Travelers Upgraded to Neutral

We are upgrading The Travelers Companies Inc (TRV - Analyst Report) to Neutral from Underperform on the back of strong first-quarter results.

Operating earnings surpassed the Zacks Consensus Estimate as well as the year-ago numbers largely on lower share count due to share repurchases. Top line benefited on the heels of increase in premiums earned (attributable to pricing gains), though lower net investment income was a partial offset as low reinvestment rates in the fixed income portfolio weighed on the performance. Moreover, increase in net favorable prior-year reserve development and decrease in cat losses came as a respite.

As the second-largest writer of auto and homeowners’ insurance through independent agents and the third-largest writer of commercial U.S. property-casualty insurance, we believe Travelers will continue to benefit from its strong market position and reap economies of scale. Its Business Insurance segment experienced positive rate change on renewed accounts for the fifth consecutive quarter.

The company remains focused on enhancing shareholders value via share repurchase and dividend increase. The company has continuously increased dividends over the past few years. Based on the strength of its financial position, the company hiked its quarterly dividend by 12%, besides spending $350 million to buy back 6 million shares in the first quarter. At March 31, 2012, the company had $3.26 billion of capacity remaining under its share repurchase authorization.

Travelers also scores well with the credit rating agencies. A.M. Best reiterated the issuer credit rating (ICR) and senior debt ratings of ‘a’ of the company on the back of its operating and underwriting results, strong risk-adjusted capitalization, strong market profile in commercial and personal lines and financial flexibility and liquidity. We believe, the company’s strong ratings scores will help retain investor confidence and augment its business going forward.

On the flip side, low interest rate environment continues to weigh on net investment income and the recent quarter was no exception to it. The reported quarter marked the fourth consecutive quarter of decline in net investment income. Lower reinvestment rates in the fixed income portfolio were primarily responsible for the dip.

Net investment income from the fixed income portfolio also declined due to weak reinvestment rates and lower average invested assets due to the company’s common share repurchases. We do not expect any uptick in the net investment income if the weak interest rate environment persists.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Travelers competes with peers like American International Group Inc. (AIG - Analyst Report) and W.R. Berkley Corporation (WRB - Analyst Report).