NEW YORK (Bloomberg)—Travelers Cos. Inc., the property insurer added to the Dow Jones Industrial Average last year, said first-quarter profit dropped 2.3% as the cost of catastrophe claims increased more than fivefold.

Net income fell to $647 million, or $1.25 a share, from $662 million, or $1.11, in the same period a year earlier, the New York-based insurer said today in a statement. Operating income, which excludes some investment results, was $1.22 a share, missing the $1.38 average estimate of 19 analysts surveyed by Bloomberg.

Travelers, led by CEO Jay Fishman, 57, is competing for business with Chubb Corp. and American International Group Inc. as demand for coverage drops amid the recession and industry rates decline. At the same time, insurers face claims from first-quarter catastrophe damage including record rainfall in the U.S. Northeast.

“They are mostly commercial, and the commercial insurance market is still very competitive,” said Paul Newsome, an analyst at Sandler O'Neill & Partners L.P., in an interview before earnings were released. The insurer also has a large presence in the U.S. Northeast, relative to other insurers, he said.

Travelers earned 3.6 cents per each premium dollar in the first three months of 2010, compared with 9.4 cents in the same period last year on the higher catastrophe costs. Premium revenue dropped about 1.3% to $5.2 billion from $5.3 billion.

Catastrophe costs

Travelers had catastrophe costs of $471 million before taxes, compared with $83 million a year earlier. Storms broke rainfall marks in New York City, Boston and Providence, R.I., last month. Hundreds of people fled their homes as rivers and drains backed up, and President Barack Obama declared parts of Rhode Island and Massachusetts disaster areas.

First-quarter catastrophe costs also included losses from a February earthquake in Chile. The 8.8-magnitude quake, along with the accompanying tsunami, killed at least 486 people, toppled bridges, downed power lines and smashed factories.

The insurer's book value, a measure of assets minus liabilities, rose 1.8% to $53.50 per share from $52.54 at the end of 2009. The company raised its dividend 9.1% to 36 cents from 33 cents. The dividend increase is the second in the past half year, after Mr. Fishman maintained a 30-cent payout for six straight quarters in the depths of the financial crisis.

Travelers gained 34% in the past 12 months in New York Stock Exchange Composite trading, compared with the 40% advance in the 30-company Dow benchmark.

Private equity

Investment income advanced 29% to $610 million after taxes as Travelers' nonfixed income holdings, primarily private equity, returned $44 million, the company said in a presentation on its website. Last year, the investment group that includes leveraged-buyout and hedge funds and real estate partnerships had a $113 million loss in the first quarter.

The LBO market, where acquirers purchase companies using mostly debt financing, is recovering after collapsing in 2007 when underwriters got stuck with $200 billion of loans they couldn't sell as credit markets froze.

Travelers pulled $294 million from reserves before taxes, up from $258 million in the year-earlier period, as the insurer again lowered the amount it estimated it would need to pay claims from past quarters. That trend contrasts with AIG, which posted a fourth-quarter loss after having to boost reserves.

Travelers repurchased 27 million shares in the first quarter for $1.4 billion. The insurer bought back $3.3 billion of shares in 2009 and said in January it expects to repurchase as much as $4 billion this year.

‘A terrific bite'

Travelers has increased prices for renewing commercial policies to protect revenue as businesses cut jobs and worksites, reducing the need for coverage. U.S. property and casualty insurance sales dropped the most in five decades last year, according to the Property Casualty Insurers Assn. of America. Policy sales fell 3.7% to $419 billion, a third straight annual decline.

“The recession cut into many of the drivers of premium, things like retail sales, payrolls, the number of autos that get sold,” said Michael Murray, an assistant vp for financial analysis at Verisk Analytics Inc. who collaborated on the study. “The recession took a terrific bite out of the demand for insurance.”

The insurer said it raised renewal rates in its three business segments in the first quarter. Industry rates for U.S. commercial insurance fell 5.3% in the first quarter and have dropped each quarter since 2004, according to the Council of Insurance Agents and Brokers.

&Copy;2010 Bloomberg News