Travelers' (TRV) Senior Notes Rated By A.M. Best, Moody's

The Travelers Companies, Inc.’s (NYSE:TRV) recently issued senior unsecured notes received ratings from A.M. Best. The credit rating giant assigned Long-Term Issue Credit Rating (Long-Term IR) of “a+” to 4% $700 million senior unsecured notes. The notes are scheduled to mature in 2047. The outlook for the ratings was stable.

The insurer intends to deploy the proceeds from the issuance to pay back 5.57% $450 million senior unsecured notes that are scheduled to mature on Dec 15, 2017. The proceeds will also be deployed to partially fund the Simply Business acquisition. Though the debt-to-capital ratio is expected to deteriorate following the new notes issuance, the metric will remain within A.M. Best’s guidelines for the current ratings.

Earlier, Moody’s Investor Service – an affiliate of Moody’s Corporation (NYSE:MCO) – had assigned A2 rating with stable outlook to the senior notes. The rating indicates the company’s strong presence in the commercial, personal and specialty insurance businesses, excellent underwriting capabilities and a robust balance sheet (with solid risk-adjusted capitalization and ample liquidity). However, catastrophic exposure, exposure to long tailed casualty lines and intensified competition in personal automobile line are partial offsets.

Though a rating upgrade is unlikely in intermediate future, the rating agency may upgrade the ratings if Travelers’s adjusted financial leverage is in the mid-teens percentage range, earnings coverage of interest and preferred dividends remain above 10x, a considerable decrease in gross catastrophe exposure, and a major decline in risk of further adverse development from asbestos and environmental liabilities. However, the rating might be downgraded if equity capital falls more than 5%, adjusted financial leverage moves above 25% of total capital and 30% of tangible capital, pre-tax operating earnings coverage of interest expense is less than 8x, and unencumbered dividend capacity falls below 5x.

Travelers, however, has been benefiting from the low interest rate environment. The insurer has been consciously making efforts to lower its interest burden on borrowings by issuing debt in the low rate environment. In turn, these efforts will facilitate margin expansion. We note that though the Fed has recently raised rates – two consecutive hikes in the last two quarters – the rate environment remains low.

Shares of Travelers lost 2.03% year to date, significantly underperforming the Zacks categorized Property and Casualty insurance industry’s increase of 0.78%. However, we believe that the company’s solid operational performance, strategic initiatives as well as robust capital and liquidity position will drive the stock higher in the near future.

Travelers carries Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks from the property and casualty (P&C) insurance industry are American Financial Group, Inc. (NYSE:AFG) and First American Financial Corporation (NYSE:FAF) . Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

American Financial Group primarily engages in P&C insurance with focus on specialized commercial products for businesses. The company had a positive earnings surprise of 23.36% in the last reported quarter.

First American Financial provides financial services through its subsidiaries. The company posted a positive earnings surprise of 19.05% in the last reported quarter.

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