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.”