Morningstar | Travelers' Strength Is Its Commercial Operations
We believe the strength of Travelers' commercial insurance operations puts a narrow economic moat around its business. Travelers, along with the rest of the property and casualty insurance industry, was buffeted by natural catastrophes over the past two years, with multiple hurricanes and wildfires affecting its bottom line. Typically, industry pricing firms following large catastrophes, and that has been the case again. However, the increases have been modest and lower than in the past, as the industry remains well capitalized. In our view, this adds up to an underwriting environment where a cautiously managed firm such as Travelers should be able to use its competitive advantage to generate modest excess returns. We think the company's recent returns are a bit below its long-term potential, but this is mainly due to cyclical considerations. As a result, we expect some mean reversion over time.The company's personal auto insurance operations have been on a bit of a roller coaster over the past few years. Travelers slimmed down its auto insurance offerings and reduced costs materially a few years ago to adjust to changes in industry dynamics. As a result, the recent performance of its personal lines business had been quite good in terms of top-line growth. However, this growth proved ill-timed as an industrywide uptick in claims hit personal auto lines, with lower gas prices, distracted driving, and more technology-laden vehicles combining to form a negative surprise for carriers. While this phenomenon was not unique to Travelers, the company's spurt of growth left it particularly exposed. However, recent pricing increases have helped to restore underwriting profitability. We think this situation highlights the no-moat nature of Travelers' personal lines operations, which account for about 30% of the company's premiums. Even with the recent improvement in underwriting results, Travelers' results are relatively weak compared with peers.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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