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Fitch Ratings reiterated Issuer Default Rating (“IDR”) at 'A+' of The Travelers Companies Inc. ( TRV - Analyst Report ) . Concurrently, the rating agency reiterated Insurer financial strength ("IFS") on the company’s subsidiaries at 'AA'.
The rating agency also affirmed Senior unsecured notes at 'A' and Subordinated notes at 'BBB+.' The outlook remains stable.
The rating affirmations came on the back of Travelers’ dominant market position, sustained operating profitability and solid capital management.
The rating agency noted that Travelers, being the sixth largest U.S. property & casualty insurer, holds almost 5% of the market share with a wide array of product offerings.
Travelers has managed to deliver average return on equity (“ROE”) above 12% for the last five years, despite suffering from catastrophe losses of $2.6 billion in 2011. Its ROE is much higher than that of its nearest peer American International Group Inc. ( AIG - Analyst Report ) with a negative ROE of 36.6% and close to another competitor W.R. Berkley Corporation ( WRB - Analyst Report ) with ROE of 12.5%. ROE for the first quarter of 2012 was 13%, up considerably from 5.7% in 2011.
It recorded a debt-to-capital ratio of 23% at March 31, 2012, well within the guideline of the rating agency. Fitch expects the company to maintain a debt-to-capital within 20%–25%.
The rating agency also noted that Travelers’ financial flexibility is supported by cash, short-term invested assets, and other readily marketable securities, which totaled $2.2 billion at first quarter 2012 end. Further, it is supported by the subsidiaries enabling the company to pay a dividend of $2 billion in 2012. Also, the liquidity is enhanced by $800 million commercial paper program.
It will retire $250 million senior debt in June 2012 with the next maturity of $500 million debt lined up for March 2013. The company’s interest coverage stands at 23.34x, comparing favorably with 4.14x of AIG and 19.25x of Berkley’s. Travelers' five-year average interest coverage was 11.9x.
Fitch stated that it might consider a rating upgrade if Travelers maintains a solid capitalization and continued strong underwritings results.
Nevertheless, Fitch stated that the ratings might be subject to downgrade if debt-to-total capital ratio exceeds 25%, suffers huge cat loss or if the capital position erodes.
We believe the company’s strong ratings scores will help retain investor confidence and help it to write more business going forward.
We retain our Neutral recommendation on Travelers. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates slight boost on the stock over the near term.
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