Travelers’ ratings also consider the financial flexibility and liquidity provided by TRV. Despite significant share repurchases since 2006, TRV maintained $2.2 billion of cash and marketable securities, and its adjusted debt-to-capital ratio remained moderate at 22.4% at March 31, 2012. However, TRV does maintain a sizable 12.8% of shareholders’ equity in intangible assets. Adjusting for tangible capital, the adjusted debt-to-tangible capital ratio was 25.7%, well within A.M. Best’s expectations at current rating levels. Interest coverage also remained strong through the first quarter of 2012 at 12.2 times.Offsetting these positive rating factors is the ongoing competitive environment within the property/casualty markets and Travelers’ exposure to natural and man-made catastrophes and emerging asbestos and environmental (A&E) claims. Being among the largest commercial and personal insurers and national property writers, the group has significant exposure to natural catastrophes, which was evident in 2011, and potential terrorist-related losses. Travelers has comprehensive reinsurance and risk management programs in place to manage its spread of risk and limit its overall exposure. Despite reporting a reduced level of earnings in 2011 due to a significant increase in catastrophe loss activity, Travelers managed to report adequate returns while maintaining strong liquidity and risk-adjusted capitalization that is a testament to the group’s conservative operating philosophy, strong business profile and strong risk management program. Like other leading carriers within the U.S. property/casualty industry, the group remains exposed to the potential development of A&E liabilities; however, more recent years have seen less adverse A&E reserve development emerge. Over the past several years, the group’s overall commercial lines reserves appear to have stabilized, as evidenced by favorable prior year loss reserve development, while redundancies have consistently occurred in personal lines reserves. The ratings of TCSA and TCSCE primarily recognize TCSA’s strong risk-adjusted capitalization, superior underwriting and operating performance and leadership position in the surety, fidelity and management liability segments. These strengths are partially offset by TCSA’s limited product diversification, areas of adverse 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 Canada acknowledge its superior risk-adjusted capitalization, favorable underwriting and operating profitability, excellent brand recognition and major profile as a specialty lines writer in the surety and corporate management liability segments. The ICR upgrade further reflects A.M. Best’s expectation that Travelers Canada will continue to produce favorable operating trends while maintaining a solid level of risk-adjusted capitalization. Offsetting these positive rating factors are the increased competition and continued soft market conditions in certain commercial lines, which A.M. Best believes the company is well positioned to withstand.The ratings of Premier recognize its strong risk-adjusted capitalization, historically favorable operating profitability and the additional operational support and financial flexibility afforded by Travelers and TRV. These positive rating factors are partly offset by Premier’s deterioration in underwriting results in recent years, 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 First Trenton acknowledge its adequate risk-adjusted capitalization, historically strong overall operating performance and benefits derived from its local market presence, as well as the additional operational support and financial flexibility afforded by Travelers and TRV. These positive rating factors are partly offset by First Trenton’s exposure to catastrophe losses, which have led to earnings volatility, single state geographic concentration, as well as an increased volatility in underwriting and operating results in recent years due to challenging market dynamics in New Jersey’s private passenger auto segment. The ratings of First Floridian recognize its strong risk-adjusted capitalization, highly profitable operating results in recent years, operating efficiencies and local market focus that enables it to respond effectively to issues associated with Florida’s personal lines market, as well as the additional operational support and financial flexibility afforded by Travelers and TRV. Partially offsetting these strengths are First Floridian’s exposure to catastrophe losses and single state geographic concentration in Florida.
While A.M. Best believes TRV and its operating companies’ ratings and outlook are well positioned at their current rating levels, factors that may lead to positive rating actions include continued strong underwriting and operating performance that outperforms peers over time. However, factors that could lead to negative rating actions include deterioration in underwriting and operating performance to a level below peers or an erosion of surplus that causes a decline in risk-adjusted capital to a level no longer supporting current ratings.For a complete listing of The Travelers Companies, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/051004travelers.pdf. The methodology used in determining these ratings is Best’s Credit Rating Methodology , which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Catastrophe Analysis in A.M. Best Ratings”; “Gauging the Basis Risk of Catastrophe Bonds”; “Rating Members of Insurance Groups”; “Rating Natural Catastrophe Bonds”; “Risk Management and the Rating Process for Insurance Companies”; “Understand Universal BCAR”; “Equity Credit for Hybrid Securities”; “Insurance Holding Company and Debt Ratings”; “Understanding BCAR for Property/Casualty Insurers”; and “The Treatment of Terrorism Risk in the Rating Evaluation.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.