Morningstar | Travelers Reports Soft 2Q, but Pricing Improves
Travelers’ second-quarter results weren’t particularly impressive, but this appears to be the result of the near-term volatility inherent in insurance results. Annualized return on equity for the quarter was a lackluster 9%. However, we are somewhat encouraged by the improvement in the pricing environment for Travelers and its peers in commercial lines, and we will maintain our $145 fair value estimate and narrow moat rating.Travelers’ commercial segment saw its underlying combined ratio (which excludes catastrophes and reserve development) tick up to 97.4% from 96.5% last year, bucking the improvement the company had seen over the past few quarters. Management attributed the rise to a relatively high level of noncatastrophe weather losses and, to a lesser extent, ongoing issues in the commercial auto line. While underwriting results were not impressive, we accept that there is some natural near-term volatility in this business and don’t make too much of this. We remain encouraged by the trend in pricing, with Travelers seeing renewal premium change of 6.7%, its highest level in five years. In the first quarter, Travelers and its peers saw something of a turn in pricing, and this augurs well for underwriting results.
The personal insurance segment also saw its underlying combined ratio increase to 94.6% from 92.6% last year. Here again, weather-related losses appear to be the culprit, and the decline in underwriting profitability was concentrated in the homeowners business. Personal auto actually saw its underlying combined ratio improve to 93.8% from 95.4%, and we think this area is in something of a sweet spot right now following strong pricing increases over the past couple of years. We’re pleased to see this business hit an attractive level of profitability but think mean reversion in underwriting results is inevitable, especially as we don’t think Travelers’ personal lines operations benefit from a moat.
Travelers Companies is a holding company. Through its subsidiaries, the company is engaged in providing commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. The company's segments include: Business Insurance, which provides property and casualty insurance and insurance-related services; Bond and Specialty Insurance, which provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services, and certain specialty insurance products; and Personal Insurance, which writes property and casualty insurance covering individuals' personal risks.
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