Morningstar | Travelers Off to Good Start in 1Q
Travelers reported a good first quarter, seeming to break free of some of the headwinds it faced in 2018. The annualized return on equity of 13.5% in the quarter shows the company trending back to the levels we expect longer term. We will maintain our $145 fair value estimate and narrow moat rating.While the improvement was modest, we are pleased to see Travelers' commercial business getting back on track, as we view this area as the core of the company’s moat. The underlying combined ratio in the business insurance segment was 95.0%, compared with 95.5% last year, due to a lower expense ratio. Granted, the company did see a modest amount of adverse reserve development in the quarter, which pushed the reported combined ratio up, but this was due to a legal change in New York, which should be a one-time event. Management noted that renewal premium change came in at 6%, the highest the company has seen in almost five years. The gains were concentrated in commercial auto and property lines, but all lines excepting workers' compensation saw an increase. In our view, this augurs well for underwriting results going forward.
Personal lines saw an even larger improvement, with the underlying combined ratio falling to 89.1% from 90.5% last year. The gains were concentrated on the auto side. This area has been a bit of a roller coaster for Travelers over the past few years, as the company experienced a burst of growth that coincided with a spike in industry claims. We think the line is in a steady condition, as policies in force have stabilized as the past year. Further, recent industrywide pricing increases have led to strong underwriting results for Travelers and its peers. We don’t think the competitive position of Travelers or its peers has meaningfully changed, and as such, we expect mean reversion in underwriting margins over time. We continue to believe that Travelers’ personal lines lack a moat and that the strong results will prove temporary.
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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