EUR 850.00 For Business Accounts Only

Morningstar | Travelers Holds Steady in 4Q

Travelers' fourth-quarter results were mixed, but overall we think they point to the resilience of this narrow-moat franchise. We consider an 11% return on equity for both the quarter and the full year a fairly solid outcome, given somewhat elevated catastrophe losses, which came in at $610 million for the quarter due to California wildfires and Hurricane Michael. We will maintain our $145 fair value estimate and believe the current market price modestly underestimates Travelers' long-term earnings potential.

Results in the business insurance segment suggest management remains relatively cautious, with net written premiums up only 3% year over year. In individual lines, management called out commercial auto as a spot where the company needs to continue to see improved pricing. The underlying combined ratio (which excludes catastrophes and reserve development) increased to 95.4% from 93.9% but held basically steady with results earlier in 2018. Overall, we think the operating environment in commercial lines has grown a little tougher lately. But this area remains the core of Travelers' moat, in our opinion, and we don’t think near-term cyclical considerations should alter investors' long-term views.

Personal lines remains a bright spot, as the pricing cycle is currently working to the company's advantage. Net written premiums were up 5% year over year, but more important, the underlying combined ratio improved to 87.8% from 90.4% last year. Travelers, like its peers, is enjoying a particularly strong pricing environment in auto lines, which drove the improvement in underwriting margins. However, we expect mean reversion over time, and Travelers' auto underwriting results are still poor relative to other leading players.