Fitch Affirms Travelers' Ratings; Outlook Stable
--Issuer Default Rating (IDR) at 'A+';
--Senior unsecured notes at 'A';
--Subordinated notes at 'BBB+';
--Insurer Financial Strength (IFS) on insurance company subsidiaries at 'AA'.
See the full list of rating actions below. The Rating Outlook is Stable.
KEY RATING DRIVERS
TRV's ratings are supported by a top-tier competitive position in the U. S. property/casualty insurance market, a conservatively structured balance sheet, a history of strong underwriting and good financial flexibility.
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.
The balance sheet is typified by a deep capital cushion, redundant reserves and moderate financial leverage. Capitalization at the operating company level scored 'Very Strong' on Fitch's proprietary capital model, Prism, which is considered consistent with TRV's 'AA' IFS rating. An increase in the Prism score to 'Extremely Strong' is unlikely given publicly traded companies' sensitivity around managing capital. Other measures of capital strength such as operating leverage and net leverage ratios were 1.0x and 3.5x, respectively, as of June 30, 2016 and are consistent with median guidelines for the current rating category.
Fitch expects share repurchase activity to reflect underlying profitability and will not reduce capital strength. TRV repurchased 10 million common shares at a total cost of $1.1 billion during the first half of 2016 (1H16) with $2.2 billion of capacity remaining under its share repurchase authorization.
TRV's financial leverage ratio was 22% at June 30, 2016, remaining within management's stated target range of 15%-25%. Operating EBIT coverage of fixed charges was 10.8x during the 1H16, which is down compared to 1H15 and modestly below Fitch's median guidelines for the current rating category.
All three business segments - Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance - reported favorable reserve development through the 1H16. Business and International Insurance reported favorable development of $231 million despite $82 million of adverse development from environmental reserves. TRV's period-over-period increase in favorable reserve development is in contrast to Fitch's expectation of declining favorable development for the property/casualty industry in general.
The combined ratio was 92.7% during the first six months of 2016, deteriorating from 89.9% in the comparable period of 2015. All three business segments reported underwriting profits and favorable prior-period reserve development.
Business and International is by far TRV's largest segment, accounting for 61% of total net written premiums in the 1H16. Workers' compensation and commercial multi-peril represent nearly half of net written premiums in the segment. Business and international reported a solid 96.2% combined ratio during the 1H16, deteriorating from the comparable period in 2015's 93.3% due to greater catastrophe losses.
TRV has market-leading positions in contract and commercial surety, private and non-profit management liability and community banks. This has been a consistently profitable business segment with each of the last six years producing a reported combined ratio below 80% with prior year favorable reserve development making significant contributions. Bond & Specialty reported a combined ratio of 60.8% during the 1H16, benefitting from 20.6 points of favorable reserve development compared to 74.9% and 7.3 points in the first half of 2015.
TRV's personal lines segment, offering auto and homeowners insurance, remains modestly sized as the ninth largest domestic writer by net written premiums. Importantly, the segment remains profitable while reporting strong growth in its auto line of business. The reported combined ratio deteriorated to 94.7% in the first half of 2016 from 87.3% in the 1H15 due to increased catastrophe losses and reduced favorable reserve development.
Annualized return on stockholders' equity (ROE) was 11.1% for the 1H16, down from 13.3% for the comparable period in 2015. Profitability is expected to be pressured in the near term as the low interest rate environment continues to challenge net investment income.
The company has maintained strong financial flexibility with $1.75 billion in cash, short-term invested assets and other marketable securities at June 30, 2016 relative to an estimated $1.1 billion in annual interest expense and common dividends.
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%.
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';
--6.25% junior subordinated debentures due March 15, 2067 at 'BBB+';
--$800 million commercial paper program at 'F1'.
MMI Capital Trust I
--7.625% Trust preferred due Dec. 15, 2027 at 'BBB+'.
USF&G Capital Trust I
--8.500% Trust preferred due Dec. 15, 2045 at 'BBB+'.
USF&G Capital Trust III
--8.312% Trust preferred 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:
--St. Paul Fire and Marine Insurance Company
--The Travelers Indemnity Company
--Travelers Casualty and Surety Company
--The Phoenix Insurance Company
--The Standard Fire Insurance Company
--United States Fidelity and Guaranty Company
--Travelers Casualty Insurance Company of America
--Farmington Casualty Company
--The Automobile Insurance Company of Hartford, Connecticut
--The Travelers Indemnity Company of Connecticut
--The Charter Oak Fire Insurance Company
--St. Paul Surplus Lines Insurance Company
--The Travelers Indemnity Company of America
--St. Paul Protective Insurance Company
--Travelers Casualty Company of Connecticut
--Travelers Commercial Casualty Company
--Travelers Commercial Insurance Company
--St. Paul Mercury Insurance Company
--Travelers Property Casualty Company of America
--Travelers Property Casualty Insurance Company
--The Travelers Casualty Company
--Travelers Constitution State Insurance Company
--TravCo Insurance Company
--Travelers Excess and Surplus Lines Company
--The Travelers Home and Marine Insurance Company
--Travelers Personal Security Insurance Company
--Travelers Personal Insurance Company
--Discover Property & Casualty Insurance Company
--Discover Specialty Insurance Company
--Fidelity and Guaranty Insurance Underwriters, Inc.
--St. Paul Guardian Insurance Company
--American Equity Specialty Insurance Company
--Northfield Insurance Company
--Northland Insurance Company
--Northland Casualty Company
In addition, the IFS ratings of the following members of the Travelers Group have been affirmed at 'AA', with a Stable Outlook:
--Fidelity and Guaranty Insurance Company
--Select Insurance Company
--The Travelers Lloyds Insurance Company
--Travelers Lloyds of Texas Insurance Company
--First Floridian Auto and Home Insurance Company
--Travelers Casualty and Surety Company of America
--Gulf Underwriters Insurance Company
--American Equity Insurance Company
Fitch is withdrawing the following rating as the company has merged into an existing entity (St. Paul Fire and Marine Insurance Company) and no longer exists as of Jan. 1, 2016.
--St. Paul Fire and Casualty Insurance Company