Oct. 25 (Bloomberg) -- Travelers Cos., the second-largest U.S. business insurer, said profit rose 15 percent, beating analysts' estimates, as higher rates for cars and small businesses boosted premium revenue.

Net income climbed to $1.2 billion, or $1.81 a share, in the third quarter, the St. Paul, Minnesota-based company said in a statement today. The average estimate of 17 analysts surveyed by Bloomberg was $1.50.

Chief Executive Officer Jay Fishman is adding customers as new software helps the company assess risks and price policies. Travelers raised premiums for drivers, small businesses and homeowners at a time when most insurance rates are declining. Industrywide, rates for business policies fell 13 percent in the quarter, according to a survey by the Council of Insurance Agents and Brokers released this week.

``They've got a competitive advantage, and they're trying to use that technology and their size to drive business,'' said Alan Devlin, an analyst with Atlantic Equities LLP in London. ``It seems to be working.'' He rates the shares ``overweight.''

Travelers, smaller only than American International Group Inc. for commercial insurance, rose 34 cents, or 0.7 percent, to $51.74 in New York Stock Exchange composite trading. The insurer has lost 3.6 percent this year, compared with a 4.2 percent decline in the 24-member KBW Insurance Index.

Profit Margin

Travelers spent 84.4 cents of every premium dollar on claims and expenses, down from 87.2 a year earlier. Policy sales climbed 2.1 percent to $5.39 billion, the sixth consecutive increase. Underwriting profit increased 28 percent to $520 million as the company lowered its estimate of the cost of paying claims from past years by $145 million.

The insurer said it would earn $6.52 to $6.62 for the year, or $1.44 to $1.54 for the fourth quarter. Fourteen analysts surveyed by Bloomberg estimated the company would earn $1.53 in the period.

In its commercial insurance unit, the company's largest, premiums increased 4.1 percent to $2.85 billion as the company added small and mid-sized business clients. Claims costs fell 8.7 percent to $1.59 billion.

Catastrophe losses were $9 million, down 10 percent. Two years ago, hurricanes including Katrina contributed to $317 million of losses in the quarter.

The Council of Insurance Agents and Brokers said the industrywide price decline was driven in part by reductions in property rates in coastal areas as a result of calm hurricane seasons in the U.S. this year and last.

Investment Income

``The company continues to grow as market declines accelerate,'' said David Small, an analyst with Bear Sterns Cos., in a note to investors. He ranks the shares ``peer perform.''

Income from investments rose 8.4 percent to $724 million as its portfolio grew 2.2 percent to $73.8 billion. Among its so- called alternative assets, which include private equity and hedge funds, income plunged 40 percent from the second quarter to $137 million. Chief Financial Officer Jay Benet said on a conference call the company's first-half earnings from alternative assets were ``historically high.''

Hedge fund holdings shrank 5 percent from the second quarter to $954 million and its private equity holdings grew 9.4 percent to $1.4 billion.

In its consumer auto unit, the company spent 91.4 cents of every auto insurance dollar paying claims and expenses, compared with 89.7 a year earlier, as the number of drivers reporting accidents rose by less than 1 percent.

Accident Rate

The increase mirrors one reported by rival Allstate Corp. last week, and indicates a reversal of a long-term trend. Until this year, Travelers and its competitors benefited from a steady decline in the rate of accident claims, helping the industry triple profit margins from 2003 to 2006.

Fishman expects increases in the accident rate of about 1 percent in future quarters, he said today in the conference call.

Travelers held $105 million of securities backed by subprime mortgages.

Travelers changed its name from St. Paul Travelers Cos. in February after it struck a deal with Citigroup Inc. to reacquire its red umbrella logo. The company was created through the $17.9 billion merger of Travelers Property Casualty Corp. and St. Paul Cos. in 2004.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: October 25, 2007 16:12 EDT