EUR 850.00 For Business Accounts Only

Morningstar | Travelers Reports Soft 2Q

Travelers' second quarter was not impressive, as overall results were held back by lower underwriting profits in the commercial segment. However, the company continues to see progress in its personal auto business, an area that has struggled the past couple of years. The net effect was an annualized return on equity of 9% for the quarter, a somewhat weaker result for this narrow-moat franchise. Even so, nothing in the quarter alters our long-term view of the company, and we will maintain our $142 fair value estimate.

The combined ratio in Travelers' business insurance segment rose to 98.8% from 96.5%, partly due to lower favorable reserve development. Even on an underlying basis, underwriting margins deteriorated, with management attributing the relatively poor results to some large noncatastrophe losses. We'd note that even before the second quarter, the business' underlying combined ratio had been creeping up the past several quarters.

Net written premiums were up 7% year over year. Management said renewal pricing is the strongest it's seen since 2014, and it believes that pricing is keeping up with claims trends. Overall, while Travelers is not immune to volatility in claims and the vicissitudes of the pricing cycle, we view its commercial operations as the core of its economic moat and continue to expect relatively strong results over time.

In our view, the one bright spot in the quarter was the continued progression of the personal auto line back toward an acceptable level of underwriting profitability. The underlying combined ratio improved to 95.5% from 102.4% last year, maintaining the recent positive trend. We think underwriting profitability has reached an acceptable level, especially given the lack of a moat around this business line.

The improvement in personal auto underwriting does appear to have come at the cost of growth, as policies in force were basically flat year over year, in line with the deceleration we’ve seen over the past year. However, we think restoring profitability is the key consideration, especially considering it was an ill-timed burst of growth that led to Travelers' underwriting issues, and we would prefer that management continue to prioritize the bottom line over the top line.