Travelers Earnings: Catastrophe and Asbestos Are a Drag, but Personal Auto Shows Improvement

Travelers’ TRV third-quarter results were weighed down by relatively high catastrophe losses and a charge to add to asbestos reserves. This pushed annualized return on equity for the narrow-moat company to 8% for the quarter. Outside of those issues, the commercial side of the business continues to perform well and the personal side showed some underlying improvement. We will maintain our $194 fair value estimate and see shares as modestly undervalued.

The business segment continues to see strong growth with net written premiums up 16% year over year. While this is mostly pricing, we think management may be getting more aggressive given favorable market conditions. The reported combined ratio in the quarter was somewhat weak at 99.1% due to a $284 million adverse development charge related to asbestos liabilities. However, the underlying combined ratio remains attractive at 89.7%, compared with 90.0% last year. We’ve seen underlying combined ratios at Travelers and peers start to flatten out over the past year as we move deeper into the hard market and we think underwriting profitability has likely peaked. Still, this leaves Travelers in an attractive spot in the near term.

On the personal side, higher catastrophe losses pushed the segment into a significant underwriting loss, with the reported combined ratio coming in at 110.0%. But while issues within personal auto remain, the situation may be starting to improve. The company continues to raise pricing and we’ve always expected pricing increases to ultimately outrun claims headwinds. This quarter suggests we might be reaching that point as the underlying combined ratio improved to 100.6%, compared with 103.9% last year, and 103.5% in the previous quarter. We also saw peer Progressive report a strong sequential improvement. While Travelers is not out of the woods just yet, it may be on the path to normalizing underwriting profitability within this line.