Best Upgrades Travelers Group Issuer Credit Ratings; Revises Outlook

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “aa” from “aa-” of Travelers Group, its P/C members and affiliate, Travelers Casualty and Surety Company of America (TCSA) and TCSA’s affiliate, UK-based Travelers Casualty and Surety Company of Europe Limited (TCSCE).

Best also affirmed the financial strength ratings (FSR) of ‘A+’ (Superior) of Travelers, TCSA and TCSCE. The outlook for the ICRs has been revised to stable from positive, and the outlook on the FSRs is stable.

In addition Best upgraded the ICR and senior debt ratings to “a” from “a-” of The Travelers Companies, Inc. (TRV), and revised the outlook to stable from positive.

Best also affirmed the FSR of ‘A+’ (Superior) and ICR of “aa-” of Travelers Guarantee Company of Canada (Travelers Guarantee), both with stable outlooks.

Finally Best affirmed the FSR of ‘A’ (Excellent) and ICR of “a+” of The Premier Insurance Company of Massachusetts and the FSR of ‘A’ (Excellent) and ICRs of “a” of Travelers of New Jersey Group and its P/C members, as well as the FSR of ‘A-‘ (Excellent) and ICR of “a-“of First Floridian Auto and Home Insurance Company. The outlook for these ratings is also stable.

The ratings of Travelers reflect its “strong risk-adjusted capitalization, favorable operating and underwriting results, proactive and comprehensive risk management, dominant market profile in commercial and personal (largely distributed through independent agents) lines, and quality management team,” Best explained.

“The ratings also acknowledge Travelers’ underwriting and financial discipline, relatively conservative investment portfolio, geographic and product diversification, and enhanced technology and internal information systems, which have improved its underwriting effectiveness and ability to service agents and customers in both commercial and personal lines.”

Best cited as “particularly noteworthy” Travelers’ “comprehensive enterprise risk management (ERM) program. The effectiveness of this program has been demonstrated over the past several years as Travelers continued to report strong underwriting and operating results and surplus growth (net of sizable stockholder dividends to TRV), despite a confluence of challenging events, including soft insurance market conditions, increased catastrophe and weather-related losses, an economic slowdown and volatile investment and capital market conditions. Furthermore, this stability has resulted in a competitive advantage for Travelers versus most of its competitors that were more negatively impacted by the aforementioned events.”

The rating agency also noted that Travelers’ ratings consider the “financial flexibility provided by TRV. TRV’s liquidity is significant, with $3.03 billion of liquid funds at March 31, 2010. The adjusted debt-to-capital ratio at March 31, 2010 remained moderate at 18.1 percent. However, TRV does maintain a sizable 14.5 percent of equity in intangible assets. Adjusting for tangible capital, the debt-to-capital ratio was 20.6 percent, well within A.M. Best’s expectations at current rating levels. Interest coverage also remained strong through first quarter 2010 at 9.7 times.”

As offsetting factors, Best cited “Travelers’ exposure to emerging asbestos and environmental (A&E) claims and natural and man-made catastrophes as well as the ongoing competitive environment within the property/casualty markets.”

Best added that, while Travelers “experienced volatility in A&E reserve development in years 2005 and prior, more recent years have seen less adverse A&E reserve development emerge. Furthermore, overall commercial lines reserves appear to have stabilized over the past several years, as evidenced by substantial favorable prior year loss reserve development. Being among the largest commercial and personal insurers and national property writers, Travelers has significant exposure to natural catastrophes and potential terrorist-related losses. However, risk management and reinsurance programs are in place to manage the company’s spread and aggregations of risk and limit overall exposure.

“The ratings of TCSA and TCSCE primarily reflect TCSA’s strong capitalization, superior underwriting and operating performance, relatively conservative investment portfolio and leadership position, namely, in the surety and fidelity segments. The ratings also reflect the benefits afforded by being an affiliate of Travelers, including significant operational support and added financial flexibility. These strengths are partially offset by TCSA’s somewhat limited product diversification and areas of loss reserve development on more recent accident years, as well as the negative impact that continued competitive property/casualty markets and weak macroeconomic conditions may have on premium and profitability levels.

“The ratings of Travelers Guarantee reflect its solid capitalization, excellent investment asset quality, sustained underwriting and operating profitability, excellent brand recognition, and strong business profile as a specialty lines writer in the surety and corporate management liability segments. Travelers Guarantee has sustained operating profitability driven by favorable underwriting results and a steady stream of investment income.

“Travelers Guarantee continues to capitalize on solid brand recognition and its beneficial affiliation and synergies shared with its U.S. parent and the global Travelers organization. Offsetting these positive rating factors are increased competition and continued soft market conditions in certain surety lines, which Travelers Guarantee is well positioned to weather.

“The ratings of The Premier Insurance Company of Massachusetts reflect its strong risk-adjusted capitalization, historically favorable operating profitability and the benefits afforded by being an affiliate of Travelers.

“These positive factors are partly offset by the company’s geographic concentration of business in Massachusetts and limited product scope (focused on private passenger automobile coverage), as well as the uncertainties associated with the recent automobile insurance reform in Massachusetts, which has resulted in increased competitive pressures.

“The ratings of Travelers of New Jersey Group reflects its adequate risk-adjusted capitalization, historically strong overall operating performance and benefits derived from its local market presence, as well as the benefits afforded by being an affiliate of Travelers. The positive factors are partly offset by the group’s moderate exposure to catastrophe losses and single state geographic concentration, as well as the declines in underwriting and operating profitability in recent years due to challenging market dynamics in New Jersey’s private passenger auto segment, stemming from increased competitive pressures and increases in severity of personal injury protection (PIP) claims.

“The ratings of First Floridian Auto and Home Insurance Company reflect its strong risk-adjusted capitalization, profitable operating results in recent years and local market focus that enables it to respond effectively to issues associated with Florida’s personal lines market, as well as the benefits afforded by being an affiliate of Travelers. Partially offsetting these strengths are the company’s exposure to catastrophe losses and single state geographic concentration in Florida.

For a complete list of the Travelers Group’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/060804travelers.pdf.

Source: A.M. Best