Cons Outweigh the Pros for The Travelers Companies

Jul.11.11 | About: The Travelers (TRV)

Given restricted premium growth and pressure on underwriting margins, we are downgrading our recommendation to Underperform on The Travelers Companies Inc. (NYSE:TRV). Also, potential reserve additions for asbestos liabilities present another risk.

Premium growth remains reduced as a result of the adverse impact of soft market conditions. Given the challenging economic environment and a slow recovery, we expect top-line growth to remain muted though lower exposures. Travelers also continues to face reduced underwriting margins related to pricing and loss cost trends.

Travelers has a significant exposure to asbestos and environmental claims and related litigation as a result of high market shares of historical acquisitions. In the past, the company had to make reserve additions for its asbestos exposure. We are concerned that Travelers may continue to take extraordinary reserve additions for both asbestos and environmental exposure.

Counting on the positives, Travelers continues to benefit from its strong market position and economies of scale. The company spent a higher amount in buying back shares supported by a lower level of catastrophe loss and balance sheet strength. It also scores strongly with the credit rating agencies.

The Zacks Consensus Estimates for second-quarter 2011 is a loss of 60 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are respectively, $4.31 and $6.06 per share.

The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the stock over the near term.

Based in New York, The Travelers Companies, through its subsidiaries, provides a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the United States and in select international markets. It competes with Hartford Financial Services Group Inc. (NYSE:HIG) and W.R. Berkley Corporation (NYSE:WRB).