Travelers Earnings: Catastrophe Losses Ding Quarter; Underlying Results Mixed

Elevated catastrophe losses of $1.5 billion in the second quarter (representing 16.1% of net earned premiums and roughly double last year’s level of losses on an absolute basis) pushed narrow-moat Travelers TRV to a loss of $14 million in the second quarter. Excluding catastrophes, Travelers continued to see tailwinds on the commercial side of the business and headwinds on the personal side; both sides roughly maintained their recent trajectories. We will maintain our $194 fair value estimate and see the shares as modestly undervalued.

Catastrophe losses pushed Travelers’ business insurance segment to basically break even with its underwriting on a reported basis. Additionally, the insurer saw a modest amount of unfavorable reserve development in the quarter. But underlying trends remain largely positive, with the company’s underlying combined ratio (which excludes catastrophe losses and reserve development) coming in at 89.4% compared with 92.4% in the year-ago period. That said, the underlying combined ratio was basically flat relative to the previous two quarters. We’ve seen a similar trend at peers, which suggests that underwriting profitability may have peaked. Management did say renewal rate changes picked up a bit sequentially in the quarter, which should help maintain underwriting profitability.

Travelers’ personal insurance segment has been weighed down by headwinds in personal auto. This area of the industry remains under pressure, and the business line continued to generate an underwriting loss. The segment’s underlying combined ratio for the quarter was 103.5%, up from 101.8% last year but basically flat with the previous quarter. Management said that while inflationary pressures are starting to ease, this is not happening as quickly as expected, which is making it difficult to improve underwriting results.