June 19, 2017 / 9:18 PM / a year ago

Fitch Affirms Travelers' Ratings; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, June 19 (Fitch) Fitch Ratings has affirmed its ratings on The Travelers Companies, Inc. (NYSE: TRV), as follows: --Insurer Financial Strength (IFS) on insurance company subsidiaries at 'AA'/'Very Strong'; --Issuer Default Rating (IDR) at 'A+'; --Senior unsecured notes at 'A'; --Subordinated notes at 'BBB+'. The Rating Outlook is Stable. See the full list of rating actions below. KEY RATING DRIVERS TRV's ratings are supported by very strong capitalization, a history of favorable reserve development, a top-tier competitive position in the U.S. property/casualty insurance market, and very strong financial performance and earnings. Capitalization at the operating company level scored 'Very Strong' on Prism, Fitch's proprietary capital model, which is considered consistent with TRV's 'AA' IFS rating. Other measures of capital strength such as consolidated NAIC RBC and net leverage ratios were 300% of the company action level and 3.8x, respectively, as of Dec. 31, 2016, and are consistent with median guidelines for the current rating category. Fitch expects that share repurchase activity will reflect underlying profitability and will not reduce capital strength. TRV repurchased 1.9 million common shares under its share repurchase authorization at a total cost of $225 million during the first quarter of 2017 (1Q17). In April 2017, TRV's Board of Directors approved a $5 billion addition to the repurchase authorization, leaving $5.7 billion of capacity. Financial leverage remains within management's stated range and below Fitch's 25% rating sensitivity. In May 2017, TRV issued $700 million of 4% senior notes due in 2047. Fitch anticipates TRV using the proceeds from the planned issuance to repay $450 million in outstanding senior notes maturing in December 2017 and to fund a portion of the purchase price of the Simply Business acquisition. Fitch calculates that TRV's financial leverage ratio will be near 24% following the debt issuance, compared with approximately 22% at March 31, 2017. This calculation does not count debt redemptions. Reserves have a higher influence on TRV's ratings given a product mix that includes long-tailed lines of business such as workers' compensation and general liability insurance. Fitch's analysis of TRV's reserves continues to indicate a modestly redundant position which is supported by a history of favorable reserve development. The company's asbestos reserve survival ratio remains below Fitch's expectations of 11-13 years despite adjustments for settlement agreements that are less likely to develop adversely. Fitch views the company's business profile as very strong and notes that companies with this profile are typically rated in the 'AA' category. TRV offers a wide range of insurance products to both the commercial and personal lines markets and frequently occupies a top tier position among independent insurance agencies. Return on stockholders' equity (ROE) was 12.8% for 2016 and annualized first quarter 2017 ROE was 10.5%. 1Q17 profitability was suppressed by a lower level of favorable reserve development, partially tied to the Ogden discount rate adjustment, and increased catastrophe losses. Net investment income is expected to remain pressured in the near term by the prevailing low interest rate environment. Operating EBIT's coverage of fixed charges was 9.5x during 1Q17, which is down compared to full-year 2016's 12.1x and below Fitch's median guidelines for the current rating category. The consolidated combined ratio deteriorated during 2016 and 1Q17 to 92% and 96%, respectively. Business & International (B&I) and Personal Lines have been responsible for the period-to-period decline in profitability. B&I is by far TRV's largest segment, accounting for nearly 60% of total net written premiums in 2016. Workers' compensation and commercial multi-peril represent nearly half of net written premiums in the segment. B&I reported an underlying combined ratio, excluding catastrophe losses and reserve development, near 94% for both full-year 2016 and 1Q17. Increasing loss-cost trends outpaced earned pricing and greater non-catastrophe weather losses explain the modest deterioration in recent results. TRV has a top-tier position in contract and commercial surety, private and non-profit management liability, and community banks. The Bond and Specialty segment has been consistently profitable with a five-year average combined ratio below 70%. Favorable prior year reserve development makes a significant contribution to profitability of this segment. TRV's Personal Lines segment, offering auto and homeowners insurance, remains modestly sized as the ninth largest domestic writer by net written premiums. The reported underwriting results were essentially break-even during 1Q17. Higher loss estimates in personal auto bodily injury liability coverages are the greatest contributor to the deteriorating underlying underwriting results in this line of business. RATING SENSITIVITIES Key rating triggers that could lead to a downgrade include: --Capitalization at the underwriting subsidiaries that is inconsistent with standards for the current rating category such as consolidated statutory net leverage greater than 4.5x, a long-term increase in the financial leverage ratio to greater than 25% or a deterioration in the Prism score to below the 'Very Strong' category; --A GAAP fixed-charge coverage ratio less than 8x over an extended period; --A sustained period where the combined ratio exceeds 100% or the operating ratio exceeds 90%; --A persistent and material deterioration in reserve adequacy. Key rating triggers that could lead to an upgrade include: --Improvement in TRV's capitalization measured by a Prism score of 'Extremely Strong'. --Sustained underwriting performance across business lines that is clearly better than the industry and similarly-rated peers. FULL LIST OF RATING ACTIONS The following ratings have been affirmed by Fitch: The Travelers Companies, Inc. --Long-Term IDR at 'A+'; --Short-Term IDR at 'F1'; --5.75% senior notes due Dec. 15, 2017 at 'A'; --5.80% senior notes due May 15, 2018 at 'A'; --5.90% senior notes due June 2, 2019 at 'A'; --3.90% senior notes due Nov. 1, 2020 at 'A'; --6.75% senior notes due June 20, 2036 at 'A'; --6.25% senior notes due June 15, 2037 at 'A'; --5.35% senior notes due Nov. 1, 2040 at 'A'; --4.60% senior notes due Aug. 1, 2043 at 'A'; --4.30% senior notes due Aug. 25, 2045 at 'A'; --3.75% senior notes due May 15, 2046 at 'A'; --4.00% senior notes due May 30, 2047 at 'A'; --$800 million commercial paper program at 'F1'. MMI Capital Trust I --7.625% junior subordinated debentures due Dec. 15, 2027 at 'BBB+'. USF&G Capital Trust I --8.500% junior subordinated debentures due Dec. 15, 2045 at 'BBB+'. USF&G Capital Trust III --8.312% junior subordinated debentures due July 1, 2046 at 'BBB+'. Travelers Insurance Group Holdings Inc. --Long-Term IDR 'A+'; --7.75% senior notes due April 15, 2026 at 'A'. Travelers Property Casualty Corp. --Long-term IDR 'A+'; --6.375% senior notes due March 15, 2033 at 'A'. The IFS ratings of the following members of the Travelers Inter-company Pool have been affirmed at 'AA', with a Stable Outlook: --American Equity Specialty Insurance Company --Discover Property & Casualty Insurance Company --Discover Specialty Insurance Company --Farmington Casualty Company --Fidelity and Guaranty Insurance Underwriters, Inc. --Northfield Insurance Company --Northland Casualty Company --Northland Insurance Company --St. Paul Fire and Marine Insurance Company --St. Paul Guardian Insurance Company --St. Paul Mercury Insurance Company --St. Paul Protective Insurance Company --St. Paul Surplus Lines Insurance Company --The Automobile Insurance Company of Hartford, Connecticut --The Charter Oak Fire Insurance Company --The Phoenix Insurance Company --The Standard Fire Insurance Company --The Travelers Casualty Company --The Travelers Home and Marine Insurance Company --The Travelers Indemnity Company --The Travelers Indemnity Company of America --The Travelers Indemnity Company of Connecticut --TravCo Insurance Company --Travelers Casualty and Surety Company --Travelers Casualty Company of Connecticut --Travelers Casualty Insurance Company of America --Travelers Commercial Casualty Company --Travelers Commercial Insurance Company --Travelers Constitution State Insurance Company --Travelers Excess and Surplus Lines Company --Travelers Personal Insurance Company --Travelers Personal Security Insurance Company --Travelers Property Casualty Company of America --Travelers Property Casualty Insurance Company --United States Fidelity and Guaranty Company In addition, the IFS ratings of the following members of the Travelers Group have been affirmed at 'AA', with a Stable Outlook: --American Equity Insurance Company --Fidelity and Guaranty Insurance Company --First Floridian Auto and Home Insurance Company --Gulf Underwriters Insurance Company --Select Insurance Company --St. Paul Fire and Casualty Insurance Company --The Travelers Lloyds Insurance Company --Travelers Casualty and Surety Company of America --Travelers Lloyds of Texas Insurance Company Contact: Primary Analyst Douglas M. 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