The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q4 2015 Results

Commercial marketplace remains remarkably stable

“Broadly speaking, the market dynamics in the commercial insurance marketplace continued to be remarkably stable.”

New CEO

“Let me take just a minute to comment on the leadership transition. What I suspect many of you want to hear from me is where do go from here? As I’ve explained to our leadership team, our challenge is this, to take today’s summit and make it tomorrow’s base camp.”

There are a lot of things that could change insurance markets over the coming years

“I guess what I would share with you is that we are very aware and deeply engaged in all of those things. So whether that’s – what’s going on with any of our competitors or what’s going on with technology or big data or driverless cars, consolidation among distribution, you could go on and on. I think what I would share with you is we’re very aware and deeply engaged…but as we think of everything that’s got the potential to change in this marketplace, nothing is going to change overnight. These are things that are all going to evolve and develop overtime.”

We think that the industry will continue to be focused on returns on products

“I’m not going to overly segment the portfolio. I think the backdrop to this is really the view of, do we think the industry is going to continue to fundamentally be focused on the returns on the products. And we think that’s the right way to be thinking about the business and we’re optimistic that the majority of the marketplace is actually looking at that.”

Focused on learning the personal lines business better

“So I had experienced managing essentially all of our commercial business and our businesses outside the U.S. what I haven’t had experienced with is, the personalized business on a relative basis not as much, personalized business in some of our functions like claim and IT and ops and things like that, risk control, so, I’m trying to spend a lot of time in those businesses and areas that I haven’t had the experience with, trying to spend a lot of time on the road out in the field with distribution and our employees in the field which has always been a priority of mine.”

Jay Benet

Continue to generate much more capital than we need to support our business

“We continue to generate much more capital than we need to support our businesses and consistent with our ongoing capital management strategies as you heard from Alan. We returned to almost $1.2 billion of excess capital to our shareholders this quarter through dividends of $183 million and common share repurchases of a little over $1 billion.’

Premium to surplus ratios are not really relevant anymore

“The premium to surplus ratio, I would view as not being relevant at all. I mean that was a ratio that was used at a time when rating agencies and regulators didn’t have the sophisticated models they have today.”

Brian MacLean

Pricing trends remained consistent

“Pricing trends remained relatively consistent with renewal rate change still slightly positive at the end of the year, while new business volume in our domestic business saw a modest increase.”

Conversations are tilting towards price declines

“A couple of years ago, almost every conversation was starting with some form of price increase even for the best accounts, because everybody saw where the trends were and that is gradually mitigated overtime. But even with those better accounts, the conversation start somewhere with trying to renew it at a modest decline or flat.”

Bill Heyman

We think funds have marked down their energy portfolios enough that there shouldn’t be a lot more downside

“During the year most funds wrote down their holdings and in some cases after the write-downs the price of petroleum rose but nothing was written up again. So we think a lot of these portfolios have been marked pretty hard. That said, if we had to predict either way, there is probably a little downside left in the portfolio but the portfolio isn’t that big that the amount are to be material then the aggregate.”

Doreen Spadorcia

Haven’t seen anything to suggest that higher miles driven is leading to more accidents

“So let me just talk a little bit about miles driven. The data shows that probably year-to-date the miles driven are up about 2.5% per capita and there is still a lot of debate about whether that makes a difference if it’s a long trip, a short trip, whether there is unemployment, whether you have safety features in your vehicles, and so you know we watch that closely but our long term trend of 3% anticipate that and we really haven’t seen anything that that particular item is causing us to view frequency differently today.”

ROE of 14.5%

“We are very pleased to start 2015 by reporting another strong quarter with operating income of $827 million or $2.53 per share and an operating return on equity of 14.5%. Our underwriting results remained very strong across all of our business units as evidenced by our combined ratio of 88.9%.”

Weather patterns have changed

we note that weather patterns do seem to be different. This change when combined with increased real-estate development, causes us to be very attentive to incorporating the real cost of weather uncertainty in our business. Part of the answer to this challenge above and beyond price and policy terms is helping our customers consider their risks and protect their assets in the most thoughtful ways possible. ”

Weather patterns continue to be unpredictable

“Regarding the weather, patterns continue to be unpredictable and that was clearly evidenced by another challenging quarter. Weather losses in the first quarter of 2015 were slightly higher than the first quarter of 2014, but more importantly in both years we experienced losses above our expectations, driven by the polar vortex last year and the extreme snowing cold in the northeast in 2015. Much has been written about the snowfall in Boston this year, which at over 110 inches was a record for the season. But the real story is that nearly 95 inches of this snowfall came in just a 30-day period. To show just how unusual that was the Washington Post cited a meteorologist who calculated that Boston should not expect to see another 30 days with that much snow for another “approximately 26,315 years.” Now, I’m not sure what they meant by approximately but suffice it to say was an extremely unusual event.”

We’re seeing significant cat losses from what we expect to be low severity events

“our expectations for cat losses are significantly higher today than they were just six or seven years ago. And importantly, historically we would have expected to have been below budget absent a fairly significant Atlantic storm. Unfortunately it has now become all too common for us to have significant cat losses from what we traditionally thought were the lower severity frequency events like tornado, hail and winter storms. So weather patterns are changing and accordingly we’re continuing to reassess and manage our property exposure and pricing in a thoughtful way.”

We’re not seeing loss cost trends vary from how we’ve underwritten them

“we’re not seeing anything as it relates to loss cost trends that’s surprising to us or different from what our assumptions are. ”

“But at this stage, our reserves, as we always do are best estimates of what we see today and we’ll just see how they develop going forward.”

We make reserve assumptions and then we decide to act based on the pricing that’s given to us in the marketplace

“Couple of times in your question, you referenced pricing and its impact on reserve. And we just don’t — pricing is not a factor as we set up reserves for our business. Our reserves are driven by costs. And the pricing what we sell it for is driven by the marketplace. And so the notion that our reserves are sit differently in a different pricing environment is just wrong; it’s just not correct.”

Private equity investments didn’t perform so well

“In private equity, the decline over the last two quarters was pronounced…for what is worth real estate this quarter performed very well at levels equal to first quarter 2014. Hedge funds performed better; the shortfall was in private equity and 50% of it came from 15% of the portfolio. So, that’s the story.”

Retention rate is a leading indicator of stability of the market

“To us, the leading indicator about lack of stability in the market and the way in which you can best assess the sort of near term is retention. It is really to me personally given my experience is remarkable that we had a record retention in our domestic business insurance business while still getting positive renewal rate. I just think that’s really quite remarkable and speaks to the stability of the business.”

Retention rate has come a long way

“I’m getting a little long in the tooth but I go back to the late 60s when retentions in the middle market were in high 60s; 70 was considered a pretty stable month. This quarter in the middle market, we were like in the 87%; it just shows you the magnitude of the difference and really I think just reinforces the way in which we run the business.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Returned $4 B to shareholders

“we returned over $4 billion in capital to our shareholders through dividends and buybacks, while still maintaining our significant balance sheet strength.”

Industry is much more stable than it used to be

“We remain optimistic about our ability to successfully execute these strategies. Our own observation is that the markets in which we do business remained fairly stable. For the last several years, we have shared with you that while we recognize that we could be wrong, we were skeptical of the concept of the old-fashioned severe insurance pricing cycle, where a bell to go off and it would be a few years of very high price increases and then another bell would go off and there would be significant price declines.”

Advanced analytics have contributed

“Advanced analytics and a more demanding regulatory and oversight environment have also meaningfully contributed. While there will always be changes in pricing both, increases and decreases in response to changes in loss costs, expense , interest rates or changes in real or perceived risk, as there are in many industries, we continue to believe that the amplitude of the cycle has narrowed substantially.”

Underwrite the account, don’t just blindly price to trend

“We have not issued an edict to the field that says get trend on every account. That would be a dumb thing to do. We say to them manage the long-term return given everything you know about the agent, the account, profile of that account and manage it thoughtfully and if that means that account is going to renew flat for a year or two, that is okay, so that is really the comment about stair step that I was speaking to.”

We really have no interest in the reinsurance business

“We really have no interest in the reinsurance business in the broadest sense, so to the extent that there are the things happening in the arena Bermuda or otherwise, we largely do not pay attention to it and I do not really have a view on the value that has created there. I am not knowledgeable I am not close enough to it to have a thoughtful view.”

We are a return driven organization

“We have always said about acquisitions and this hasn’t changed. It is very, very much the same. We are a return-driven organization, the principal view that we would take for looking at anything is what would it do to our return profile over time. Would it potentially improve our return dynamics and that could be either in magnitude or in volatility. To the extent there is diversification, geographic expansion and providing lower volatility returns that could meet the threshold also.”

We are big enough, we don’t need to be any bigger

“We are big enough, we do not need to be any bigger, but we are driven about returns, driven by them.”

If you tell your underwriters to grow, you’ll get growth

“Underwriters will do, good ones, will do with precision what you ask them to do, so you better be really good at knowing what you are asking of them….If you tell an underwriter grow, they will. We don’t tell them that, we tell them to find thoughtful ways to deploy capital. If they cannot, it is okay. It’s okay. No one will ever be asking you why they did not meet their volume budget, because first time you asked them that they will meet at the next quarter and all of us understand that you would never speak to loan officer that way at the back”

The feedback loop is so much faster than it was 20 years ago

“I can’t overstate how different that is than it was 20 years ago. It is just quite different. I think most importantly is that the feedback loop between what goes on in the field and what is really – knowledge at the home office to ways going on is stunningly shorter than it was 20 years ago, so the ability to act and react to changes not just cyclical big time changes, but local changes on offices, on market, on company in a local place is just that much better.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Hit a 15.2% ROE

“as demonstrated by our operating returning on equity of 15.2%. In addition to posting very strong financial results, the underlying dynamics in our businesses are showing very solid performance and give us continued optimism about our future financial results.’

Have reduced shares outstanding by 51% in last 8 years

“he Board of Directors initiated the current share repurchase program on May 2nd, 2006 a little over 8 years ago. On May 1st, 2006 the day before the board authorization Travelers market capital was $30.2 billion and we had approximately 696 million shares outstanding. Since that time, we’ve repurchased over 416 million shares at an average price of $56.50 per share issued a net amount of approximately 51 million shares mostly in connection with share-based incentive comp awards, and now have 331 million shares outstanding at the end of the current quarter, a 52% reduction in our common shares.”

Since returns are strong, can start to grow the top line

“as overall returns have become more consistent with our long-term objective, we have begun to see improving top line trends. We have said many times that volume is never our goal, but that we always seek opportunities to add business that meets our target returns.”

You can’t always depend on the kindness of strangers

“I have also been asked whether we would be interested in building a book of business and in effect arbitraging it against the reinsurance opportunity. And I am always mindful that when you take on a risk on the right side of your balance sheet, there is some permanence to it; and the reinsurance profile on the left may or may not be permanent. And you’ve got to be very cautious and careful about not finding yourself in an unreinsured position or in a mismatch, which can happen and has happened.”

I am hopeful that this business will prove to be less cyclical than it was in the past

“I am hopeful, maybe even cautiously optimistic, that we will not – and I said this by the way 10 years ago – maybe not 10, maybe 8 years ago. I personally believe that the property and casualty business will have a meaningfully lower level of cyclicality. Never said zero, but always said a less, lower amplitude of that cyclicality. There are a host of reasons why I believe that. Analytics and data are just one, but a very important one.

And I think it has proven on the way down before we entered into this cycle. I think it has been proven here on the way up. I am hopeful, maybe even optimistic, that that will turn out to be true on the way down. We don’t see anything in the way in which business is done at the point of sale in the market that would suggest that we are at a precipice, that would suggest that something fundamentally is going to change next month, next quarter, or frankly even next year.”

Wild cyclicality is bad for everyone

“Wild cyclicality up or down is actually bad for everybody. And better insight, better data, better analytics is actually better for everybody. You get better analysis, you get better, more thoughtful pricing related to risk.”

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

11% ROE

“Operating income was $673 million or $1.93 per share. Operating return on equity was 11.04% and we continue to make great progress on lifting our returns, largely in response to continuing very low interest rates and continuing volatile weather. Who would have thought that we’d be talking about a polar vortex in July and at 2.5% ten year treasury in 2014”

Decline in rate doesn’t mean the environment has gotten more competitive

“we just caution everyone from reacting to the decline in the headline number as an indication that the environment generally has become meaningfully and broadly more competitive.”

Retention is best indicator of a competitive environment

“We’ve always said, and have for many years, that retention is going to be the leading indicator of a changing competitive environment.”

In the 90s retention got down to the 60s

“I’ll go back to the last really difficult pricing environment that we had, which was back into the ‘90s, you’ll see retention rates in middle market drop down into the high 60s. And that really defined what was going on, there was tremendous churn in the marketplace. It didn’t happen overnight, but retention rates declined and that followed, that led, if you will, the overall rate dynamic”

Everyone needs to feel good to retain the customer

“the real emotional content behind retention is agent comfortable, market comfortable, customer comfortable, a terrific set of circumstances where everybody feels good and fair and equitable in the relationship. And that will encourage accounts to stay where they are. And that’s a really good thing, it’s good for the accounts by the way.”

The industry has evolved over the last 20 years

“I think much better management in the industry than wasn’t the case 20 years ago. You look at capital deployment philosophies; it’s different than it was 20 years ago.”

“And I’ve listened to other companies and how they report, I don’t think we’re unique in that regard, I think – I listen to other companies and I’m impressed by what I hear and the nature of controls and procedures and the thoughtfulness and I think is a consequence the magnitude – there’ll always be some cyclicality here and there’s cyclicality in every business. But I said, coming close to probably 8 or 9 years ago, I thought that the amplitude on the way up as well as the amplitude on the way down were going to be much more narrow.

I think that was true obviously on the way up we will now see it on the way down. So that’s what I think, and we’ll find out, I think the leadership in this industry has come to understand that attempting to grow market share by marginally changing price, and actually creating share holder value from it is impossible. I think about it all the time, and I don’t know how to do it and I’m not sure anybody else does. And so we’ve all learned within our own cultures and our own environment and our own strategies, how to manage our businesses to create shareholder value, that’s what we’re supposed to do.”

A storm can hit commercial lines unevenly

“when you get into tornado, hail the, the impacts in the commercial business can be really random and volatile.

Personal lines you have a storm and it hits the neighborhood and we can kind of see the claims. In business insurance you can hit our risk or not hit our risk and it could dramatically change the number. So that’s the perspective relative to kind of normal. PI about normal this quarter BI a little bit worse than normal.’

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Strong ROE

“Our operating return on equity of nearly 18% in the quarter is the highest since the fourth quarter of 2009 when we posted just over 18%.”

“record net and operating income per diluted share of $2.95, operating ROE of 17.8%, and a GAAP combined ratio of 85.7% – were exceptional.”

Look at everything, but you don’t need to take on every risk

“Our own situation is really unchanged, which is that we’ll look at anything because you always learn by whatever you look at, but our interest is very selective.”

No sense in getting bigger just for the sake of being bigger

“We’ve achieved a level of performance and returns and profitability that we at least domestically don’t need to be any bigger to be successful. If we can be and continue to be successful, that’s fine. Being bigger and being less successful is a bad trade-off, so we’re always evaluating whatever we look at in the context of return on invested capital – on invested capital, importantly. It’s margins, profitability, all that, so I’d say that our interest domestically remains unchanged but relatively highly selective.”

Just because high ROE doesn’t mean that’s the new run rate, we’re still not at mid teens long term ROE

“We’re not there – most definitively, we’re not there. In order to achieve our goal, and it’s not vague by intention, it’s vague because our business is simply not as precise as some people tend to think. This mid-teens ROE over time, to achieve that, you’re going to have to achieve periods of time where you exceed mid-teens, because there will be good weather, there will be bad weather, and that’s going to move back and forth. So we still have to make progress, so there’s no particular change in our approach, our philosophy, what we’re trying to achieve.”

Not even sure mid teens ROE is possible in this interest rate environment

“At this level of interest rate, I’m still not 100% convinced that it is achievable in today’s environment.”

It’s critical to have a strategic goal

“We said several quarters ago – I’ll reiterate it today – it remains an aspirational goal. I think that it’s critical in an organization to express a strategic goal, and absent something fundamentally changing that’s permanent, sticking with it. It’s not just words that we use here in a webcast; it’s embedded in the systems by which we price product, it’s embedded in the systems by which we evaluate risk selection. It’s what people in the field, underwriters, understand their mission to be, so we don’t mess with it lightly. We leave it as is because it takes so long to get the DNA of an organization to reflect these strategic initiatives.”

PC insurance less cyclical

“We’ve been talking about much less amplitude in the cyclicality of our business for a lot more than three to five years. I think you can go back almost 10, certainly 8 where it began to get increasingly clear to us that the factors that we thought had contributed to that remarkable cyclicality were being moderated.”

Better data

“They were much better data. I know that we led that effort because of our history, but we’re not unique in the sense of one and only in that regard – better data, better analytics broadly across the business and the industry, particularly amongst the best competitors.”

Sarbanes Oxley helped mitigate the cyclicality too

“I think that Sarbanes Oxley actually had a meaningful impact on our business. It brought boards of directors into the discussions of reserve setting and the controls and procedures behind it. Those were really good things not because they changed bad behavior, because you can presume that in my comment – I don’t mean it that way – but it improved the processes.”

If you sacrifice margins for growth, you end up sacrificing returns on capital

“We also don’t believe that you can on the margin grow your business by cutting price marginally. I think – we think that’s just a fool’s approach to the business. If you really want to use price as that type of a competitive approach, you’ve got to cut it to the point where you’ll accept materially lower returns than anybody else. That will change it, and my guess is it will be at a level of profit that is simply unsupportable for the long term. So we at least, we reject the notion that you can moderate pricing to grow your business.”

Don’t grow by cutting price, grow by identifying where you have a competitive advantage

“We try really hard to grow our businesses, and in many cases we’ve been extremely successful. It’s not been based on price; it’s been based on risk selection – importantly, identifying the competitive advantages that you have in your business and applying them more broadly to business opportunities that arise. “