Best Revises Outlook on Travelers and Most Subs to Positive; Affirms Ratings

May 31, 2013

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa” of the property/casualty subsidiaries of The Travelers Companies, Inc. (TRV) (also known as Travelers Group), based in New York, its affiliate, Travelers Casualty and Surety Company of America (TCSA), based in Hartford, and TCSA’s affiliates, the UK-based Travelers Casualty and Surety Company of Europe Limited (TCSCE) and Travelers Insurance Company of Canada (TICC).

Best has also revised the outlook to positive from stable and affirmed the ICR and senior debt ratings of “a” of TRV and its two wholly owned downstream holding companies, Travelers Property Casualty Corp. and Travelers Insurance Group Holdings, both domiciled in Hartford.

In addition Best has affirmed the FSR of ‘A’ (Excellent) and ICR of “a+” of The Premier Insurance Company of Massachusetts and the FSR of ‘A’ (Excellent) and ICR of “a” of First Trenton Indemnity Company, as well as the FSR of ‘A’- (Excellent) and ICR of “a-” of First Floridian Auto and Home Insurance Company. The outlook for these ratings is stable.

The rating actions reflect “Travelers’ strong risk-adjusted capitalization, favorable operating and underwriting results, dominant market profile in commercial and personal lines (largely distributed through independent agents) and quality management team,” Best explained.

“The ratings also acknowledge Travelers’ proactive and comprehensive risk management, underwriting and financial discipline, relatively conservative investment portfolio, geographic and product diversification and enhanced technology and internal information systems, which have improved its underwriting effectiveness and ability to service agents and customers in both commercial and personal lines.

“In addition, Travelers’ superior product breadth, industry leading data and analytics and leading position within its distribution network have enabled it to report a trend of strong earnings that have outperformed the majority of its peers over time, despite a sharp increase in weather-related losses and the current low interest rate environment.”

Best added that its ratings for Travelers “also consider the financial flexibility and liquidity provided by TRV. Despite significant share repurchases since 2006, TRV maintained $1.6 billion of cash and marketable securities, and its adjusted debt-to-capital ratio, excluding accumulated other comprehensive income (AOCI), remained moderate at 19.8 percent at March 31, 2013. However, TRV does maintain a sizable 12.7 percent of shareholders’ equity in intangible assets. Adjusting for tangible capital, the adjusted debt-to-tangible capital (excluding AOCI) ratio was 22.7 percent, well within Best’s expectations at the current rating level. Interest coverage also remained strong through the first quarter of 2013 at 14.3 times.”

As partial offsetting factors Best cited the “ongoing competitive environment within the property/casualty markets and Travelers’ exposure to natural and man-made catastrophes.” The report explained that “being among the largest commercial and personal insurers and national property writers, the group has significant exposure to natural catastrophes, which was evident in 2011 and 2012, and potential terrorist-related losses.”

Best also pointed out, however, that “Travelers has comprehensive reinsurance and risk management programs in place to manage its spread of risk and limit its overall exposure. Despite reporting an increased level of catastrophe loss activity in 2011 and 2012, Travelers managed to report solid returns while maintaining strong liquidity and risk-adjusted capitalization, which is a testament to the group’s conservative operating philosophy, strong business profile and comprehensive risk management program.”

In addition Best noted that Travelers, like other leading carriers within the U.S. property/casualty industry, “remains exposed to the potential development of asbestos and environmental (A&E) liabilities; however, in more recent years, it has seen less adverse A&E reserve development emerge. Over the past several years, the group’s overall commercial lines reserves appear to have stabilized, as evidenced by favorable prior year loss reserve development, while redundancies have consistently occurred in personal lines reserves.”

Best said the “ratings of TCSA and TCSCE primarily recognize TCSA’s strong risk-adjusted capitalization, superior underwriting and operating performance and leadership position in the surety, fidelity and management liability segments. These strengths are partially offset by TCSA’s limited product diversification, areas of modest adverse loss reserve development on more recent accident years, as well as the negative impact that continued competitive property/casualty markets and weak macroeconomic conditions may have on premium and profitability levels.

“The ratings of TICC recognize its superior risk-adjusted capitalization, favorable underwriting and operating profitability, excellent brand recognition, strong profile as a leading specialty lines writer in the surety and corporate management liability segments, as well as the additional operational support and financial flexibility afforded by Travelers and TRV. Partially offsetting these positive rating factors are the recent increased competition and continued soft market conditions, as well as the modest increase in TICC’s expense ratio due to its projected investments in technology.

“The ratings of Premier acknowledge its strong risk-adjusted capitalization, historically favorable operating profitability and the additional operational support and financial flexibility afforded by Travelers and TRV. These positive rating factors are partly offset by the deterioration in Premier’s underwriting results in recent years, its geographic concentration of business in Massachusetts and limited product scope (focused on private passenger automobile coverage), as well as the increased competitive pressures associated with the recent automobile insurance reform in Massachusetts.

“The ratings of First Trenton reflect its adequate risk-adjusted capitalization, historically strong overall operating performance and the benefits derived from its local market presence, as well as the additional operational support and financial flexibility afforded by Travelers and TRV. These positive rating factors are partly offset by First Trenton’s exposure to catastrophe losses, which have led to earnings volatility, single state geographic concentration, as well as an increased volatility in underwriting and operating results, earlier in the five-year period, due to challenging market dynamics in New Jersey’s private passenger auto segment.

“The ratings of First Floridian recognize its strong risk-adjusted capitalization, highly profitable operating results in recent years, operating efficiencies and local market focus that enables it to respond effectively to issues associated with Florida’s personal lines market, as well as the additional operational support and financial flexibility afforded by Travelers and TRV. Partially offsetting these strengths are First Floridian’s exposure to catastrophe losses and single state geographic concentration in Florida.”

In conclusion Best said: “Factors that may lead to positive rating actions for TRV and its operating companies include continued strong underwriting and operating performance that outperforms peers over time.

“However, factors that could lead to negative rating actions include deterioration in underwriting and operating performance to a level below peers or an erosion of surplus that causes a decline in risk-adjusted capital to a level no longer supporting current ratings.

A complete listing of The Travelers Companies, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings is avaialble at: www.ambest.com/press/053005travelers.pdf .

Source: A.M. Best

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