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We are downgrading Travelers Companies, Inc. (TRV - Analyst Report) to Neutral from Outperform as we remain concerned about its fourth quarter results being negatively affected due to the catastrophe loss stemming from Superstorm Sandy.

Exposure to catastrophe events always remains a headwind for property & casualty insurers. Travelers’ results have always been adversely affected by catastrophes. The occurrence of Superstorm Sandy in the final quarter of the year is apprehended to impede the company’s results. Catastrophe loss modeling companies project the loss to be approximately $20 billion for the industry. Travelers’ cat loss in the fourth quarter of 2011 quadrupled from the loss incurred in the year-ago period. Cat loss incurred was largely due to early snowstorms in northeastern United States.

However, due to the absence of any significant catastrophe event, Travelers posted underwriting gain in the third quarter with significant improvement in combined ratio.

Alongside, Travelers has significant exposure to asbestos and environmental claims and related litigation as a result of high market shares of historical acquisitions. We are concerned that Travelers may continue to take extraordinary reserve additions for both asbestos and environmental exposure.

Counting on the positives, Travelers Business Insurance continued to deliver positive trend in net written premiums on the back of pricing gains and positive audit premiums. Retentions were at a high level. Further, after a long gap of five quarters, Travelers enjoyed higher investment income.

Travelers has always been focused on returning more value to its shareholders via share buybacks and dividends.  Its dividend yield of 2.66% is better than that of its nearest peers, Hartford Financial Services Group (HIG - Analyst Report) with a yield of 1.87% and W. R. Berkley Corp. (WRB - Analyst Report) with a yield of 0.93%. With excess capital at its disposal, Travelers expects share buybacks in the fourth quarter to be more thanthe third quarter.

Travelers currently carries a Zacks # 3 Rank, implying a short-term Hold rating.

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