Travelers 1Q14 Earnings Call Notes

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. “

Leave a Reply

Your email address will not be published. Required fields are marked *