Fitch Affirms Travelers' Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed its ratings on The Travelers Companies, Inc. (NYSE: TRV), as follows:

--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 Outlooks are Stable.

KEY RATING DRIVERS

TRV's ratings are supported by a strong competitive position as a top five U.S. property/casualty insurer, solid earnings, prudent capital management and financial flexibility. Balanced against these strengths is TRV's continued investment concentration in municipal bonds.

TRV's market position and size/scale is characterized as 'Large' by Fitch given its nearly 5% market share of the property/casualty industry measured by net written premium. The company 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.

TRV's underwriting and return ratios remain at the upper end of the median guidelines for the 'AA' rating category within Fitch's sector credit factors. The combined ratio was 90.5% for the first half of 2014, improving from 91.4% in the comparable period of 2013 in spite of greater catastrophe losses. Improved pricing and a lower expense ratio were responsible for the better combined ratio.

While all three business segments reported solid results, Financial, Professional & International Insurance drove the period-to-period improvement. Catastrophe losses increased, amounting to 5% of premiums year-to-date 2014, up from 3.9% in the first half of 2013. All business segments reported favorable reserve development and the total increased modestly to 4.1% of premiums in the first half of 2014 from 3.8% in the first half of 2013. Annualized return on stockholders' equity (ROE) 14.6% for 2014, down from 15.8% in the same period of 2013 as stockholders' equity grew faster than earnings.

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. Other measures of capital strength such as operating leverage and net leverage ratios were 1.1x and 3.8x as of June 30, 2014 and are at median guidelines for the current rating category.

TRV's debt-to-capital ratio was 21.1% at June 30, 2014, which is within management's stated target range of 20%-25%. Operating EBIT covered fixed charges by 13.8x times during the first half of 2014, which is at the upper end of the range for Fitch's median guidelines for the current rating category. The next significant debt maturity is $400 million of senior debt in December 2015.

TRV repurchased 18 million common shares year-to-date June 30, 2014. The average price per share repurchased was nearly $88 and the total amount spent on repurchases was $1.6 billion, which represented 91% of net income over the period. TRV has $3.2 billion remaining capacity under its $5 billion share repurchase authorized at the close of the third quarter 2013.

TRV has maintained significant holding company liquidity with $1.8 billion in cash, short term invested assets and other readily marketable securities at June 30, 2014 compared to an estimation of one year's interest expense and common dividends of $1.1 billion. TRV's liquidity profile is supplemented by an $800 million commercial paper program that is backed by a three-year $1 billion syndicated credit facility.

The company carries a large investment allocation in state, municipal and revenue bonds, amounting to $35 billion or 54% of fixed-income securities as of June 30, 2014. This asset class is experiencing a heightened level of stress given the fiscal problems of many states and municipalities. Concerns over the municipal portfolio are largely mitigated by its diversification, high credit quality and $1.6 billion net unrealized gain as of June 30, 2014. In addition, nearly one-quarter of TRV's municipal bonds are 'prefunded', meaning there is an escrow to fund repayment, significantly reducing credit risk.

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 on a run rate basis.

--A sustained period of net losses or catastrophe losses out of proportion with the company's market share.

Key rating triggers that could lead to an upgrade include:

--Improvement in TRV's capitalization measured by a Prism score of 'Extremely Strong. However, given publicly traded companies' sensitivity around managing capital, this level of overcapitalization is unlikely.

--Sustained underwriting performance across business lines that is clearly better than the industry and similarly-rated peers.

The following ratings have been affirmed by Fitch:

The Travelers Companies, Inc.

--IDR at 'A+';

--Short-term IDR at 'F1';

--5.50% senior notes due Dec. 1, 2015 at 'A';

--6.25% senior notes due June 20, 2016 at 'A';

--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';

--6.25% junior subordinated debentures due March 15, 2067 at 'BBB+';

--$800 million commercial paper (CP) 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.

--IDR 'A+';

--7.75% senior notes due April 15, 2026 at 'A'.

Travelers Property Casualty Corp.

--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

--St. Paul Fire and Casualty 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

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', Nov. 13, 2013.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=857534

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Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA, +1 312-368-2054
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Gerry Glombicki, CPA, +1 312-606-2354
Director
or
Committee Chairperson
Jeff A. Mohrenweiser, +1 312-368-3182
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Douglas M. Pawlowski, CFA, +1 312-368-2054
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Gerry Glombicki, CPA, +1 312-606-2354
Director
or
Committee Chairperson
Jeff A. Mohrenweiser, +1 312-368-3182
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com