Economy Still Weak, Risk Not Rewarded: Travelers CEO

An economy that has yet to show signs of a sustained recovery is providing little reward for investors looking to take risks, Travelers President and CEO Jay Fishman told CNBC Thursday.

Wall Street
Wall Street

The company, which reported earnings Thursday that missed analyst expectations, remains conservative in its portfolio with a heavy dose of municipal bonds and only limited exposure to instruments that carry greater risk.

Fishman said the strategy has worked well for the company over the past several years as it has missed much of the danger that has hammered at other financial services firms.

"Our view on the economy such as we see it from our data is we are trying to make a bottom. You can't see any recovery," he said. "We see nothing that would suggest a 'V' recovery at least in the context of those variables that are used to value business insurance policies."

Travelers reported earnings of $1.39 for the quarter, a miss of about 10 cents a share that Fishman blamed on a series of intense weather events, particularly hail storms that have generated a multitude of claims from both homeowners and businesses.

An economic "malaise" has prevented Travelers from passing on its costs to customers in the form of rate increases, he added.

As such, the company has had to rely on its $72 billion investment portfolio to generate returns.

All but $4 billion of that portfolio is in fixed income, with $41 billion of that total in municipal bonds. Fishman said the top 16 states other than California still carry premium ratings on their debt.

"Our investment group, they deserve all the credit," he said. "We have managed through this crisis."

Fishman looked back to the beginning of the subprime mortgage crisis to demonstrate how the company has managed risk. In January 2005, the difference in yield between a 10-year mortgage-backed security from Fannie Maeand a 10-year privately issued MBS was just 0.25 percentage points. Travelers held $200 million in MBS at the time and stopped buying.

"We weren't geniuses that we could see the real estate market collapsing, but we're very disciplined underwriters—risk-reward calculations," said Fishman. "The difference in yield now is tighter than it was just before the financial crisis. If you think you weren't getting paid for taking risk then, you're really not getting paid to take risk now."

Travelers remains "aggressive buyers of our own stock," with purchases of $5 billion worth over the past 12 months and 36 percent of total shares outstanding since 2006, Fishman added.

The firm has a smattering of our investments outside the fixed-income space, including $1.8 billion in real estate. It also carries a small derivative position in Treasurys futures that keeps the company inside of four years on the yield curve.

Fishman compared the way Travelers invests to Berkshire Hathaway chairman Warren Buffett, saying the two companies are very different in their approaches.

"Warren Buffett, bless him, does it differently. His insurance company generates cash flow for his investment business to be aggressive," Fishman went on to say. "We don't have his intellectual capital, we don't have his financial capital. We just can't do it that way. So our investment group is there to support our business as a thoughtful, risk-taking insurance company."