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Fitch Retains Travelers' Ratings

TRV WRB

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Fitch Ratings reiterated the Issuer Default Rating (“IDR”) at 'A+' of The Travelers Companies Inc. (TRV - Analyst Report) according to Reuters. Concurrently, it retained senior unsecured notes at 'A’ and subordinated notes at 'BBB+’. The rating agency also affirmed the Insurer financial strength (“IFS”) at ‘AA’ of the insurance subsidiaries. The ratings carry a stable outlook.

The rating affirmations came on the back of Travelers dominant market position with sustained solid earnings track record and a prudent balance sheet. Despite an estimated loss of $650 million, after tax and net of reinsurance from Superstorm Sandy, Fitch expects Travelers to deliver better earnings in 2012 compared with the year-ago level.

Travelers holds a dominant position by virtue of its array of insurance products offered to both the commercial and personal lines markets and also holds 5% market share of the property/casualty industry in terms of net written premium. Furthermore, it has an average return on equity of 12.2% over the last 5 years.

The company’s debt-to-capital ratio was 21.8% as on Sep 30, 2012, within the credit rating agency’s criteria. Also, the company consistently buys back shares to return more value to its shareholders.

However, Travelers has significant exposure to state, municipal and revenue bonds, an asset class having higher stress level. Nonetheless, the concern is dwarfed by credit quality and considerable unrealized gain. Also, one-fifth of the municipal bonds are escrowed, which lower credit risk considerably.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe the company’s strong score with the credit rating agencies will help it write more business going forward.

The rating agency might consider a rating upgrade if Travelers continues to deliver sturdy underwriting performances, which will also outperform the industry and peers and maintain an overcapitalized position.

The ratings might be subject to downgrade if consolidated statutory net leverage is more than 4.5x, debt-to-total capital ratio to moves ahead of 25%, fixed charge coverage ratio falls below 8x and there is a continued overhang of cat loss.

Recently, W.R. Berkley Corporation (WRB - Analyst Report), which closely competes with Travelers, also received rating affirmation from another credit rating agency, A.M. Best Co.  The rating agency affirmed the ICR and debt ratings of Berkley.

Travelers and Berkley both carry a Zacks #3 Rank, translating into a short-term Hold rating and have a long-term Neutral recommendation.
 

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