Our Long-Term Financial Strategy for Creating Shareholder Value
More than a decade ago, Travelers laid out a clear, simple and unwavering mission for creating shareholder value:
Our results in achieving the elements of this long-term financial strategy speak for themselves. Over the past decade:
- our return on equity has significantly outperformed the average return on equity for the industry;
- we returned more than $34 billion of excess capital to our shareholders;
- we grew dividends per share at an average annual rate of 10%; and
- we more than doubled our book value per share.
Importantly, over this 10-year period, our return on equity has been less volatile than that of others in the property and casualty industry. The level and consistency of our return on equity over time reflect the value of our competitive advantages and demonstrate the discipline with which we run our business.
The successful execution of our long-term financial strategy has enabled us to deliver a total return of approximately 240% to our shareholders over this 10-year period.
Delivering Industry-Leading Return on Equity Over Time
The results we deliver are due to our deliberate and consistent approach to creating shareholder value. We have been clear for many years that one of our crucial responsibilities is to produce an appropriate return on equity for our shareholders. That is our North Star. This has meant developing and executing financial and operational plans consistent with our goal of achieving superior returns, which we defined many years ago as a mid-teens core return on equity over time. We emphasize that the objective is measured over time because we recognize that interest rates, reserve development and weather, among other factors, impact our results from year to year, and that there are years — or longer periods — and environments in which a mid-teens return is not attainable and other years in which we expect we will achieve or exceed a mid-teens return. We established the mid-teens goal at a time when the 10-year Treasury was yielding around 5%, and in that environment, a mid-teens return was industry leading. Our ability to achieve a mid-teens return over time going forward will depend on interest rates returning to more normal levels by historical standards. In any event, we will always seek to deliver industry-leading, superior returns over time.
Our focus on core return on equity encompasses multiple performance objectives key to creating shareholder value. The measure is a function of both (1) core income and (2) shareholders’ equity (excluding unrealized gains and losses on investments). Accordingly, core return on equity reflects a number of separate areas of financial performance related to both our income statement and balance sheet, including the quality and profitability of our underwriting and investment decisions, the pricing of our policies, the effectiveness of our claims management and the efficacy of our capital and risk management.
Granular and Deliberate Execution
One critical component of our ability to deliver exceptional returns over time is our granular approach to underwriting. In our commercial businesses, that means execution, including the allocation of capital, on an account-by-account, line-by-line or class-by-class basis. In personal lines, that means a very high degree of account segmentation and the allocation of capital generally on a very local geographic basis. With that and our advanced data and analytics, we select the risks we write and price our products deliberately with our targeted return in mind. Underlying all of this is a culture that understands how to balance the science and art of decision making based on data and analytics. That culture alone is a competitive advantage, and one that we believe is hard to replicate.
Our granular and deliberate execution goes beyond risk selection and pricing. There are other profitability levers in our business, including, among others, volume, mix, expenses, claims handling initiatives and reinsurance. We have a long track record of capitalizing on all of the available levers to deliver superior returns — and of applying these levers on a strategic and business-by-business basis. This is evident in the way we have executed quite differently in each of our business segments through changing economic and business cycles.
Disciplined Investment Approach
Similar to our underwriting strategy, our investment philosophy is well defined and consistent. Our investment portfolio is managed first and foremost to support our insurance operations and, accordingly, is positioned to meet our obligations to policyholders under a wide range of conditions. We emphasize risk-adjusted returns and credit quality rather than reaching for yield that is not consistent with the underlying risk. Our asset allocation is designed so that even when we experience lower non-fixed income returns, which we know on occasion we will, the predictable stream of investment income from our fixed income portfolio will nonetheless provide a firm and reliable foundation for our overall results.
Right-Sizing Capital and Growing Book Value Over Time: A Balanced Approach
Our capital management strategy has been an important driver of shareholder value creation over time. Our first objective for the capital we generate is to reinvest it in our business — organically and inorganically — to create shareholder value. We will continue to retain capital to support growth in our business and invest capital to further our ambitious innovation agenda and advance other strategic objectives. Today, we are making strategic investments in everything from talent to technology. We are disciplined stewards of our shareholders’ capital, and to the extent that we continue to generate capital that we cannot reinvest consistent with our objective of generating industry-leading returns over time, we will manage it the same way we have for more than a decade — by returning it to our shareholders.
Our performance has enabled us to return significant amounts of excess capital to our shareholders in the form of dividends and share repurchases while meaningfully growing book value per share. We set our dividend at a level that we believe to be both competitive and sustainable, recognizing that we provide coverage for catastrophic events, and use share repurchases to return additional excess capital to our shareholders. This strategy gives us the flexibility to respond to changing business conditions and permits us to take advantage of business opportunities as they present themselves.
Acquisitions and Footprint
The lens through which we evaluate acquisition opportunities is that a transaction should contribute to our mission by improving our long-term return profile, reducing the volatility of our returns or creating shareholder value through some other important strategic benefit, such as a geographic or product position.
We have a great deal of experience in executing strategic transactions, and we view this as a core competency. The company that we are today has come together through a number of significant transactions over the past two decades.
Across all of our businesses, our strategic focus continues to include creating opportunities to write more business through retaining and growing our relationships with our high-quality in-force accounts and bringing our franchise value to new customers. As we have done successfully over the past few years, we will continue to seek to grow without compromising our return objectives or changing our risk profile, primarily by targeting customers, industries, products and geographies that we know well. In terms of geography, we believe that geopolitical risk and economic instability around the world are underappreciated today, and so we like our North America concentration. That is not to say that we do not continue to explore and evaluate opportunities outside of North America, but we have set an even higher bar for them today.
Investing in Our Future
Our competitive advantages set us apart; they are foundational to the success of our long-term financial strategy. At the same time, we understand clearly that the world is changing, and changing quickly. Broadly speaking, we see four significant forces of change impacting our industry:
- Consumers’ expectations are changing and being shaped by their experiences in other industries.
- Rapid progress in technology is enabling us to reimagine almost every aspect of our business.
- The opportunities presented by data and analytics are becoming even more consequential.
- Traditional distribution is consolidating and alternative models are developing.
We are focused intently on these forces of change. While our long-term financial strategy is not changing, the competitive advantages that have fueled our success over the last decade will not necessarily be the same as those we will need to continue to lead for the next decade. That is the focus of our innovation agenda: making sure that our competitive advantages are as relevant and differentiating tomorrow as they are today.
Ultimately, the vision for our innovation agenda is to be the undeniable choice for the customer and an indispensable partner for our agents and brokers. This vision drives our three innovation priorities:
- Extend our advantage in risk expertise.
- Provide great experiences for our customers, agents and brokers.
- Optimize productivity and efficiency.
A key theme running through our investments is that they are designed in large part to enable us to optimize the top line at attractive returns. We have been investing in these priorities for several years, while delivering industry-leading returns and an improving expense ratio.
We are undertaking this work from a position of strength. We have the resources and expertise to be successful, and we benefit from a lack of distraction. Moreover, our business is complex, and the value of deep domain expertise in understanding risk and the products and services our customers need to manage that risk cannot be underestimated as the starting point for innovation. We believe the winners in our industry will be those who can innovate successfully on top of a foundation of excellence.
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Underlying our financial strategy and our innovation agenda is the Travelers Promise — our promise to be there for our customers, communities and employees. Only by faithfully keeping the Travelers Promise will we earn the support of key stakeholders essential to our success. And only by successfully delivering on our financial strategy and executing our innovation agenda will we earn the resources we need to keep the Travelers Promise. That’s why, at Travelers, our business strategy and performance are inextricably linked with the Travelers Promise.
Underlying our competitive advantages are three key enablers that help set us apart — our talent and expertise, our industry-leading data and analytics and our financial strength.