EUR 850.00 For Business Accounts Only

Morningstar | Travelers' Results Pick Up a Bit in 3Q

Overall, while Travelers' year-over-year comparisons benefited from the large catastrophe losses recorded last year, we think third-quarter results show the insurer tracking back toward the strong returns we are expecting from this narrow-moat franchise longer term. During the quarter, underwriting results largely held level with recent results, but investment income improved, pushing the annualized return on equity to 13%. We will maintain our $145 fair value estimate.

Results in the business insurance segment suggest improved pricing is leading to better results. Management said it saw a 5% increase in renewal premiums, about on par with recent gains, with the underlying combined ratio coming in at 95.4%, an improvement both year over year and sequentially. This bucks the modest deterioration we'd seen over the last year or so and suggests pricing has reached a point where it is keeping pace with loss trends.

In personal lines, particularly auto, Travelers saw strong improvement. We think this segment is now operating at a very attractive profitability level following a couple of years of poor performance due to an ill-timed spurt of growth. The combined ratio came in at 91.3%, and excluding catastrophes and reserve development, improved about 6 percentage points year over year.

While we are pleased to see Travelers get its personal auto insurance business back on track, we believe the industry as a whole is operating at underwriting margins that are not sustainable, as recent pricing increases following a previous spike in claims appear to have overshot the mark. We expect mean reversion over time, noting that another large carrier has already started to modestly cut pricing this year.

While catastrophes were not a major issue during the third quarter, despite Hurricane Florence hitting the East Coast of the United States in early to mid-September, there could be some impact from Hurricane Michael, which hit the Southeast in early October. Management said it expected to see material losses from this event across multiple states but did not include any precise figures. We believe that so far, natural catastrophe losses for the industry as a whole are shaping up to be relatively high this year from a historical perspective, but not as bad as the losses the industry realized last year.