related losses totaled $1.08 billion in the second quarter of 2011, but fell to $357 million in 2012. Mother Nature has been kinder this year to major insurance companies, with no major natural calamities reported so far. Improved loss ratios will also help Travelers improve its bottom line this quarter. We presently have a price estimate of $70 for Travelers, which is in-line with the market price.
In August, 2011, Hurricane Irene hit the U.S. East Cost, followed in September by Tropical Storm Lee. Both of the storms caused massive damage in the Eastern part of the U.S. Travelers earnings during the period were impacted by this damage with claims and adjustment expenses of $4.14 billion, 29% higher than 2010. We expect the loss and loss adjustment expense ratio to improve from last year, primarily due to improved weather conditions this year. This will impact the combined ratio which stood at 96.3% in the first half of 2012.
Improved margins will also lead to a long-term increase in float or the amount that the company is able to invest to gain returns. The company’s investments at the end of the second quarter stood at $70 billion, with an average pretax yield of 4.2%. The company maintains a very conservative investment portfolio with almost 90% of investments in fixed maturity securities such as U.S. Treasury bonds and government agency bonds.
To compensate for high catastrophe losses in 2011, which totaled $2.56 billion, Travelers has had to increase insurance rates for its business insurance clients. Prices increased by 7.5% in the first quarter of 2012, by 7.2% in the second quarter and by 7.7% in the third quarter. Earned premiums in the first half of the year increased by 3% as a result, whereas fee income fell by $7 million.
Business and financial insurance is the most important division for Travelers, accounting for more than half of the net written premiums and 60% of our price estimate. With increased competition in the property and casualty insurance market, particularly from established giants like AIG (NYSE:AIG), we expect a gradual decline in Travelers share of the market in the next few years. Despite this decline, the market will grow enough to allow Travelers to increase its top-line in the coming years.