The Travelers Cos. may have made a bold move in 2013 when it snatched up Dominion of Canada General Insurance. But the property/casualty insurance giant will be extremely selective about future M&A opportunities and partnerships, CEO Jay Fishman said.
“We will look at anything because you always learn by whatever you look at,” Fishman noted during the company’s 2014 first quarter investor call, which revolved around record earnings for the company. “But our interest is very selective [as we have] achieved a level of performance and returns and profitability, at least domestically, where we don’t need to be any bigger to be successful.”
Fishman’s comments followed news that Travelers had booked net and operating income of more than $1 billion, or $2.95 per share, a 17 percent jump from $896 million in net income, or $2.33 per share in the 2013 first quarter. Those gains reflect, in part, the full impact of the Dominion acquisition in Travelers’ quarterly financials for the first time, Travelers President and Chief Operating Officer Brian MacLean said during the earnings call.
Fishman, speaking during the Q&A session after the earnings report, didn’t just talk about future M&A plans. He commented on its previous major acquisitions and partnerships. Travelers’ joint venture in Brazil has gone well, he said, adding that its acquisition of Dominion “was opportunistic,” in a market where “very few acquisition candidates were really available.” But thanks to the decision of Dominion’s previous owner to exit the business, Travelers has jumped from 21st to 10th place in the Canada market and is taking full advantage of Dominion’s large infrastructure already in place.
“We thought they were on the right path to doing the right things to making their own business more profitable, and we thought we could accelerate the timeframe,” he said. “And the more intermediate and long-term aspects of taking our commercial products, exporting them to Canada and using Dominion’s remarkable distribution organization for leverage—that remains right clear in focus.”
Fishman added he’d consider other partnership operations similar to the J. Malucelli Participações em Seguros e Resseguros S.A., its joint venture in Brazil, on a case-by-case basis. He added the company would also like to expand in India, but found ownership stake restrictions in that country to be restrictive toward broader investment.
Selective M&A doesn’t mean that Travelers won’t plow ahead with more acquisitions. On the contrary, Fishman explained in his recent annual letter to shareholders that it would “continue to look at attractive opportunities outside of the United States” and Fishman reiterated that during the earnings call.
Industry insiders watch Travelers closely because it is among the first major property/casualty insurers to report quarterly earnings and the only one to be part of the Dow Jones Industrial Average. Some analysts have said the company’s numbers may reflect a deceleration in commercial lines rate increases. Fishman, during the 2014 Q1 earnings call, continued to deny this as he did earlier this year.
“We couldn’t be more pleased with our efforts to improve returns through continued execution of our granular pricing strategy,” Fishman said during the earnings call.
“Given our segmentation approach of seeking appropriate returns on an account-by-account and class-by-class basis, we have shared with you that the headline aggregate rate gain, which is the result of our active pricing strategy, will come down as we continue to execute this strategy,” he added.
Fishman acknowledged “some industry observers perceive this as an indication of increasing price competitiveness,” but rejected that interpretation “because we are managing our pricing actions very thoroughly.”
Fishman said “in that regard, for our individually underwritten accounts, we have the ability to consider each individual account’s contribution before engaging in renewal negotiations. This is where our analytical competitive advantage based on data really matters. Our strategy is very much proactive and much less reactive than it seems many industry observers believe.”
Fishman said that beyond the Dominion deal, net gains come from higher underlying underwriting gains and a jump in investment income.
Travelers handled nearly $5.9 billion in net written premium during the quarter, a record and a 5 percent hike over the same period in 2013. Total revenue reached $6.7 billion, up 6 percent year-over-year.
Travelers’ underwriting results achieved a combined ratio of 85.7, which was 2.8 points lower than the previous year, thanks to better underwriting margins and reserve development, though higher catastrophe losses partially offset this.
Net investment income jumped 7 percent after taxes.
Travelers returned $882 million to shareholders, which included $705 million in share repurchases.
In other good news, Travelers said it improved the profitability of its business insurance, despite severe winter weather. As well, substantial operating income gains and written premium growth came through in financial, professional and international insurance, largely because of the Dominion acquisition, the company said.
Travelers also noted an expansion in underlying underwriting margins for both auto and homeowners insurance. The company said it expects further gains thanks to the launch of its Quantum 2.0 auto product, which is now sold in 28 states and the District of Columbia.