JS Earnings Call Notes – RLI, PG

RLI Chief Coperating Officer Craig Kliethermes thinks their competitors are selling insurance policies at prices that they will regret in the future

The construction industry continues its slow rebound with increasing competition in the space. Local knowledge and policy terms are a big differentiator when writing contractors and we’ve seen some lack of discipline and lack of knowledge from competitors. This will likely come back to bite them over time.”

Alternative capital continues to flood the reinsurance market, reducing prices across the industry

Primary pricing on cat continues to be challenging even after factoring the relatively cheap capital provided by reinsurers and alternative capital. Rates on cat are down about 15% year-to-date, the second straight year of double-digit decreases. When we see larger players writing accounts at a 100% of expected model loss providing three months of extra coverage for no charge and readily deploying $100 million policy limits, we have to wonder if discipline will return anytime soon.  Memories are short, the paybacks are long in this business. We continue to offer responsible terms and conditions and pick our spots.”

And that they’ve been able to hire away talent from competitors going through mergers

“We’ve invested both in additional people and product across our casualty portfolio as we have seen some fallout of people from the M&A activity between quality companies. As you know, we believe the quality underwriters and claim staff who buy into our model are the bedrock of RLI.”

They are having difficulty writing new insurance policies which adequately compensate them for the risk they are taking on

Overall, casualty rates have remained slightly positive, large accounts are consistently under pressure; new business is challenging to find at the right price as everyone is very defensive of their best accounts.  We continue to see stiff competition and a general lack of discipline with what appears to be cash flow underwriting mentality in the space.”







Proctor & Gamble (PG) CFO Jon Moeller reduced the company’s growth expectations

“We continue to operate, though, in a very challenging and volatile macro environment. Market growth rates on both a volume and value basis have decelerated due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 3% to 4% globally. We now expect 2% to 3%.”

And currency continues to remain a headwind

“Currencies are weakening across the board, more than three-quarters of a billion dollars since the start of the fiscal and over a $1 billion after-tax versus year ago. This is on top of a $1.5 billion impact last fiscal year and nearly a $1 billion impact the year before. Across three years, FX has been a $3.5 billion impact over 30% of fiscal year 2013 core net earnings after-tax. Since the start of December, the current year FX headwind has increased by $300 million after-tax with a 40% devaluation in Argentina and additional 15% devaluation in Russia and nearly a 10% devaluation in Mexico.”

They expect these trends to continue for the forseeable future

“We expect these dynamics: slowing market growth, geopolitical hot spots, and a stronger dollar will continue to be part of our reality going forward.  Against this backdrop, we’re staying focused on big opportunities in our control, executing what is the largest transformation in our company’s history, without changing productivity, transforming our portfolio and strengthening category business models and innovation plans.”

And they’ve amended their marketing strategy in a substantial way

“Continued digitization has been and will be a big enabler of our overhead and manufacturing enrollment efficiencies. We’re reducing non-working marketing expenditures – costs that do not impact reach, do not impact frequency. Last year we reduced the number of agencies we worked with by nearly 40% and cut agency and production spending by about $370 million. We’re aiming for an additional $200 million of agency-related savings this year. These are non-working savings that enable us to invest in advertising and in trial of consumer-preferred products. We’re strengthening our working marketing programs — greater reach, higher frequency, greater effectiveness, at less overall marketing costs.”

They’re also investing marketing dollars around their key brands

“Last fiscal year in the US we increased total marketing and merchandising support behind Pantene by 440 basis points, increased Tide brand spending by 220 basis points and invested an additional 150 basis points in Fusion behind the new FlexBall innovation. This year we’ve made similar increases to advertising programs in the US on Shave Care, Fabric Care; in Brazil on Baby Care and Fabric Care; in China on Fabric Care and Oral Care. In North America alone, we’ve added nearly 100 basis points to advertising and in-store merchanting budgets since we started the fiscal year.”

The US Laundry detergent segment was an area of strength 

The US laundry detergent category is continuing to grow, up more than 4 points on a value basis across all outlets over the last 3 to 6 month periods. Within this, our share is growing. P&G’s US laundry detergent value share was up a point last fiscal year and was up a half a point in the December quarter.”

And they are finally gaining traction in their online Gilette shaving offering

“We’re also innovating online. With more men purchasing their blades and razors through e-commerce, we’re establishing Gillette as the online leader. While we were admittedly late to build out our online offering, Gillette Shave Club launched in June and is off to a very good start. We’ve increased our e-commerce share of blades and razors more than six points and nearly double the online consumption since launching Gillette Shave Club.”

Proctor & Gamble (PG) CFO Jon Moeller did say he saw a slowdown in China

Our second largest market both sales and profits is China. Here Q2 organic sales were again down high single digits in line with the Q1 trend. We’ve gotten behind in premium innovation which has been a contributor to our soft top line trends over the last several quarters.”

Proctor & Gamble (PG) CFO Jon Moeller highlighted the firm’s thinking on of currency hedging

There are three reasons we typically don’t end up choosing to hedge. Up to two-thirds of our foreign-exchange losses and a significant amount of our forward exposure is in currencies that are either non-deliverable or are very difficult to hedge. The Argentinian peso, Venezuela bolivar and the Ukrainian hryvnia are three examples.  Second, hedging is neither free nor cheap. Currency volatility in itself increases in significant ways this cost. So when you want it most, it becomes difficult to afford.  The last shortfall of hedging as the answer is that it solves nothing longer term. It also does nothing to help restore the margin structure of the business. A hedge simply defers volatility. When the instrument expires, you have the same hit with the same margin impact you would have had, had you not hedged. While it takes time and there is a lag between the hurt and the help, we typically look to pricing, sizing, mix enhancement, sourcing choices and cost reduction to manage FX impacts. We’ve historically recovered about two-thirds of FX impacts with pricing over time.”

Proctor & Gamble (PG) CFO Jon Moeller explained how he thinks about the trade off between market share and profitability

In terms of market share, our objective is balanced growth and value creation with the growth objective being over time at to slightly ahead of markets. So market share does matter but particularly in a time when we need to restore structural economics and in response to currency moves we can get ourselves in big trouble, as that becomes the driving metric. And so as we’ve said we’re prepared to lose some share in two situations.”