Travelers 2Q17 Earnings Call Notes

Alan Schnitzer

An active weather year

“This has been an active weather year, with first half after-tax catastrophe losses of $488 million or 6 points on the combined ratio. To put that in some context, this was our highest level of first half catastrophe losses since 2011. While relatively high, the level of weather losses this quarter and year are within an over time range that we plan and price for. And we are confident that we are appropriately managing our exposures.”

Piloting investments in AI and robotics

“We are focused on our digital agenda on advancing the way we leverage data on exploring and piloting smart investments and things like AI and robotics on setting the standard in terms of the experience for our customers and distribution partners and as always on being as productive and efficient as possible. So as much as we are relentlessly committed to day-to-day execution we are just as committed to our long-term strategic position.”

Lowering price to generate incremental premium is a fools errand

“Yes, Josh. We have always thought that lowering price to generate incremental premium is a fool’s errand, because we operate in a very competitive marketplace and you just end up with same relative market share at lower profitability. And once you lower the price and consequently lower the margins on the business you are keeping, then you got to write a whole lot of new business to get that margin back. So, we don’t feel like that strategy. “

Travelers 4Q16 Earnings Call Notes

The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q4 2016 Results

Cost of capital goes up if risk free rate and borrowing costs go higher

“And so there are couples of things going on that could impact cost and capital. For example, if the risk free rate goes up, cost of equity goes up. If the tax rate goes down then our after-tax cost of borrowing theoretically goes up. There could be other things in a change in tax policy. But if you just started with those two simple assumptions, you would look at that and say, gee, if the risk free rate goes up and if the tax rate goes down, you would speculate that our overall cost of capital would go up. If our overall cost of capital went up then our return objectives would go up with it.”

Brian Maclean

Combined ratios above 100 in personal lines

“So instead of taking you to a detailed reconciliation of the quarter, it would be more productive to focus on the full year ratios. For the full year combined ratio, we had a 104.0 and the underlying combined ratio was 101.8. These were both higher than we expected and at a level that does not meet our target returns. For full year 2016 underwriting combined ratio included about 2 points from the 10-year effect that we discussed last quarter. As we said then, when you are growing your book of business, the higher levels of new business will temporarily increase the combined ratio and the impact of 10 year in the year was as we expected.”

Deterioration is because of a trend towards more severe accidents

“The deterioration is primarily driven by an increase in the trend towards more severe accidents. Some of the factors that lead us to this observation are a higher percentage of claims involving distracted driving, more accidents involving higher speeds and more accidents on highways and at intersections. This is also consistent with recent industry data. For example, the National Safety Council report of significantly higher traffic cyclicalities in 2015 and 2016, a two year trend that we haven’t seen in decades.”

We are taking action to increase rates as a response

“In response to these developments, we are taking action in the marketplace. Our primary response is to file for increased base rate. And in November and December of 2016, rate increases were implemented in 16 states, which cover about 60% of our quote volume.”

Auto is a long tail business

“we’re talking about very recent accident periods for a very long tail-line of business, so just as a perspective. At the end of 2016, we have paid less than 15% of what we believe the ultimate losses will be for auto bodily injuries. So, it’s by nature a long tail-line of business, so it takes a while to play-out. We’re looking at all of the activity that we see, both in frequency and severity of loss, cut every which way you can think of, and looking at frequency activity, incurred losses, the paid losses.”

We’re seeing another increase in the trend of severity of bodily injury

“We got to ’13 and talked about a elevated level of bodily injury, and we were hoping that that would remain pretty constant. And we went through about two year period, 2013, 2014 into 2015, where we saw very constant, again elevated levels but constant with our expectations, of what we were getting in bodily injury. In fact, 2014 has developed favorably and we continue to see that. And what we are talking about now is another increase in that trend. And we’re talking about very, very recent accident periods, and looking at the data and responding, I think pretty quickly.”

Travelers 3Q16 Earnings Call Notes

The Travelers Companies’ (TRV) CEO Alan Schnitzer on Q3 2016 Results

Renewal rate has improved in domestic business insurance

“In domestic business insurance, renewal rate change has improved a little bit for two sequential quarters led by our middle market business where rate has also increased sequentially month-to-month in the quarter. Underneath that middle market, we again achieved rate gains in excess of loss trend on our poorer-performing segments.”

Auto injury severity is increasing

“Looking at auto profitability, the underlying combined ratio for the quarter was 101.1, up about 5 points from the prior year. About 4.5 points of this increase was due to the year-to-date impact of an adjustment we made to the loss ratio related to bodily injury severity for 2016, which, for the most part, reflects higher severity in our smaller claims. About 3 points of that increase relates to the first two quarters of this year. With respect to this change, I want to emphasize a few points. First, as Alan said, we believe this is environmental in nature; that is we are seeing it across all our auto products both in personal and commercial lines. Second, what we are seeing is from the last four accident quarters and for a long tail line like auto liability, that is very recent activity…for reference I’d say look back to commentary we had going back as far as 2011, 2012 into 2013. We were talking about liability trends, what we were seeing in the auto product relative to distracted driving relative to increased litigation relative to increased utilization of medical diagnostic tools and the impacts on bodily injury. And to be totally honest, there were a couple of years there where we were getting a lot of questions from folks on this call about why are you seeing something that no one else is talking about? And over the years, I think everybody has been talking about it.”

Still early to say impact from the storm

“Kai, we anticipated that and we’re happy to give you an early range but I do want to indicate that we’re just three weeks post storm, so it’s still early for us. And it could be influenced from here through the end of the quarter by large BI claims that come up that we haven’t identified yet. So we would say our range at this point is $75 million to $150 million and that’s pre-tax. And again, the risk factor going forward is going to be claims that we haven’t seen or don’t know of yet but they could come in between now and the end of the quarter.”

Travelers (TRV) Q1 2016 Earnings Call

Travelers (TRV) CEO Alan Schnitzer said some catastrophe losses hurt the company’s insurance results
To put the weather in some context, our catastrophe losses were about $100 million, after tax, higher in the quarter than they were last year, and these are the highest first quarter cat losses we’ve had since 2010. The timing of catastrophes is, of course, unpredictable, but this level of weather volatility is certainly within our playbook. We’re confident in our ability to model and manage our exposures and that we’re pricing appropriately for the risk. In this case, it just so happens that, by design, we have a healthy market share in the Dallas/Fort Worth Metroplex, where severe hailstorms were concentrated. “
Travelers (TRV) CFO Jay Benet partly blamed capital markets for decrease returns in the insurance company’s investment portfolio
Our net investment income was $439 million, after tax, this quarter, which was $39 million lower than the prior year quarter. In addition to the lower fixed income returns, non-fixed income NII was down $15 million after-tax, due to lower hedge fund returns that resulted from the more challenging capital market conditions in recent months.”
Working on a pilot project to determine whether to offer car insurance to Uber drivers
Second, we did roll out, in a couple of pilot states, for use for individuals when they’re using their car for Uber. And what it really does is, it covers what’s called the trolling period. Until there’s a match, then the coverage is clear that there isn’t any personal insurance coverage.”

Travelers 4Q15 Earnings Call Notes

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.”


“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.”

JS Earnings Call Notes 10.22.2015 – Halliburton, RLI, United Technologies, Bank of New York, Travelers, Pentair, iRobot, General Motors

Halliburton (HAL) President Jeff Miller says their business remains pressured but they ultimately expect a recovery in their end markets

“The pumping business in North America is clearly the most stressed segment of the market today, but it’s also the market that we know the best. We know our approach works when the market turns, and it will. This is the segment that we expect to rebound the most sharply.”

They expect oil drilling activity will remain tepid for the rest of the year

“We believe these prices are clearly unsustainable, but as we have been saying all along, pricing cannot stabilize until activity stabilizes. Looking ahead to the fourth quarter, visibility is murky at best. Based on current feedback, we believe most operators have exhausted their 2015 budgets, and will take extended breaks, starting as early as thanksgiving. Therefore our activity levels could drop substantially in the last five weeks of the year.”

They remain in active negotiations with the Department of Justice to gain regulatory approval to complete their Baker Hughes acquisition

During the quarter, we announced the second tranche of businesses to be marketed for sale in connection with the acquisition of Baker Hughes, and we expect that marketing process to begin shortly. On the first tranche of divestitures, we have now moved into the negotiation process. On the regulatory front, during the quarter, the timing agreement with the DoJ was extended by three weeks, and accordingly, Halliburton and Baker Hughes agreed to extend the closing date to December 16th.”

Halliburton (HAL) CEO David Lesar said their customers always want to drill 

And I think one of the things that our customers demonstrate, and believe me, we love all our customers. If they have cash they are going to spend it.”

Over half of the equipment is idled right now

If we look at the amount of horsepower that’s idled right now, just on the side lines, about half of it is on the sidelines today in terms of stacked equipment. And that’s equipment that’s not getting any maintenance, and it’s being cannibalized for parts.  The other factor that we see now, service intensity continues to increase actually on a per well basis. And so, that’s yet again harder on the equipment that is working. So if we look at what’s stacked today, we think about half of that equipment stacked today will not be ultimately serviceable. So that maybe in their estimates four to six million horsepower out of the market in ’16.”

Halliburton (HAL) CEO David Lesar ultimately expects the pricing of their services to recover

There are some key customers as Jeff said in key basins that have been very loyal to us, and we want to stay loyal to them. We know they are going to survive. We know they have good assets. We know they are going to get a budget reload, and we know that they want to take advantage of the services pricing that’s out there today, even if I don’t like that service pricing, it is there. It’s a fact of the market. This is a long-term game we are in. These are long-term customers we have. We typically make good money from them in good times, and I’m not going to walk away from them in the kind of times we are in today because it will pay off in the long run, and I think that’s in my view the smart way to approach this.”





RLI Executive Vice President Craig Kliethermes said the firm’s superior underwriting continues to shine

RLI was founded on the promise of finding really smart disciplined insurance professionals and aligning their interest with shareholders. The culture of underwriting excellence will continue to be the focal point of our organization.  We posted an 81 combined ratio for the quarter which leaves us at 83 year-to-date. All of our segments came in under a 90 combined ratio.”

And they have been able to slightly increase rates  

Rates overall have been slightly up about 1% to 2% for the quarter and year-to-date mostly led by rate increases on all wheels based businesses.”

One of the strongest sectors of their business has been automobiles and trucks where they have an excellent reputation 

In casualty we continue to be led by our transportation business. We grew over 40% in the quarter and are up over 20% year-to-date while margins remain good. Rates were up nearly 10% for the quarter driven mostly by the public auto sector. While many have suffered terrible fates in the wheels business our results have evidenced, our underwriting discipline, and that relationships and expertise really do matter in this business. We had several large customers return to us this quarter as a result of poor service and claim handling by our competition.”

Catastrophe pricing remains weak  

Cat pricing continues to be down double-digits, went down a little more than quake. A very challenging environment to write much new business, the focus is to keep the best renewal accounts.  The broader market in general does not seem rational and disciplined to us.”

RLI Executive Vice President Craig Kliethermes reiterated what separates his company from the competition

We regularly see flights to markets that appear to produce exceptional underwriting results. It isn’t that easy, whether it be surety or more generally to specialty space, it isn’t the title specialty business that automatically earns you good underwriting results. You can’t get specialty results without specialists. That is what we have at RLI, specialists with a narrow and deep expertise and underwriting and handling claims that in a particular niche market that should differentiate us in all market cycles particularly in the more difficult troughs.”





United Technologies (UTX) CEO Greg Hayes said the sale of the Sikorsky helicopter unit reduces the company’s overall reliance on government spending

“When the Sikorsky sale is complete, the UTC portfolio will be focused on its core businesses, and that is supplying innovative game-changing technologies for the buildings and aerospace systems industries. Going forward, UTC will have a better organic growth profile, along with higher operating margins and a stronger, more predictable cash flow. And defense exposure for UTC goes from 19% to 13% on Sikorsky.”

United Technologies (UTX) CEO Greg Hayes highlighted some of the secular growth trends which will fuel their end markets 

“Thinking about Buildings and Aerospace portfolios, we’re very well positioned. Otis is the best elevator business in the world. And I say that because we’ve got 1,800 branch offices, we’ve got 3 million unit installed base and we service over 1.9 million elevators on a daily basis.  Our Aero backlogs are at their highest levels ever, giving us confidence that Pratt and UTAS can deliver the strong revenue growth goals that they’ve laid out.  The long-term outlook remains solid, innovative products, industry-leading franchises, global scale and solid market fundamentals in our core businesses, driven by revenue passenger mile growth and the global expansion and continued urbanization of the middle class.”

While China continues to decelerate  

In Asia, we continue to see the China market weakening. Growth in fixed investments has slowed considerably. Otis new equipment orders in China were down 19% in the quarter after being down 11% in the first half of 2015.”

And they expect next year will remain a challenging sales environment as well for the entire company

“Net-net, as Greg said last month, 2016 will likely be another challenging year. Earnings in three of the four segments – Otis, Pratt, and UTAS – will be flat to down even with the pension benefit.”

United Technologies (UTX) CFO Akhil Johri said almost half their revenue is recurring

Also we have a significant base of recurring revenues, which today account for about 45% of UTC sales.”

United Technologies (UTX) CEO Greg Hayes said the company operates with a 30 year time horizon

It’s simply a recognition that while we have to make investments in the short run, this is really a 30-year time horizon. We’re investing in engines today, we’re investing in elevators today that we’re going to service for 30 and 40 years.”

United Technologies (UTX) CEO Greg Hayes acknowledged they have lost market share to elevator competitors, such as Kone

And so to your point, KONE has gained share on us in China. We’re not happy, we’re going to go after that and not just China, really it’s globally.  It’s about having great product and a great service team and great leadership and we’ve got that across-the-board in Otis today and I’m confident we’re going to be able to regain share without sacrificing a lot of margin.  The loss in China market share, to some extent, was driven by a conscious decision on our part not to play in certain segments.”

And they are remaining disciplined when evaluating potential acquisition opportunities 

“We have not seen or found an asset of quality that we like quite yet, but we continue to look. And it ultimately comes down to, can we buy a business and create real value for the shareowners without having to give all of that value to their shareowners in the firm  in the form of a very high takeover premium.  I think what’s off the table today is the bigger deal. We’ll do deals in kind of that $1 billion to $5 billion range, things that we can finance with existing cash or cash flows or what we have on the balance sheet.  So over time, as the UTC share price recovers back to towards where intrinsic value is, we may think of a bigger deal.  We’ve closed on a couple of deals and we’ve walked away because the value wasn’t there at the end of the day after we did due diligence and we did the right thing.”





Bank of New York Mellon (BK) CEO Gerald Hassell said the firm is finding it a difficult environment to grow revenue so they are focusing on what they can control which is namely operating expenses

Our priority is executing on our business improvement process that leverage our scale and expertise to deliver efficiency benefits to clients, while reducing our structural costs. Our success on this approach is reflected not only in lower expenses in nearly all categories, but in our industry leading market positions across all of our businesses.  And we have also been analyzing our current real estate portfolio to reduce cost. And we are selecting locations and workplace standards that enable collaboration and innovation.”

Bank of New York Mellon (BK) CFO Todd Gibbons said due to negative interest rates in Europe, the bank is charging some of its customers to hold their deposits

There is a slight decline, in deposits since we initiated that strategy, but not much. We did up the charge for some of those deposits in the third quarter, late in the third quarter. And I would say just seeing a modest decline, if any.”

And they plan on improving their advisor retail offering

“Absolutely, what I would point you to is that while we are the sixth largest asset management in the world, in terms of U.S. mutual fund families, we are currently 37th. So we have all of the investment capabilities or a large majority of the investment capabilities in-house that is used by investors that use mutual funds, financial advisors and individuals, ultimately as the end users. But our platform to reach advisors is below where we think it should be or where it could be to really improve our distribution of our investment capabilities through that channel.”





Travelers (TRV) CEO Jay Fishman said analytics and pricing policies appropriately have been a huge competitive edge for the company

But as I reflected on this quarter’s earnings as well as the string of quarters that we put together over the recent past, my hypothesis is that the competitive advantage of analytics, risk selection and pricing management have had a meaningful effect, particularly cumulatively. I can’t prove it to you because I don’t know what our results would have been if we weren’t just good as we are. But I do believe that one of the important factors that has led us to produce industry-leading returns is the fact that we have managed the changing rate environment over the last five years as effectively as we have.  I am certain that it has mattered and you should know that the commitment to analytical insight that produces these advantages is very much a part of the DNA of this place.”

Travelers (TRV) CEO Jay Fishman said their customers tend to be some of the older demographics

And we know that for example from our experience of being the GEICO partner for as many years as we have been, the customers that buy directly are on average, now it doesn’t mean that we are on lots of exceptions but on average they are younger, more single, more single cars, more minimum limits, they are a different driver than a higher end older, importantly older driver, the sort of type that was typically been a Travelers customer. So you can speculate and it’s all it is, is it possible that distracted driving is impacting that younger group disproportionately relative to the older drivers.”

Travelers (TRV) CEO Jay Fishman reiterated the company’s acquisition strategy 

And I would just add that in the context of acquisitions, we’ve been actively engaged with anything that’s transpired, we’ve established views of value and where value can be created, and points at which it can be and if we would have find the transaction, that would fit strategically, that would enable us to either reduce the volatility of our own returns or potentially even improve them and of course, that’s hard being the highest return competitor in the industry, but if we can find that, we’re not uncomfortable moving ahead, where we have done a few transactions in our lives and feel that we have got the skill base to execute and so we will always keep looking.  





Pentair (PNR) CEO Randall Hogan said customers are delaying their purchases and deferring maintenance

“Core sales in all four Valves & Controls sub-verticals were down double digits with the steepest declines in mining. We also saw weakness in our short cycle business, which is further evidence that customers will not only cut capital expenditures this year but are also deferring some maintenance turnarounds and operational expenses.”

Pentair (PNR) CFO John Stauch elaborated on 2 distinct distribution strategies for the company

Our customer buys from us either in a short cycle, I need it quickly, I want it for a installed based or MRO aftermarket application, or I’m seeking an engineer to order application or a project. So, our sales force has been working to meet those customer needs in that regard.  So, what we’ve done is we’ve aligned the two value streams to support that within the business around those two buying proposals, which starts to identify the needs to serve the short cycle, which means I need local inventory, I need to get it to you in 24 to 48 hours, I have to have service centers to be able to give you the service you need. And then on longer projects, I can generally ship that from anywhere in the world, and I can begin to work and then engineer the order to the customers’ needs.  The standard is obviously a higher margin, and you’re buying something that you need on a like-for-like basis.”





iRobot (IRBT) CEO Colin Angle said the business saw weak sales in Japan

Q3 revenue met our expectations, due to continued strong growth in the United States and China, partially offset by softness in Japan. Third quarter earnings exceeded expectations, primarily because we decided to curtail the planned incremental Japan marketing investment, as the overall economic climate in the region was dampening its impact.  While we are experiencing weakness in a few isolated international markets, we expect the macro impact to be temporary.”

Despite increased competition into the robot vacuuming category, they claim they are still leading the category

While we are experiencing weakness in a few isolated international markets, we expect the macro impact to be temporary. Global spending in robot vacuum cleaners continue to grow, and we are maintaining our leadership position in the market, despite several recent entrants in the category.  As the vacuuming market continues to grow, there are new entrants, but they have not impacted our share, and so I think that that’s the key message that we have been able to successfully raise our performance bar swiftly enough that, we feel like we are increasing our performance lead over the competition, and the market share figures support that confidence and the performance of our products.”

iRobot (IRBT) CEO Colin Angle referenced one of their products high ratings on Amazon as a validation of the quality of the end product

And the performance of the robot has been outstanding, and it is a huge amount of technology that we just put on the marketplace, so that the fact that we are getting very high ratings on Amazon, suggest that the tremendous amount of work we went into ensuring that connecting the app and the ease of use of the app and the navigation technology ability to function in real world environments, is all proving out in a very positive fashion.”

And they are collecting data direct from their robots on how and when the products are being used

We actually feed back to our customers, the ability to monitor when the robot came out, and how much area that it covered. Those are things that we also can collect and understand. So just plain usage data and run time data are two of the earliest things. Also if you call our customer service line, with an issue on the robot, the robot will be able to give us some information, as to its own state. And so, those are all very-very helpful in order to improve customer confidence and customer experience.”





General Motors (GM) CEO Marry Barra cited the company’s improved emphasis on investment returns as opposed to the old strategy of sales volume

“Adjusted automotive free cash flow of $0.8 billion reflects seasonality and the settlement of several uncertainties, and our 26% return on invested capital based on a trailing fourth-quarter average demonstrates that our disciplined capital allocation is paying off. It had $3.3 billion in EBIT adjusted with an 11.8% EBIT-adjusted margin. These are both records for North America.”

Truck & SUV sales were strong and they picked up additional market share

“Clearly, trucks, crossovers and SUVs drove strong sales gains. U.S. retail market share in Q3 was up nearly 1 percentage point from a year ago, 16.5% compared to 15.6% in 2014. GM’s share of the entire retail full-size pickup segment is approximately 40%, up 2 percentage points from a year ago.”

General Motors (GM) CEO Marry Barra intends to use their scale to drive further efficiencies and higher profitability

We’re leveraging our scale across the value chain to develop this new vehicle family that will require less capital, generate more volume, and drive more profitability.  And as we look at cost efficiencies, we continue working across the entire value chain to make sure that we are as efficient as possible so we can enhance the customer experience and also drive shareholder value.  As we talked about in the Global Business Conference, we have identified $5.5 billion of savings from the 2015 to 2018 timeframe. And that’s from purchasing initiatives, manufacturing, driving for efficiencies and reducing administration expenses.”

General Motors (GM) CEO Marry Barra said the company continues to focus on selling vehicles in smaller Chinese cities as opposed to competing in the hyper competitive large urban marketplaces

And despite the slower growth, there is still significant growth potential for China. Much of the growth will be in the Tier 2 to 4 cities and that currently represents 85% of GM’s volume. We will continue to focus on sustaining strong margins between 9% and 10% through the sales growth that is afforded by MPVs, SUVs, and Cadillac.”

General Motors (GM) CFO Chuck Stevens said they are combatting the slowing growth in China by managing their mix

And as we’ve talked about on a number of occasions, we’ve been able to generate these results specifically because the team in China has been proactively managing the market risk with several actions such as optimizing mix – and you saw the results with the September sales being up significantly from an SUV perspective – aggressively reducing cost by rolling out cost-down-efficiency-up initiatives and really working to manage our inventory levels and ensure that we’re aligning supply and demand.”

And they’ve been able to generate a substantial amount of savings by altering their material cost

But if you look just one of the components of that, this year we’ve talked about non-raw-material performance of $2 billion. We’re very, very much on track to deliver that.”

General Motors (GM) CFO Chuck Stevens said the entire car industry is acting more rationally than in the past by utilizing less discounting of end products

Overall, the dynamics in the industry remain reasonably rational.  One of the things that we talked about and if you look at the share performance year-to-date is our real focus on shifting our volumes out of fleet and into retail because retail is more profitable than fleet.”

JS Earnings Call Notes 7.21.2015 – Bank of New York Mellon, IBM, Halliburton, Pentair, Travelers, United Technologies

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.



Bank of New York (BNY) CFO Todd Gibbons said the firm was able to increase revenue while reducing firmwide expenses for the first time in many years

Expenses were down 1% year-over-year and 1% sequentially as our business improvement process and the stronger US dollar are driving lower expenses in almost every category. Our ability to grow revenue and control expenses resulted in more than 460 basis points of positive operating leverage year-over-year.”

Bank of New York (BNY) CEO Gerald Hassell said the firm won a large back-office contract with T Rowe Price during the quarter and elaborated on the trend of asset managers outsourcing their back office functions

We do actually see it as a long term trend where investment managers in general are really trying to focus on their investment management process and less focused on providing — doing the mid-office and back office services internally. We do see it as a long term trend. We want to be very thoughtful about which clients we take on and make sure we’re leveraging our platforms and driving profitable revenue growth for ourselves rather than just taking on any one at any time. T. Rowe is a fantastic client. It’s a great partnership. We worked on this together for well over a year and we think we have a good rapport with them and a very similar culture. We feel good about this one.”

And CFO Todd Gibbons discussed what’s driving that trend of outsourcing

“But there is a fundamental trend where asset managers, just like other financial institutions in a high regulatory change, lower growth environment, are getting back to basics and fundamentally focusing on the investment process as their value proposition and relying more on firms like us to verbalize their middle office costs and actually their front office technology cost.”

The firm’s various alternative investment offerings continue to garner fund flows from investors

“We’ve had eight straight quarters of growth in alternatives and those have been strategies where clients are either getting uncorrelated exposures or they are getting absolute returns on asset allocations strategies that give them better diversified portfolios exposure.”




IBM CFO Martin Schroeter said the BRIC (Brazil, Russia, India, China) countries, who were the darling of the investment world just a few years ago due to their higher structural growth rates, saw decelerating growth during the quarter 

“The BRICs impacted IBM’s overall revenue growth rate by 2 points in the second quarter or said another way our revenue excluding the BRICs would have been up 1%. So let me start there, within the BRICS only India had modest growth building on improved operational performance and services. The other three countries were down at a double-digit rate. Brazil was down 16% though our revenue in Brazil last year was up over 20%, so was a very tough compare. The volatility of our results in Russia continued and our revenue in China was down 25% with fewer large transactions in the quarter.”
IBM CFO Martin Schroeter reminded investors that IBM is deeply embedded in some of the world’s largest companies 
“Nine of the top 10 U.S. retailers and each of the top 10 global banks run an IBM’s commerce solutions. IBM commerce now powers 30,000 organizations globally.”

Halliburton (HAL) CEO David Lesar believes a significant portion of the industry is operating unprofitably 

“We believe many of the smaller service companies are now operating below cash breakeven levels, which leads to the conclusion that pricing cannot stay at these levels for an extended period.”

And, much like their closest peer Schlumberger, they don’t expect the oil services market to recover until 2016

“We are not expecting a meaningful activity increase until sometime in 2016, depending on the pace of production declines and where commodity prices settle out in the coming quarters. Therefore, what we are continuing to do is manage our cost, service our customers that are engaged in this flight to quality, and prepare for the Baker transaction.”




Pentair (PNR) CEO Randall Hogan said he sees customers buying patterns as more cautious than last quarter

“While second quarter results came in close to our expectations, with Technical Solutions and Water Quality Systems delivering strong organic growth, we exited the quarter with increased concerns about our Valves & Controls segment. We now have a more cautious outlook on spending in energy and industrial and the ability of our Valves & Controls segment to navigate this more difficult environment in 2015.”

With particular weakness in certain geographies 

In particular, we saw a continued slowdown in spending, including MRO [maintenance, repair, operations] in chemical and petrochemical in Europe and Asia. We also saw a further pause in buying decisions in North American chemical and petrochemicals. The projects in the backlog, while delayed, still appear to be moving forward.”

Pentair (PNR) CEO Randall Hogan said he hopes his company can do several M&A transactions in order to drive consolidation in the sector

“So we are logically the right consolidator. It was part of the vision as we looked at it to build the company and get scale and have this advantaged structure. And we want to put it to work. We want to put it to work across the segments in a way that creates shareholder value going forward. We think we are aligned with shareholders on creating shareholder value. We’re not happy. We’re not satisfied at all with recent performance, and we’re open to all kinds of ideas. And we believe we’ve earned the right to be a consolidator, and we want to be.”




Travelers (TRV) CEO Jay Fishman reiterated his thesis that the insurance industry is acting less cyclical than previous decades due to rational participants

“We continue to believe that the amplitude of the cyclicality that our industry will deal with is much less than would have been the case historically and you can trace that comment back to our Investor Day in May of 2007; and of course while things can change, so far so good.”

Travelers (TRV) CEO Jay Fishman said that the insurance industry participants are acting more rational in pricing their policies 

“So the simple arithmetic of taking a lower rate on a large book in the hope of driving revenue synergies is often a fool’s errand. Now it isn’t always. Some people can do perhaps elegantly, but there haven’t been too many of them. So I suspect that the market will continue to think about interest rates and weather and the cost of capital and all of it seems to be incorporating as it prices its product with an unknown cost of goods sold. I don’t expect a lot of change. Could be dead wrong, but that’s one person’s view.”

And the industry’s emphasis on data analytics has helped insurance underwriters better price the various risks in their policies

“Any one company if it’s large enough and is willing to accept subpar returns over time can affect the marketplace from a pricing perspective, that’s not been the case, it’s not been the case for a long time. Now why that is, I actually think a lot of it is data and analytics and the fact that people actually understand their returns better than they did 10 years ago. No one would open knowingly say, well I’m pricing this to produce subpar returns, I think that happened to some extent accidentally, not intentionally and so I think the data is different than the business, it’s been different for some time. I get asked all the time, are we pleased or not that other people seem to be getting good at it? I think it is great. I think the more people understand the cost of goods sold in our business and the risks associated with it, the more we look like a normal financial services business and less of one that’s operating in the dark. So, I think that we may have led this and I’m sure we did, but the fact is that you see it in virtually everyone’s reporting, greater reliance on analytics and return focus and that’s I think what’s causing it. We’re allowing it to happen perhaps is a better expression.”




United Technologies (UTX) CEO Greg Hayes said the Otis elevator business has lost significant market share and needs to shift strategies

“The key for Otis really, is to regain market share. Over the last 10 years or 15 years, we’ve seen a continued erosion of Otis market share as we have pursued margin expansion, and I think we have taken margin expansion to the point now where we’re not terribly competitive based on new equipment pricing. And quite frankly, you’ve got to feed the service business with new equipment orders. There’s also the issue of course, of service in Europe, and that is probably the biggest issue. Otis has 1.9 million elevators under service, about 1.1 million of those are in Europe. And that’s where we’ve seen the biggest pricing pressure, and we’ve seen no growth in that market for the last couple of years. So we’ve got to return to growth on new equipment, and we’ve got to stem the service degradation and pricing that we’ve seen in Europe as well.”


We’re excited to announce that Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.


White Mountain (Ticker: WTM) CEO Ray Barette says book value and share price have grown at nearly the same rate since the firm’s IPO 30 years ago

“2015 marks the thirtieth anniversary of the Company’s IPO. Since then, we have grown book value per share and share price by 14% and 13% per year, respectively, including dividends.”

White Mountains thinks about the insurance business in a way that’s materially different than a majority of their insurance peers

We have achieved these results by remaining focused on creating shareholder value per share, often giving up short term upside to avoid big downside. Our results have been lumpy, often disappointing, for extended periods of time. The key to success in the insurance business is to avoid big mistakes.”

Nonetheless, they have made some strategic mistakes along the way

“We made three big mistakes in the last ten years that have significantly reduced our overall performance.  We have learned from those lessons, and I believe we have improved our approach to managing those and other major risks. The challenge has been in not becoming overly risk averse. In practice, we have substantially de-risked your Company.”

They are still experiencing soft pricing in some insurance lines

“The influx of capital from peers and alternative markets is putting pressure on prices and terms and conditions, mostly in peak cat zones and some specialty areas.”

A large portion of their investment portfolio is in conservative, short duration bonds which has hurt their investment returns 

“The short duration positioning of the fixed income portfolio left money on the table but protected our capital position from what we continue to perceive as an asymmetrical risk to rate movements.”

The company has nearly $1 billion of cash sitting on the balance sheet and is no hurry to put it to work given current valuations 

“Intellectually, we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we all just went to play golf.”

The firm prioritizes underwriting for profitability rather than underwriting in order to grow revenues

“An insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written, and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.”




IBM CFO Martin Schroeter reminded the financial community of the mission critical work & transaction data that are run using IBM’s servers

“Let me give you a real example of what we’re talking about. If you are UPS, one of the largest logistics companies in the world, you have to manage nearly 5 billion deliveries a year with highly seasonal changes in demand. Your customers expect their packages to arrive on time, and they expect to schedule, manage and track shipments anywhere, anytime, and increasingly through their mobile devices.  These mobile transactions can lead to dramatic increases in overall traffic as customers complete transactions at will. This requires a system that can handle the growth and scale seamlessly when activity spikes, maintaining a secure system that’s always available. That’s why UPS chose to upgrade to the IBM z13 mainframe because it could meet the expanding demands of the mobile economy.  I don’t think that mainframe is fully appreciated for the essential nature of the work it does.”

“Financial services sector is obviously one where the mainframe plays a pretty vital role in how the world banks run and when you get a new mainframe, particularly when so relevant to them shifting their business into mobile, particularly one where counter fraud is such an important part of what they have to think about every day.  And again you need scalability, you need reliability. You have to run all the time.”




Verizon (VZ) CFO Frank Shammo says the company is willing to let the most price sensitive customers defect to other carriers

“If the customer who is just price-sensitive and does not care about the quality of the network, or is sufficient with just paying a lower price, that’s probably the customer we’re not going to be able to keep”



Travelers (TRV) CEO Jay Fishman on the firm’s insurance underwriting pricing discipline 

“We don’t pressure underwriters for volume, we don’t. If you do, you will get volume; you won’t like what you get; that’s been our philosophy but you will get it. We let them run their business with tremendous amounts of data like adults making thoughtful decisions managing it for the long-term.”

Travelers CEO Jay Fishman says that low interest rates require clients to pay higher premiums than usual in order for Travelers to earn a decent return on capital

“Fixed income returns remain at historical lows and as a consequence, we must continue to be mindful that this challenging environment has already lasted far longer than most would have assumed and we will continue to factor that environment into our pricing strategies.”



Pentair (PNR) CEO Randall Hogan says the company saw  a significant slowdown in all parts of their business  

“We do not see this to be a Pentair specific issue as this broad-based decline was across virtually every business, every geography and every market.”

Pentair CFO John Stauch says he sees deflation in his sector

“I think clearly global commodity prices are not increasing.  We don’t want to use the word deflation yet but it feels like we are heading a little bit more into deflation area environment and so we are put our main suppliers on notice that we all have to work competitively to reduce our cost structures.”



iRobot (IRBT) CEO Colin Angle says robot vacuuming is becoming more of a substitution to traditional vacuuming 

“I think that one of the driving factors is the demand for robot vacuuming is showing very strong continued signs of growth, so that we have an underlying improvement in demand for our products. The robot vacuuming is becoming more and more mainstream. The skepticism, barriers to purchase continue to be reduced. And I think that our marketing programs continue to improve and as we more efficiently learn how to speak to our customers.  We believe that we’re approaching a mainstreaming of robot vacuuming, where our household penetration is still quite low relative to where we believe it’s going.”



MarketAxxess (MKTX) CEO Rick McVey says his firm is taking market share from clients who traditionally call a banks sales & trading desk to buy or sell bonds   

“Accelerating market share gains across high-grade, high-yield emerging market and euro bond products drove our record results. Our estimated adjusted U.S. high-grade market share was 15.6% for the quarter up from 13.4% a year ago.”



Bank of New York Mellon (BK) CEO Curtis Farrell says the firm is leveraging technology to increase efficiency on a profit per employee basis    

“Our goal as part of our business improvement process is to drive down the labor component of our company and use technology as the strategic asset. So, one of our goals is to get to revenue per employee up, the employee expense down and use technology as a strategic asset to get there. So clearly part of our plan is to reduce that employee headcount per revenue.”


Travelers FY 1Q15 Earnings Call Notes

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.”

Travelers 4Q14 Earnings Call Notes

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.”