We are downgrading our recommendation on The Travelers Companies Inc. (TRV - Analyst Report) to Underperform from Neutral given its exposure to catastrophe losses and low interest rate environment, which will continue to weigh on the results.
Cat loss almost quadrupled in the fourth quarter from the year-ago level due to early snowstorms in northeastern United States. A combination of higher cat loss, higher non-catastrophe weather-related losses and lower net favorable prior year reserve development resulted in high claims and claim adjustment expenses, which increased approximately 13% year over year.
Low interest rate environment continues to weigh on net investment income, and the recent fourth quarter was no exception. It marked the third consecutive quarter of decline in net investment income. A drop of 16% in the fourth quarter was largely due to lower returns from the non-fixed income portfolio.
Net investment income from the fixed income portfolio also declined due to weak reinvestment rates and lower average invested assets as a result of the company’s common share repurchases. Any uptick in the net investment income is not expected if the weak interest rate environment persists.
Counting on the positives, based on its financial strength, Travelers spent $1.9 billion to buyback 51 million shares and paid $669 million in dividends. It has a dividend yield of 2.77%, more than that of its nearest peers, Hartford Financial Services Group Inc. (HIG - Analyst Report) with yield of 1.94% and W. R. Berkley Corp (WRB - Analyst Report) with yield of 0.87%.
Travelers is focused on small and mid-sized commercial accounts and has a balanced personal lines book, but lacks exposure to large-account casualty business. Its Business Insurance segment continued to see a positive trend in net written premiums on the back of pricing gains and positive audit premiums. Also, retention and new business levels are at a high. The segment experienced positive rate change on renewed accounts for the fourth consecutive quarter.
The quantitative Zacks #3 Rank (short-term Neutral rating) for the company indicates no clear directional pressure on the stock over the near term.
Based in New York, The Travelers Companies, through its subsidiaries, provides a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the United States and in select international markets.