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Can The Travelers Companies Benefit from American International Group's Weakness?

Insurer upgraded on expectation for increase in market share

by Jocelynn Drake (jdrake@sir-inc.com) 9/17/2008 12:04 PM

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The Travelers Companies (TRV: sentiment, chart, options) has earned the scrutiny of Wall Street recently as many expect the insurer to benefit from weakness in American International Group (AIG: sentiment, chart, options). This morning, Goldman Sachs Group Inc. analyst Thomas Cholnoky boosted the stock from "neutral" to "buy." Cholnoky believes that a number of competitors, including Travelers, will be able to gain market share across many of AIG's product lines. In addition to the rating boost, Cholnoky raised his target price on the stock to $57 from $49.

This upgrade follows one the stock received from Citi Investment Research analyst Joshua Shanker yesterday. Shanker lifted the company from "hold" to "buy," saying that both Chubb (CB) and TRV stand to gain from the troubles at rival American International Group Inc.

"In the event of a ratings downgrade ... a large amount of AIG's business may be in play, as insurance contracts are dependent on the financial stability of the carrier," Shanker wrote in a note to investors.

The analyst also lifted his price target on TRV from $49.50 to $51.50.

For those not familiar with the firm, The Travelers Companies offers personal auto and homeowners insurance. TRV's largest segment is commercial property/casualty insurance to businesses big and small. It is the second largest business insurer in the U.S., behind AIG, and provides commercial auto, property, workers' compensation, marine, and general and financial liability coverage to companies in North America and the U.K.

The company is a favorite on Wall Street. According to Zacks, the stock has earned 9 "buy" ratings and 3 "holds." This configuration leaves little room for additional upgrades. However, the average 12-month price-target stands at $55.83, according to Thomson Financial. Any additional price target upgrades could add some lift to the security.

Yet, not everyone is quite so optimistic when it comes to their outlook for TRV. Options players have loaded up on put positions, lifting the Schaeffer's put/call open interest ratio to 0.80. This reading is higher than 77% of all those taken during the past 52 weeks. In other words, short-term options speculators have been more pessimistically aligned just 23% of the time during the past year.

Technically speaking, the shares have been on a tear recently. The stock has busted through resistance at the 45 level � an area that capped the shares since late June. In fact, the stock rallied an impressive 11.8% on Tuesday on the expectation that it will benefit from AIG's weakness. The security is down more than 1% this afternoon as investors take some profits off the table. The stock has already put in a volatile session, fluctuating from a low of 46 to a high of 51. In fact, the 51 region could prove to be a key resistance area for the shares, as TRV was halted in this region in April and May.

From a longer-term perspective, the shares remain in a downtrend that started when they reached a peak in April 2007.

Overall, TRV is one stock worth watching as interest begins to move to those companies that could benefit from any AIG fallout. Traders should keep a close watch on the 51 level, as a break through resistance here could signal that the stock is poised to start a solid uptrend, which could be fueled by a reversal of sentiment among the remaining pessimists.

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Can The Travelers Companies Benefit from American International Group's Weakness?

Insurer upgraded on expectation for increase in market share

by Jocelynn Drake (jdrake@sir-inc.com) 9/17/2008 12:04 PM

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