We are upgrading our recommendation on The Travelers Companies Inc. (TRV) to Neutral from Underperform based on a high retention rate, pricing gains, favorable renewal rate changes, favorable prior year reserve development, prudent underwriting practice and a strong capital position. The company also scores strongly with the rating agencies and returns value to shareholders through dividend and share buybacks.
Travelers continues to benefit from its strong market position and economies of scale. Its Business Insurance continued to deliver positive trends in net written premiums on the back of increases in pricing, exposure and a moderate account growth. Also, Retention and new business levels were at high levels. The company recently also announced the offering of three new coverages to health care providers.
Travelers also continues to return value to its shareholders through dividend payment and share buyback. Travelers paid out $174 million in dividends in the quarter. It has a dividend yield of 2.97%, higher than the industry average of 2.52%. Also, Travelers bought back 3.9 million shares for $237 million during the quarter.
Travelers scores strongly with the rating agencies. Recently, A.M. Best affirmed the issuer credit rating (ICR) and senior debt ratings of “a” of the company. Standard & Poor’s upgraded the credit rating to A from A- based on the expectation that the company will continue to post solid results and outperform its peers.
On the flip side, the company also suffered hugely due to catastrophe losses. Catastrophe costs in the second quarter were almost $1.1 billion inducing the loss for the quarter.
Travelers has a significant exposure to asbestos and environmental claims and related litigation as a result of high market shares of historical acquisitions.
Premium growth remains reduced as a result of the adverse impact of soft market conditions. Given the challenging economic environment and a slow recovery, we expect top-line growth to remain muted though lower exposures. Travelers also continues to face reduced underwriting margins related to pricing and loss cost trends.
Travelers reported an operating loss of $0.91 per share in the second quarter, wider than the Zacks Consensus Estimate loss of $0.62. Results were far behind earnings of $1.39 in the prior-year quarter.
The Zacks Consensus Estimate for third-quarter 2011 is $1.37 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $4.03 per share and $6.02 per share.
The quantitative Zacks #3 Rank (short term Hold rating) on the stock indicates no clear directional pressure on the shares 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. It competes with Hartford Financial Services Group Inc. (HIG) and W.R. Berkley Corporation (WRB).
HARTFORD FIN SV (HIG): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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