Core earnings of $9.18 a share topped the $7.39 average estimate, the combined ratio was 86.8%, and the insurer returned $1.77 billion to shareholders. Shares fell about 4% before the open as investors focused on higher catastrophe losses, then turned higher.
Travelers beat earnings forecasts by almost a quarter. Investors' first instinct was to sell it.
The property and casualty insurer reported third-quarter core income of $1.947 billion, or $9.18 a diluted share, against an average estimate of $7.39, with individual forecasts ranging from $7.07 to $7.49. That is about $1.79, or 24%, above the average, and up from $8.14 a year earlier. Net income was $1.917 billion, or $9.04 a share. Core return on equity was 22.1%.
The underwriting itself was strong. The combined ratio, claims and expenses as a share of premiums, was 86.8%, and the underlying combined ratio, which excludes catastrophes and changes in prior-year reserves, was 84.1%. Underwriting income before taxes was $1.432 billion. Net written premiums totaled $11.48 billion.
Travelers returned $1.769 billion to shareholders in the quarter, including $1.508 billion of share repurchases.
What the early selling focused on
Catastrophe losses rose 34% from a year earlier, and that number drew the most attention early. Shares were down about 4% before the open. By early afternoon they had reversed to $389.01, up about 1.3%.
The quarter's structure offers a way to read both reactions. The gap between the reported and underlying combined ratios is 2.7 points. But that gap is a net figure: favorable development on prior-year reserves added $234 million to results, which offset part of the catastrophe cost. Catastrophes alone therefore weighed on the quarter by more than 2.7 points, and investors who looked first at that line saw a business exposed to a more expensive weather year.
Those who looked at the underlying ratio saw the opposite. An 84.1% underlying combined ratio means the core book of policies is priced to make a healthy profit before any catastrophe, and the reserve releases suggest earlier years were priced conservatively.
Investments
Chief Executive Alan Schnitzer called the period "excellent third quarter results" and pointed to "a record result from our investment portfolio." With Treasury yields near 5%, new bond purchases lift what insurers earn on their portfolios, a tailwind that does not depend on underwriting.
Market implications
One reading is that Travelers is earning well on both sides of the business. Underwriting margins are wide, reserves are releasing, investment income is at a record and buybacks are running at more than $1.5 billion a quarter. On that view, the morning selloff was a headline reaction to catastrophe losses that the rest of the business easily absorbed.
A second reading is that the quality of the beat deserves a discount. Favorable reserve development is not a recurring source of profit, catastrophe losses are rising, and part of the earnings strength comes from investment income that would shrink if rates fall.
What to watch
Fourth-quarter catastrophe activity, renewal pricing commentary for commercial and personal lines, and whether reserve releases continue. A rise in the underlying combined ratio would matter more than another quarter of high catastrophe losses.