Travelers Book Value Drops Most Since 2008 as Munis Slump

Travelers Cos., the second-largest U.S. commercial insurer, posted the biggest quarterly decline since 2008 in a key measure of the company’s value as higher interest rates pressured its bond portfolio.

Book value, a measure of assets minus liabilities, slipped to $66.65 per share from $68 three months earlier, the company said today in a regulatory filing as it announced second-quarter results. The decline was driven by a $1.77 billion drop in net unrealized gains in its $62.8 billion portfolio of fixed-maturity securities.

Fixed-income securities fell in the quarter after Federal Reserve Chairman Ben S. Bernanke signaled that some of the central bank’s stimulus efforts could end in 2014. That halted a rally in bond prices that was fueled by Fed efforts to stoke the economy after the 2008 financial crisis. Insurers hold bonds to back policyholder obligations and generate investment income.

Most property-casualty insurers have been keeping the duration of their portfolios short “to minimize the impact higher interest rates” have on portfolios, Barclays Plc analysts led by Jay Gelb wrote in a note to clients this month. “That said, if interest rates continue to rise sustainably near-term, we would expect book value deterioration.”

Travelers was the worst performer in the 30-company Dow, falling 3.8 percent to $82.21, even as second quarter net income climbed 85 percent to $925 million from a year ago and profit beat analysts’ estimates. Margins improved after the insurer charged some customers more for coverage and paid out less in claims for the natural disasters. The company also benefited from a legal settlement and resolution of a tax matter.

Municipal Bonds

“The impact of higher interest rates more than offset the very positive impact on book value per share of our strong earnings,” Chief Financial Officer Jay Benet said on a conference call.

Travelers’ portfolio of municipal bonds showed the biggest absolute decline in value in the quarter, followed by investments in corporate debt. The obligations of U.S. states and cities dropped about 3.3 percent in the three months ended June 30, the worst performance since 2010, according to Bank of America Merrill Lynch data. Corporate bonds slipped 3.4 percent in the period, the data show.

“The rise in interest rates does have a positive side,” Benet said. “Going forward, if interest rates stay at their current levels, we’d be able to reinvest proceeds from maturing bonds at higher yields than we were previously assuming.”

Unrealized Gains

The unrealized gains are monitored by investors and analysts as a sign of financial strength and don’t count toward earnings. Insurers often hold bonds to maturity, meaning they may not realize gains or losses tied to interest rate fluctuations. That contrasts with the treatment of bonds that are written down when a borrower’s creditworthiness deteriorates.

The rise in interest rates has not been significant enough to impact the insurer’s pricing strategy, Benet said. Policy sales fell by less than 1 percent to $5.82 billion in the quarter as price increases hurt the premiums it collected in its personal insurance business. Its commercial insurance divisions fared better as rate increases helped boost sales.

Travelers is seen as a bellwether for U.S. property-casualty insurers, because it reports before many competitors and sells coverage nationally. The insurer’s commentary about pricing may cause investors to question whether more increases are sustainable industrywide, Josh Stirling, an analyst at Sanford C. Bernstein & Co. wrote in a note today.

‘Modest Deceleration’

“The company’s guidance this quarter is that margins will continue to expand in most of their businesses as we work through the year,” Stirling said. “However, in the quarter, the data appears to show a modest deceleration.”

American International Group Inc., the largest U.S. commercial insurer, fell 1.8 percent. W.R. Berkley Corp. slumped 4.3 percent and Chubb Corp., the insurer of high-end homes and corporate boards, declined 2.8 percent.

Travelers said it plans to give notice to about 450 employees this week that their positions are being eliminated. The insurer is also cutting jobs through attrition, after its personal auto business lost sales amid price competition with other insurers. The plan will be fully implemented by 2015 and lead to $140 million in savings, the filing showed.

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