We are upgrading
The Travelers Companies Inc
(
TRV
) to Neutral from Underperform on the back of strong first-quarter
results.
Operating earnings surpassed the Zacks Consensus Estimate as
well as the year-ago numbers largely on lower share count due to
share repurchases. Top line benefited on the heels of increase in
premiums earned (attributable to pricing gains), though lower net
investment income was a partial offset as low reinvestment rates in
the fixed income portfolio weighed on the performance. Moreover,
increase in net favorable prior-year reserve development and
decrease in cat losses came as a respite.
As the second-largest writer of auto and homeowners' insurance
through independent agents and the third-largest writer of
commercial U.S. property-casualty insurance, we believe Travelers
will continue to benefit from its strong market position and reap
economies of scale. Its Business Insurance segment experienced
positive rate change on renewed accounts for the fifth consecutive
quarter.
The company remains focused on enhancing shareholders value via
share repurchase and dividend increase. The company has
continuously increased dividends over the past few years. Based on
the strength of its financial position, the company hiked its
quarterly dividend by 12%, besides spending $350 million to buy
back 6 million shares in the first quarter. At March 31, 2012, the
company had $3.26 billion of capacity remaining under its share
repurchase authorization.
Travelers also scores well with the credit rating agencies. A.M.
Best reiterated the issuer credit rating (ICR) and senior debt
ratings of 'a' of the company on the back of its operating
and underwriting results, strong risk-adjusted capitalization,
strong market profile in commercial and personal lines and
financial flexibility and liquidity. We believe, the company's
strong ratings scores will help retain investor confidence and
augment its business going forward.
On the flip side, low interest rate environment continues to
weigh on net investment income and the recent quarter was no
exception to it. The reported quarter marked the fourth consecutive
quarter of decline in net investment income. Lower reinvestment
rates in the fixed income portfolio were primarily responsible for
the dip.
Net investment income from the fixed income portfolio also
declined due to weak reinvestment rates and lower average invested
assets due to the company's common share repurchases. We do not
expect any uptick in the net investment income if the weak interest
rate environment persists.
The quantitative Zacks #3 Rank (short-term Hold rating) for the
company indicates no clear directional pressure on the stock over
the near term.
Travelers competes with peers like
American International Group Inc.
(
AIG
) and
W.R. Berkley Corporation
(
WRB
).
AMER INTL GRP (AIG): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis
Report
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