旅行家集團 (TRV) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the St. Paul Travelers fourth quarter and year-end earnings review.

We would like to remind all participants that you are on a listen-only made, and after the conclusion of formal remarks, you will be given instructions for the question and answer session.

At this time, I would like to turn the call over to Mr. Michael Connelly, Vice President of Investor Relations.

Mr. Connelly, you may begin.

Good morning.

Welcome to the St. Paul Travelers of fourth quarter and full-year 2006 results.

Hopefully all of you have seen our press release, financial supplement and web cast presentation released earlier this morning.

All of these materials can be found on our web site at www.StPaulTravelers.com under the investors session.

Today with me are Jay Fishman, Chairman and CEO;

Jay Benet, CFO;

Brian MacLean, COO;

Joe Lacher, Head of our Personal and Select Businesses, and other members of senior management.

They will discuss the financial results of our businesses and the current market environment.

They will refer to the web cast presentation as they go through their prepared remarks, and then we will open it up for discussions.

Before I turn it over to Jay, I would like to draw your attention to the explanatory note on page two of the web cast.

Our presentation today includes certain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995.

All statements, other than statements of historical facts, may be forward-looking statements.

Specifically, our earnings guidance is forward-looking and we may make other forward-looking statements about the Company's results of operation, financial condition and liquidity, the sufficiency of the Company's reserve and other topics.

The Company cautions investors than any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance.

Actual results may differ materially from our current expectations due to a variety of these factors.

These factors are described in our earnings press release and in our most recent 10-Q and 10-K filed with the Securities and Exchange Commission.

We do not undertake any obligation to update forward-looking statements.

Also, in our remarks are responses to questions, we may mention St. Paul Travelers' operating income which we use as a measure profit and other measures that may be non-GAAP financial measures.

Reconciliations are included in our recent earnings press release, financial supplements and other materials that are available in the investor section of our web site, StPaul Travelers.com.

With that, I am going to turn it over to Jay.

Thank you, Mike.

Good morning everyone and thank you for joining us today.

We're extremely pleased with our Company's performance in the fourth quarter and for all of 2006.

For the first time in our Company's history, our annual revenues exceeded $25 billion.

Net written premiums for the year were up 5%, excluding our runoff operations, and on the bottom line we posted operating income of $4.2 billion, or $5.90 per diluted share with a strong operating return on equity of 17.9%.

Earnings were quite strong, even after adjusting for the favorable catastrophe year and the favorable reserve development we experienced during the year.

Margins remained healthy, reflected by our overall combined ratio 88.1%.

In the fourth quarter, the Company earned approximately $1.2 billion of operating income, or $1.69 per diluted share, with an operating return on equity of 19.6%.

Each of our business segments contributed to this terrific result.

In keeping with our commitments to active capital management, in 2006 we repurchased more than $1.1 billion of our Company's stock under our repurchase program, including $750 million in the fourth quarter, and we increased our quarterly dividend by 13% in May of 2006.

Given our results, we accelerated the pace of our repurchase program from what we originally indicated and we have now received Board approval to increase our authorized repurchase program by an additional $3 billion.

We're targeting to complete the entire program within the next 24 months with some seasonality, given our wind exposure.

That is, the new $3 billion, plus the remaining authorization on the old program.

In the marketplace, we experienced consistently high retentions during the fourth quarter and throughout the year across all of our businesses.

In the southeastern U.S., renewal price changes increased dramatically during the course of the year, but elsewhere renewal pricing was generally flat.

Brian will be providing you with some interesting new data on our non-coastal operating dynamics in just a few minutes.

In Business Insurance, we're beginning to see real improvements in new business flow.

Strategies that were implemented to produce these results were based upon two important structural changes.

First, early in the year, we realigned our commercial insurance businesses into two new segments -- Business Insurance and Financial, Professional and International insurance.

This change was designed to both maximize our franchise potential as we were able to get more business units working together on behalf of our customers while simultaneously maintaining our focus on industry and product specialization.

Second, we formed a bridge between our national enterprise level and each local underwriting office by creating 14 regional president positions.

The responsibility of these leaders is to deliver the entirety of our franchises in an easy-to-access seamless way.

They have a very specific focus of representing our entire Company in their regional territories.

They act as general managers of their geographies' operations, drawing upon their extensive local experience with distributors and customers.

In Personal Insurance, we continued investing in our multivariant pricing product for personal auto insurance, Quantum Auto, as well as ongoing claim initiatives and geographic diversification, all of which enables us to produce profitable growth exceeding that of the broader marketplace.

We also began to roll out our home owners multivariant pricing product, Quantum Home, and we will continue its implementation throughout 2007.

In June, 2006, we launched a national advertising campaign to reinvigorate our brand under a single name, Travelers, along with our tag line, insurance in-synch.

The campaign has had a galvanizing impact on our distributors and our employees.

In summary, our goals as a Company will remain consistent for the years to come.

Our job is to project and build shareholder capital, and in that regard, we believe that a mid-teen return on equity over time are achievable.

We will seek to grow market share organically where marketplace conditions are favorable and we're committed to returning capital to shareholders when appropriate.

With that, let me turn it over to Jay Benet.

In the end, I will come back for a few summary comments.

Thank you, Jay.

Page three of the web cast contains a summary of our fourth quarter 2006 financial performance.

Earned premiums increased by 4% over the fourth quarter of 2005, reaching a record level of $5.3 billion, while for the full year, earned premiums grew by 2% to almost $20.8 billion.

For the fourth quarter, operating income was $1.2 billion, the third quarter this year in which we exceeded $1 billion of operating income, bringing the total for the year to $4.2 billion.

This full-year result was more than twice what we earned in 2005 with operating income benefiting from CAT losses of only $67 million after tax, net favorable prior-year reserve development of $255 million after tax, a combined ratio of 88.1% and record net investment income.

I would also like to point out that our weighted average diluted share count decreased to 711 million shares this quarter from 715 million shares in that third quarter of this year due to our share repurchase activities.

As the data on page four indicates, the most significant reasons for the difference between consolidated operating income and GAAP combined rations for the fourth quarter of 2006 as compared to the fourth quarter of 2005 were net prior-year reserve development, which was favorable by $100 million after tax in the current quarter due mostly to our personal insurance business and unfavorable by $372 million in the prior-year quarter due to that quarter's A&E charge, and minor CAT losses in the current quarter as compared to the very large CAT losses in the fourth quarter of the prior year, which were related to hurricane Wilma and adjustments made for hurricanes Katrina and Rita.

The quarter-over-quarter comparisons of operating income also benefited from an after-tax increase of $69 million in NII, a $27 million after-tax gain related to the early redemption of our $593 million 7.6% trust preferreds, and business growth, among other things.

And you will hear in more detail from Brian and Joe how, overall, we continued to experience high retention levels, moderately positive renewal price changes and increasing levels of new business.

On page five, you see our prior-year reserve development for the last four quarters and for the full year.

As the table indicates, we have experienced net favorable prior-year reserve development throughout 2006, ending the year with $255 million after tax.

Of particular note is the continued favorable development in our Personal Insurance segment that resulted from better-than-expected auto loss experience due in large measure to our claim initiatives and better-than-expected non-CAT related homeowner's claim severity due in part to less-than-expected repair costs.

I would like now to turn the mike over to Brian and then to Joe for their discussions of our businesses.

Thanks, Jay.

I'm going to take a few minutes to talk about our commercial businesses, but given that the basic results and market conditions are pretty consistent with what we have been reporting for the last four quarters, I'm not going to go through all of the data on pages six through 11.

Instead, I will give some broad observations on our results across all of the businesses, comment on a few specific issues and then address any market-specific questions you might have in the Q&A.

Our overall income and combined ratio results for the quarter and the full year were outstanding, and you can see them on pages six and 10.

Obviously, the lack of catastrophe losses had a lot to do with the great numbers, but even on an ex-CAT basis, our underwriting margins saw improvement.

The basics are the same as we've been reporting all year, pricing has been stable and loss trend is moderate with frequency trends flat to even negative in some of our markets and severity trends very benign.

The severity numbers are partially a function of environmental issues, such as the improvements in auto and workplace safety technology, an improving tort environment, less demand surge than we anticipated for property repair materials and from workers comp performance.

But in addition, our numbers are being driven by underwriting actions and claim initiatives.

In the claim area, we've made some significant investments over the last four to five years and we're seeing the impact in our 2006 and prior-year loss trends.

The investments have primarily been in our frequency lines, auto, property, basic GL, and are across our Commercial and Personal businesses.

On the top line, we continue to see modest written premium growth in both the quarter and the full year.

Although the trend vary business by business, overall premium levels are being driven by strong retentions and stable pricing.

You can see the production stats on pages eight and 11.

Our renewal price change numbers remain at slight positives while underlying pure rate changes are slight negatives, and given where our margins are, this is a great result.

On the new business side, overall market conditions are more competitive, but we're beginning to see momentum from all the initiatives we've been driving for the past two years.

Our underwriting expertise and product breadth are unmatched in the industry and we have a leading position with our distribution force, the independent agents.

Our primary strategic focus continues to be leveraging these marketplace strengths to drive organic growth.

We have seen new business growth in several commercial markets, most dramatically in commercial accounts business where our new business is up appreciably over prior quarters.

Our actions aren't limited to that market, however, and are being driven by three fundamental initiatives.

First, we've made almost 500 new commercial line agency appointments in the year.

We are challenging the bias that we are already in every agency we should be, and we will continue to make new appointments throughout the coming year.

Secondly, we're leveraging our underwriting expertise to expand our products into a variety of new industries.

A great example of this is our auto dealers program that we rolled out last quarter.

We looked at this industry, one that we had been in before, and designed a new product that we believe is very sound from an underwriting and pricing perspective.

We did some detailed market analysis to prequalify opportunities, took these out to our agents and have had tremendous success.

And lastly but certainly not least, we are broadening our product penetration with both existing and new accounts.

We will never be all things to all accounts, but given the breadth of our capabilities, we should be writing a much bigger share of our accounts than we typically have.

We're taking a more aggressive approach in this area and are seeing real traction.

These initiatives have combined to increase our new deal flow and we are winning more in the market.

I do want to emphasize that this is a market where we have significant scale and expertise and our underwriting results have been excellent.

In fact, our accident year combined ratio in commercial accounts for the full year and in the fourth quarter is under 90%.

So, we're watching a broad array of metrics to make sure we're not compromising our underwriting standards and we feel great about the progress.

The last thing I want to comment on is the non-coastal pricing environment.

For this, I will refer you to page nine.

As we have been saying all year, it's the tale of two markets -- the Atlantic Coast, and everything else -- so we thought it was important to show some country-wide retention and price data for our two largest markets, Select and Commercial accounts, and that data excluding the Atlantic and Gulf Coast [strips].

As you can see from the data, our renewal price book has had significantly less softening then the industry rhetoric would suggest.

In select accounts, which is our retention, which is for all lines, non-coastal counties with 84%, with about 2 points of positive price change, the underlying pure rate was negative 2%.

In commercial accounts, the retention was 87%, pure rate was down 3% and price change was down 1.

So, the message here is, rate retention on a very profitable book of business with modestly softening prices.

And we can be as concerned as the next underwriter when it comes to where the market may go, but for 2006, it was very stable.

So in summary, all of our Commercial businesses had very strong results for the quarter and for the full year.

The businesses continue to perform well with excellent margins, good retentions, stable pricing and the new business environment continues to be competitive, but we believe our franchise has a great opportunity to organically grow our business in a very responsible way.

Now with that, let me turn it over to Joe Lacher, who will review Personal lines.

Thanks a lot, Brian.

Turning to pages 12 and 13, our Personal Insurance segment delivered very strong earnings this quarter with an operating income of $348 million and 78% combined ratio.

Similar to last quarter, earnings benefited from light catastrophe activity with only a $14 million charge.

We also had favorable prior-year reserve development of $90 million after-tax.

Our results continue to benefit from increases in business volumes.

Net written premiums for the quarter grew 6% over prior year.

Across personal insurance, we generated strong retentions and renewal pricing consistent with recent quarters.

Our pattern of profitable growth has been driven by our focused aspirations to build industry-leading product sophistication, to execute with optimal claims effectiveness, to deliver our products and services with unparalleled ease and to broaden our position as the carrier of choice across our distribution.

Advances on all of these fronts have fueled our results.

Looking specifically at auto, policies in force grew 10% and net written premium increased 3%.

On last quarter's call, I mentioned that we were shifting a large percentage of our auto new business from 12-month policy terms to six-month policy terms.

As we discussed, this should have no impact on policy counts or earned premium, but is slightly depressed written premiums in the third and fourth quarters.

Adjusting for that impact, auto net written premium growth was approximately 6%.

We remain pleased with the performance of Quantum Auto, our multivariant pricing program, on all fronts -- the program's roll-out, agents' acceptance of the product, the sophistication and adaptability of the pricing structure and the loss performance.

By the end of the fourth quarter, Quantum Auto was active in 37 states and the District of Columbia, and in January, the product was implemented in Georgia.

As I mentioned before, this represents the bulk of the impact of the program's rollout.

Our investments in our staff and our infrastructure enabled us to generate nearly 340 auto filings in 2006.

This execution with an added nimbleness allows us to more regularly tune all of our programs to target optimal results.

Quantum policies now represent about 17% of our total auto written premium for 2006.

We've begun pilots aimed at converting our in-force book to Quantum pricing.

We're very confident about the program's success.

Turning to loss trend, we have observed some increases in loss cost trends and industry results, and we have heard a number of competitors commenting on similar trends in their results.

Our loss trends remain favorably out of pattern and are somewhat declining.

We believe our results are helped by the successful implementation of the claims initiatives that Brian mentioned earlier.

We have increased the speed to contact and work with our claimants.

We have increased the levels of personal contact that our staff has in the settlement process.

We now have 38 ConciergeClaim locations open, and this includes two proprietary sites, one which had its grand opening just yesterday.

These are just examples of the initiatives which are widespread and are having meaningful impact on our claim results.

As we look broadly across the auto marketplace, we're seeing increasing competition for new business.

Unlike earlier in 2006, we're seeing this extend beyond advertising and marketing efforts and into some pricing actions.

This market softening is having some impact on our new business writings and we're watching it closely.

In Homeowners, our production continued its consistent performance with policies in force and growing at 8% and net written premium growth of 9%.

We are particularly pleased that these results, given the contracting housing market and the impact of Atlantic wind exposed strategies.

Our Phase II Quantum Home has been implemented now in six states and we expect the majority of the program's rollout to be completed by early 2008.

This product offers unsurpassed product and pricing segmentation and will enable Travelers to continue to deliver profitable growth while outperforming the industry.

While very early, the program is delivering solid production results.

We're seeing quotes and issued policies across a broader spread of customers than in our historical programs and the mix is in line with our expectations and goals.

The marketplace in homeowners continues to be a complex one, very much in line with Brian's comments on commercial property.

In Atlantic wind-exposed areas, capacity is at a premium and most carriers are executing some combination of exposure management activities.

We continue to execute very locally and to ensure that our risk-reward equations are appropriately balanced in these areas.

Outside of these wind-exposed areas, the marketplace is considerably more stable and we continue to observe a competitive environment that I would describe as disciplined.

Again, we are thrilled with our results overall.

We started the year with a lot of questions concerning the effectiveness of our Quantum Auto program and we promised the proof would be in results.

The program is approaching 20% of total auto written premium, it has been active for nearly 19 months, it has expanded our reach across the market, it has been embraced by our agents and delivers strong financial results.

It's a winner.

In homeowners, our results have consistently outperformed the industry.

We are confident that Quantum Home will solidify and expand that leadership position and continue our pattern of strong results.

Our claim initiatives are producing favorable loss trend results against an industry headwind of a softening market and somewhat rising loss costs.

We've continued to add agents to our distribution force with roughly 1500 new appointments in 2006, giving us new growth opportunities. 2006 was a great year and we're confident about how it positions us for 2007.

With that, I will pass back to Jay.

Thanks, Joe.

As you can see from page 14 of the web cast, average invested assets grew by $3.7 billion from the fourth quarter of last year driven by the very strong operating cash flows of $4.8 billion for the year, including $1.7 billion in the fourth quarter.

One component of this strong cash flow I would like to highlight is the $1.3 billion reduction we experienced in reinsurance recoverables.

Included in this reduction is approximately $550 million related to the 2005 hurricanes and over $400 million related to Gulf and commutation activities.

The quality of our investment portfolio remains very high.

Below investment-grade securities are only 2.9% of the fixed maturity portfolio and duration is 4.0.

After tax NII, as shown on page 15, was a record $701 million in the quarter, up 11% from last year's fourth quarter.

The fixed income portfolio benefited from the increase in the invested asset base, as well as higher reinvestment rates, while the non-fixed income portion of the portfolio benefited from strong performance across the board for our private equity hedge fund and real estate, and our after-tax yield at 3.9% was at its highest level since the merger.

As page 16 indicates, we ended the year with over $24.5 billion of common equity, ex-FAS 115, up 13% since the beginning of the year and book value per share, ex-FAS 115, of $36.20, up 15% since the beginning of the year, each after the impact of $1.1 billion of share repurchases and $696 million of dividends.

Excluding the share repurchases, common equity and book value per share, both ex-FAS 115, would have increased even more by 18% and 16%, respectively.

Our debt to total capital ratio of 18.9% was below our target of 20%.

Our statutory surplus increased by 18% to just under $21 billion since the beginning of the year, and our holding company liquidity stood at $1.5 billion, exceeding our target of one year's worth of interest in dividends, or approximately $1.1 billion.

All in all, we entered 2007 with an extremely strong balance sheet.

As I've said in recent quarters, given market conditions and barring unforeseen events, we expect to continue to generate more than enough capital to support our business growth and consistent with what we had said in prior quarters, we remain committed to both growing book value and returning excess capital to our shareholders.

Finally, I would like to discuss our guidance for 2007, which is broadly in line with 2006 results after adjusting for CAT and prior-year reserve development.

We expect fully-diluted EPS for 2007 to be in the range of $5.20 to $5.45.

And it's important to note that this EPS range assumes CAT losses of $530 million pretax, or $355 million after-tax; no prior-year reserve development, either favorable or unfavorable; the repurchase of approximately $2 billion worth of our common shares; invested asset growth in the low-single digits, after share repurchases and dividends; and weighted average diluted shares of approximately $690 million after share repurchases and employee equity awards.

And with, let's turn back to Jay Fishman for his concluding remarks.

Just a couple of comments before we take your questions.

In summary, earnings of $4.2 billion and return on equity of nearly 18% were very strong for the year, and even after adjusting for the benign CAT weather season and the favorable development, both in book value per share of 15% for '06 and intangible book value per share of 18.5%, both ex-FAS 115; total return to shareholders for the year of over 22%.

We believe we have made meaningful progress in a large number of important initiatives that we've undertaken and that we're very well positioned to continue to generate strong performances into 2007.

And with that, operator, we can open it up for questions.

(OPERATOR INSTRUCTIONS).

Jay Cohen, Merrill Lynch.

Just a couple of questions, not so much specifically about the quarter, but first of all, it looks like in your guidance, you increased the CAT load versus your initial expectation for 2006.

I don't think exposures have gone up all that much and I want to understand why that was.

And then secondly, if you could comment on some of the developments in Florida, and given the fact that you had a pretty big retention last year and didn't buy as much reinsurance, is the availability of additional reinsurance a potential positive for you?

Let me -- I will take a shot at the first, the CAT estimate stuff, and then maybe Jay can comment on the Florida situation.

Obviously, a ton of things going into the CAT modeling process, not the least of which is working pretty tirelessly for the last year, along with everyone else in the industry, with the modeling agencies to understand better how they work and how we should appropriately input our data.

On our pure exposures, I would say that in the Southeast, Gulf Coast, up through the Southeast, clearly, our exposures are down.

In the Northeast, our policies in force are actually up, so modestly higher exposures there in the Personal Lines business.

In addition to that, we -- and, again, I'd say probably almost every carrier in the industry -- has been really driving to get much better insurance to value, and so that has driven up numbers on existing accounts.

And so all of that is -- oh, and the other thing we've really done is tried to a better job of really looking at exposures that wouldn't be in the traditional model, so what we call non-modeled exposures, things boat and yacht in the personal lines business, our oil and gas accounts, or Lloyd's exposures, etc.

So that's all I think factored in better than what we had historically done in the past.

So overall, I think your comment right in the Southeast, Gulf Coast, that exposures are not increasing PIF counts Personal lines going up in the Northeast and then some other factors driving them.

Jay, on the Florida question, I would really make two observations.

First, this is a complex proposal that has come out of Florida and the actual regulations and rules by which they will be implemented haven't even been published yet, so it's difficult to respond broadly to the legislation.

Certainly in terms of the availability of reinsurance, we will avail ourselves of it and use that to continue to help mitigate our risk.

All an insurance company can do is to spread a loss.

We can spread it to time or we can spread it to people, but there's no magic printing press in the basement.

And, ultimately, the issues that we are facing on the coast is -- how should the costs be borne?

Should they be borne prospectively, should they be borne retrospectively, should they be borne within the region or outside of the region?

Government has a role to play in that public policy debate, certainly insurance companies do too.

So this I think is a pretty complicated matter.

But in terms of specifically the reinsurance question, yes, we would avail ourselves of it.

I'm assuming, just a final follow-up with that quickly, that your guidance with '07 does not include any changes in the Florida hurricane catastrophe fund?

Most of what we think about, Jay, in the hurricane catastrophe fund has its impact in the Personal Lines homeowners piece, and we would assume that the opportunity to buy up in layers, we would avail ourselves of, but it would not have a material impact on earnings and we probably would not buy down into the lower layers because that has some unfavorable pricing components to it.

But it really should not have a big dollar impact.

I think that's actually the point, which is if you look at our catastrophe exposures, and this is some information that we provided to you back at investor day earlier this year, the Southeast Florida in particular is not actually the leading exposure for us as it causes us to strike our reinsurance strategy.

It actually is driven by other zones and other areas.

And so the impact of potentially lower pricing in Florida is fine, but not particularly material.

Great, thanks for the answers.

(OPERATOR INSTRUCTIONS) Paul Newsome, A.G. Edwards.

Good morning and thank you for the call.

I was going to ask if you had any thoughts about the change in contingent commissions to these sort of -- I guess I'll call them retroactive kind of structures.

It sounds like you and others are doing that, and whether or not you think that there could be any adverse selection problems, given that others are not giving up contingent commissions?

Paul, I don't think so, and I don't think so for a couple of very important reasons.

In fact, I really know so.

First, our program, while it is prospective in nature, continues to reward for performance.

It does so in a different way than historical profit-sharing plans did.

But to the extent that an agent were to take actions that would attempt to take advantage or arbitrage the timing dynamics between one company that differentiates for performance and another, it really isn't in their interest to do so.

If our plan was a flat fixed plan, I certainly can understand at least the question.

Two, there is a presumption in that question that agents can actually tell which accounts are better margin accounts than others.

And on an individual account basis, losses are really quite random and the ability of an agent to make a decision as to which accounts are higher profit and which ones are lower profit is an external thought process only.

When we speak with agents, it just doesn't resonate with them.

The third point is that, if you even look right now, every company compensates its agents differently; some more, some less.

The question of adverse selection can really be asked in the current environment, which is -- why don't agents drive all of their business to the highest-paying company around?

And the answer is, because agents, at least in our experience, do what's right for their customers.

And as a consequence, they're blending all of the factors of the right coverage, the right price, the right company, the right match and the right and fair and equitable compensation.

And that has really been our perspective, which is that if agents feel that they're being compensated fairly and equitably, that you are in the game and that you don't have to be the highest compensating company.

They don't make decisions that way.

It's just not been my experience at all.

Agents in my experience, and in fact in most agencies, the producers who actually place the accounts don't even know what the profit-sharing or compensation arrangements are.

It's typically not even known to them.

So the notion of there being some kind of adverse selection where agents would somehow conspire to drive higher-margin accounts to those that pay differently than others I just think is sort of outside of the industry commentary and doesn't bear any relationship at all to the way that agents really do business on behalf of their customers.

Excellent.

Hopefully, you're dead on.

Thank you for the answers and congratulations on the quarter.

(OPERATOR INSTRUCTIONS).

Larry Greenberg, Langen McAlenney.

I just have one small numbers question.

In the press release, you referenced for financial, professional and international that there was some positive tax impacts from non-U.S. operations.

Could you quantify that?

The biggest piece of it dealt with what we did in the quarter.

As you know, we have talked about the sale of Afianzadora, our Mexican surety business.

In that, we had a tax basis that was higher than our GAAP basis.

So it created a book tax gain, and that was approximately $18 million.

And that was the lion's share of it.

In addition to that, we had a few million dollars associated with some UK tax benefits where you just had the filing of the tax return develop some refinements in the numbers.

But it was mostly the Afianzadora transaction, marking everything to market in preparation for it closing.

Great, thanks.

Brian Meredith, UBS.

A couple of quick questions.

One, other revenues looked like they were pretty high in the quarter.

Anything -- any one-timers going on there?

I think you saw from my comments, we had a gain -- we had the early extinguishment of our trust preferreds that I was referring to in my commentary.

And those were actually from legacy St. Paul, and at the time of the merger, they were marked to market in accordance with the P-GAAP balance sheet that was established.

So in doing the early termination, we just did not have any kind of call premium associated with it.

What got reflected in the income statement was the write-off of the favorable credit associated with the P-GAAP adjustment.

Terrific.

Joe, I wondered of you could dive in a little bit more on competition in the personal auto area.

You said it was competitive.

It's interesting to see that your renewal rates are still -- they actually trended positive the last couple of quarters.

Are things lightening up with respect to price competition in the personal auto area, or do you expect it to continue to be pretty competitive and maybe get more competitive?

A couple of things weaving together there, Brian.

The industry in general and the marketplace in general, we've commented for a number of quarters that we saw the market competitive, but not necessarily have seen that ripple into pricing.

I think we're changing that comment a little bit.

We are seeing some carriers move more with the pricing lever to stimulate some growth, given their numbers.

And our expectation was that would continue for some time and we're watching it closely and looking at individual carriers and individual locales because it's, again, very much a local game, and are comfortable that we have the nimbleness and responsiveness and local attention to figure out what's appropriate to do in each of those market environments.

And then on the loss cost situation, are you saying that loss costs continued to be favorable?

In your guidance looking forward for 2007, are you still assuming favorable frequency trends and favorable loss cost inflation?

I'm going to lead to Jay answer the broader conversation and I'll answer it more generally.

In the PL component where I had made those comments, we are not assuming that frequencies necessary decline.

What we are watching is that the claim initiatives are impacting severities, or pure premiums are impacting the loss costs that we're ultimately paying, and those are having a favorable impact.

We are baked into our numbers what has happened to date and have some of that thought process in our view going forward, but have a general bias that we would like to see those materialize in fact before we start booking them.

Terrific.

Tom Cholnoky, Goldman Sachs.

I was just wondering if you could give us a little bit more detail about -- I know you don't get quite into frequency and severity trends, but if you could give us -- if you would try to dig down a little bit into what's actually going on, because I think the market was somewhat spooked yesterday with a jump in severity trends for Allstate and their standard auto area.

And can you become, just give us a little bit more color on what is exactly going on in frequency and severity, Personal auto?

I'm assuming you were asking about Personal Lines?

Yes, sorry.

What we are finding there is modest motion in frequency generally down a little bit, but not particularly significant one way or another.

(MULTIPLE SPEAKERS) frequency overall generally is flat.

(MULTIPLE SPEAKERS) what we're actually finding in severity is somewhat down and we look across that broadly, across the coverages.

There's one or two where it's up a little, but generally it's down and we can most significantly attribute it, at least in our results, to our claim initiatives.

We are seeing -- the industry data suggests that some of those severities are moving up.

We've heard the same comments from other players, it's just not bearing fruit in our results.

When you talk about modest down frequency or flat, is that something that was trending throughout the whole year?

In other words, a year ago, was frequency solidly down, and now it's down just less, or has it just been the same throughout the whole year?

I think it has been dropping, and I would have to go back and pull the specifics, but from memory, it has been modestly down low-single digits, and I might describe it as leveling, but still down slightly.

It's flattening.

Joe was talking in previous meetings, and sometimes this conversation can get pretty mundane, but we talked about the initiative to get out and appraise cars, cars that have been in accidents, much quicker than we have in the past;

Joe can give you the specific data.

But over the period of time that that initiative began, we have actually reduced the average time that a car gets inspected substantially.

What are the numbers?

I think we were averaging close to 180 some-odd hours and are down in the neighborhood of 45 to 50 hours now.

So huge reductions in that timing.

And what we really have, our average loss cost in personal lines for a claim are about $3400 to $3500.

So reducing them 10% could be huge, but it's really a small amount of dollars.

It's a game of vacuuming nickels, and we have dozens of initiatives that are going on throughout our claim processes.

Some of them are the speed with which we get the car, some are the concierge facilities.

The particular importance of that one, because sometimes we talk about claim initiatives and they sound very grandiose, but they're really not always.

They get pretty mechanical.

When you cut the number of hours as dramatically as that, we actually cut the car rental expense significantly.

Meaningful reduction in car rental expense, and it has also been our experience that when you get to the customer faster that in fact the claim doesn't grow, that it tends to be isolated to the incident that just occurred.

If there was $2500 of damage to a bumper, you're going to pay that no matter what, but the leakage around the edge get reduced.

It's rental car days, it's storage days at a body shop, it's -- occasionally people might find that they discover that, if they work with the body shop, they can get something that was not part of the accident repaired.

Those things don't happen in that process, and we get happier customers because we actually indemnify them and restore them to the position they were before the accident quicker.

So you get better customer service and you get more accurate claim payments, and it comes from a lot of little items that have a meaningful impact on severity.

And severity, and that's where this shows up.

We're obviously not talking about frequency because we're not changing the number of incidents that occur, but we are changing the average cost to repair the incident and we're changing it significantly.

And it's these kinds of things we believe that are continuing to drive our severities somewhat down.

And given what is going on in in the market today with a little bit more competitive environment, would you expect your accident, your auto, personal auto accident year loss ratios, to trend higher in '07?

I think we have these processes baked into the guidance that we have provided, and I'm going to try not to dig deeper into the specifics of that.

And we are happy with where we are.

There's nothing better than investing in some claim initiatives and having meaningful impact when you're finding a softening market environment and rising loss costs for competitors.

It's a good position for us to be in.

Let me make that clear.

When we say we're seeing rising loss cost, we're listening to the same web cast that you listen to.

We don't have proprietary data on any other competitors' loss costs, we simply listen to their commentary as well.

And we pick up industry fast-track data and other industry sources that I'm sure you have that you can watch, publicly available information.

We've been hearing the same reports of severity that seem to be ticking up from some other folks.

We're not experiencing that.

Just to understand though, even if the loss cost trends are a little bit more problematic in '07, your initiatives that you are undertaking suggest that -- I'm not trying to pin you down to a number, but I'm just trying to just think relative terms, that really there shouldn't be much movement in your accident year results in '07, given your initiatives?

If you have flat frequency, and that's again what we're experiencing now and anticipating, and you have flat to modestly down severity, the real question is -- what happens to rate?

And so, you tell me -- does rate go up three or four points, in which case you have one margin outcome, or does rate go down three or four points, in which case you have a different one?

Yes, but you're also suggesting that you can drive the severity by some of your initiatives?

Oh, no.

I think, again, our presumption is that severity for this year is not going to increase.

We're commenting on what we've seen in '06, which is seen as being in check, and then our forecasting process, we'd probably forecast it more as flat.

For us, the real question on margins, and that's really I think what you're asking, is -- what happens to rate?

No, I understand that, but I was also trying to dig in on what you can control.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

Charlie Gates, Credit Suisse.

I apologize if either of these questions have been asked.

Evan Greenberg on their conference call, on [Ace's] conference call yesterday said that he saw casualty pricing in the U.S. off 4% to 7%, he saw property pricing off 5% to 15%.

How does this mesh with your own thinking?

Clearly, in our renewal book, we're not seeing across the board numbers to that magnitude.

But, not knowing exactly what Evan was basing the comment on, clearly, the larger account market is under more pressure than the smaller account market.

So if you have a -- in then property world, for example, the large accounts are always going to be out ahead of the curve, no matter where the market is going.

So we are absolutely seeing more softening in the large account property market than we would be in the other extreme, CMP, down in the small commercial world.

So our book probably has a different blend than Ace's, but the numbers that we have gotten, and we have put some in there, and I don't know if you missed the beginning of it, Charlie, but I'm trying to find the page.

In your slides -- I looked at the slides.

On page nine of our web cast, showing where we are, across all products, in our core -- forget small commercial, look at core middle market, we were running at minus 3 points of pure rate and 1 point of price, and that's a blending of property.

So our average would clearly be below the numbers that Evan seeing -- better than, less price reduction.

And then you have the new business market, and I don't know if he talking about just renewal book or new business, and new business pricing is always lower than renewal pricing.

But I think our perception would be, it's not that soft.

My follow-up question, seemingly, the AIG likely merger with 21st Century, similar to what Berkshire did with GEICO 11 years ago, what do you think that portends for your personal auto insurance business?

We're going to watch it closely, Charlie.

They were closely aligned with 21st Century before.

They had 70%-plus ownership in that, so it wasn't a fully independent group.

They're a significant competitor and they were a significant competitor before and will be going forward, so we'll keep watching it and see where they move.

Thank you.

I think, Charlie, just one other thing I would add, and this is a much more generic comment than specific to this situation, but what you're seeing happening at the distributor level is increasingly doing business with fewer and fewer leading companies, that the kind of age-old practice of having insurance relationships with 30 markets, that just doesn't work for them anymore.

It's expensive, it's not efficient, very time-consuming, and I think this is one of the things you're seeing is the benefit of size and scale, where you can do more for the agent, when can meet more of their needs and their customers' needs, you're just more important.

And I love where we are in that regard.

There's precious little that an agent needs that we don't have the expertise to do and do well.

So it's not -- these are -- AIG is obviously not a small company, but 21st Century is, and in terms of their ability to add value at the agency level, I'm sure they do fine job.

But in terms of the national franchise, it's just in a different position.

But I guess the only two points I heard today; one, 21st Century does not use agents; two, I guess the second observation is that I don't know how you fight the fact of the renewal commission over time.

That is, the fact that if I buy my auto insurance through an agent, I pay a renewal commission, and if I go the other route, I don't.

I'm sorry, Charlie, ask the question again -- the renewal commission?

I think over time, it was my understanding, sir, that if you buy your auto insurance through an independent agent or a captive agent, you pay a renewal commission.

But, if you buy your auto insurance through a direct response Company, such as GEICO or 21st Century, you don't.

And I don't know how you fight that, given that it's possibly $80 on a $1000 purchase.

You really ought to spend a little bit of time taking a look at the economics of being a direct writer.

They have tremendous up-front costs.

They talk about, the business dynamic and the direct channel is much more a retention dynamic because you spend tremendous amounts of money up front advertising and the service dollars to attract the customers in, and then you have to keep them for a reasonable number of years simply to recover that cost.

So I think that the dynamics are different, but I don't know that you really end up with one channel that's more competitive than the other.

What we do think you find is that certain consumers have a preference for one channel or another and recognize that.

But in terms of the economics, they are different, but not necessarily clearly one being an advantage over the other.

Clearly, you're right that if you only look at the renewal side of it, there's a component there, but if you only look at the new business side, there's a distinctive advantage in the agency world.

Thank you.

Alain Karaoglan, Deutsche Bank.

Good morning, and my apologies if you addressed these two questions before.

But did you comment on loss cost trends in casualty lines?

Are these turning out better than expected/ do you see that trend continuing, if that's the case?

And the second question is regarding partnership income or non-fixed income, investment income.

In the past, Jay, you have encouraged to look at sort of the average over the past four or eight quarters, but since the past eight quarters have been quite good, do you still think that's a valid way of looking at that for the other investment, or should we be little a little bit more conservative than that.

We have disclosed what our investments are so that you can put whatever assumptions against them you want to make.

As we look at it, we have been, as far as our future planning goes, looking at these kinds of longer-term averages trying to weigh in changes that have taken place in the marketplace, if any.

But we have seen, if you really look at the eight quarters that we're showing here and go back further than that, the returns on average have been fairly steady.

So hopefully that helps.

On the loss cost trends in casualty across the commercial business, there clearly are some environmental factors that are helping to moderate those.

We view it as a more underwriting-friendly tort environment.

There has been workplace safety dynamics, there has been some significant comp reforms in most notably California.

So, basically, we think it's a fairly stable environment for casualty loss cost.

We have clearly seen different patterns in the past and we're nothing close to any of the alarming stuff that we've seen in our history.

So hopefully, that's responsive.

Yes, thank you very much, and thanks for the increased share repurchase program.

David Small, Bear Stearns.

We have heard that there -- competition has heated up in the E&S market, particularly admitted players looking for growth from what has been E&S business.

I guess given that you both an E&S and an admitted operation, could you comment on this trend?

And also, how do you prevent cannibalization from one division to the other?

For start, we're in both markets, but our E&S marketplace is a tiny, tiny fraction of what we do on the admitted side.

So honestly, our perspectives on E&S are more from our admitted writings and how it affects us than our penetration into the other market.

Right now, I think that there's some movement in that marketplace, but the simple for us is, it's not dramatically affecting us.

I guess let me phrase it differently.

Are you seeing opportunities to find growth from what had been E&S business?

Clearly, the E&S marketplaces are going to struggle with the environment and we're seeing some opportunities, but I wouldn't call it dramatic.

It's not a significant mover in our numbers.

I don't know.

I was trying to think if I had an answer.

I don't know that I have any additional insight or information.

Our excess casualty business has -- and I say that only because it has some similar dynamics to the E&S marketplace.

Our excess casualty business has not been growing.

In fact, if anything, it has actually been shrinking.

And if there is one place where I think the pricing dynamic that I think about really has evidenced itself, it's in that excess liability/excess casualty business.

We saw it six to nine months ago in the upper layers of D&O, we saw a more aggressive competitive dynamic there.

And I think that has continued to creep its way through the other excess casualty businesses.

But that is predominantly where I've seen it, certainly not on the primary side.

Is that fair?

Thank you very much.

I appreciate it.

Josh Smith, TIAA-CREF.

I apologize if this was answered earlier, but my question is on Florida.

What has been the impact on your reinsurance value or aggregate that you do at July, given the likely reduction in aggregates?

And second, what is your overall view of the legislation?

Are you comfortable buying cheaper reinsurance from an unfunded state plan than buying it from the private market?

We did, but I will cover it again because I think it's an important enough topic.

First, the legislation down there is awfully complex and the rules and regulations, the specific regulations that we're going to have to live with, haven't even been published yet.

So it's very difficult for us to really take a step back at the moment and speak about its impact on a comprehensive basis.

Certainly, to the extent that reinsurance is made available to us at more attractive terms than we could otherwise buy it in the private marketplace, we're going to buy it.

I think that the Florida hurricane catastrophe fund will openly honor its obligations, and that makes some sense.

What does not make sense is, and I think I've spoken to this earlier, is that all an insurance company can really do is spread a loss.

It can spread it amongst lots of people, or it can spread it over time.

And the debate in all of these coastal communities is really going to come down to, who in the end should bear the costs of rebuilding, and how do we from a public policy perspective want to allocate that cost?

Do folks in the northern part of the state believe that they benefit from the economic development that occurs along the coastal area.

They have higher tax revenues, better schools, so that in fact people in the North are willing to absorb some of that cost.

Or, do you come to the conclusion that says, no, I live in the northern part of the state, I have nothing to do with the coast and I'm not willing to bear any of that rebuilding cost.

Then, if substantively we're only left to spread that cost amongst the people who live on the coast, then the cost is going to become problematic for them because you begin to dilute the spreading mechanism.

I think in the end, we will ultimately have a discussion, a public policy forum along those lines, just philosophically who should bear the cost of rebuilding.

We can play a role in that obviously by charging premiums and collecting funds and all of the rest.

But data really is going to be the issue there and I think in other coastal communities and we're anxious to be constructive.

We're in the insurance business, this is what we do, is we do spread risk and we do take risks.

We'd like to be part of the solution and we're anxious to be a part of the debate.

Just to confirm, you had no qualms buying reinsurance from the unfunded state plan if a $20 billion event comes through, you don't feel that there's going to be some repercussions where there's going to be some consumers up in arms again about rate hikes and that they're going to come after the primaries and not let them leave and do all sort of crazy stuff?

You asked one question, which is how do we feel about buying reinsurance from the Florida Hurricane Catastrophe Fund, given what we have learned about the legislation in these early days, and now you've taken it to a $20 billion event where in effect, the Fund doesn't have the money and now it's struggling to pay its claims.

That is the risk that they're taking.

I do understand it, but ultimately, again, Florida has been a bit of a challenge because, in effect, the rules keep changing.

We enter into a contract, we agree to do certain things, we do it with an assumption of what the environment is.

And lo and behold after the fact, the environment keeps changing.

That's the kind of activity that will tend to keep competitors from engaging in a marketplace.

You have to have some sense of trust, some sense of understanding of how the market is going to behave after the fact.

For the moment, we are willing to go on good faith.

Again, I have not -- the regulations aren't out.

The information on it is not yet available.

If you are asking me, are we comfortable going on good faith, that Florida is doing its best to attempt to resolve its problems, yes, we think they are, and again we're anxious to be part of the solution.

I do understand that, in a serious event, the question is going to become -- who funds that loss?

It gets back to my first question -- who pays the loss?

Is it in effect a tax burden to be borne by Florida citizens, is it an assessment to be borne by insurance companies?

It's all up for grabs, and certainly there has been plenty of analyst commentary on it that's more knowledgeable about it than I can offer.

But, again, going in, do we presume that things will run as yet, I think we do.

Thanks for the insight, I appreciate it.

Todd Bault, Bernstein.

I have to say, since the merger, the results really have been pretty outstanding.

The book of business seems much better balanced, balance sheet is a lot stronger and you really should be congratulated for all of that.

However, one initial assumption you made at the time of the merger was way off, and that was about revenue synergies which were driven by this idea that agents would not diversify away from you, that they were going to be playing with fewer big carriers.

That assumption was just wrong.

It's counterintuitive for anyone that's in the industry.

You just said it again, Jay.

You just said that you're seeing that kind of benefit, and it was clearly wrong last time.

So I guess if you're going to keep insisting that agents are not going to diversify for their own benefit, I think investors need some proof of this.

Is there any way you can provide data that shows that agents are dealing with fewer, bigger carriers, because that's just counterintuitive based on how agents actually behave.

Well, I spend a fair amount of time talking with agents and I talk to them and really I think do interactive them probably more than anybody else on this call.

What is the proof?

The proof, one, is look at the retentions that this company has had since the merger occurred.

They have been remarkable.

They have been absolutely remarkable.

If there was any indication that agents, brokers or customers were going to diversify away from us, you would have seen deteriorating retentions.

They have not; they've only improved.

They've only improved.

Second, we've actually achieved growth greater than the industry average.

We have been able to market the franchise of this company to the agents in a ways that they say, it's in my direct interest to do more with you.

I'm a better business person by doing more business with Travelers.

That is the way it is, and I think that the proof is very much in the numbers.

I think your assertions that you that's fact, it's just not true, is just dead wrong, candidly.

It was wrong when you did the acquisition.

We clearly saw the agents diversify away from you.

Oh, no you didn't.

You actually never did.

What you saw, Todd, was the -- and we've said it over and over and over -- what you saw was, the rationalization in some markets of two different underwriting profiles where we had to make decisions about ways in which we would conduct business.

That is what you saw.

You're just not right on the point here, I'm sorry.

The fact is, the retentions in virtually every line of business that we have had since April of '04 are up.

New business is up.

What you saw in the first six months were in segments like construction where we had two very different underwriting profiles between St. Paul and Travelers, and it had to be rationalized.

We had to come up with a single underwriting philosophy.

You saw that in several of our lines of business, and that is what you saw.

You did not see a diversification away from us.

I challenge you to take a look at our numbers over 2.5 years and see anything in the numbers that suggest that anybody is diversifying away from us.

I suggest -- it matters a lot less what I think.

I suggest you talk to some of your bigger shareholders and think about what they thought at the time of the merger when you made that statement and what resulted.

And I'm just saying, it just doesn't sound right, given what -- like I said, what people know about how the industry works in terms of agents and what we saw at the merger.

You could be right, but --.

Todd, you're a good guy and we have a lot of respect for you and we love your interest.

I think on this one, you have to look at the data and wrestle with it, and I think you'll come to different conclusion.

But you have been in the business.

You're an actuary, for crying out loud.

If anybody understands it, you do.

So you have the ability to get it, and I'll sit down and we'll go over it with you.

Ladies and gentlemen, this does conclude our question and answer session.

I would now like to turn the presentation back over to our management for any closing remarks.

Thanks again.

I know that there was another call at 9:00.

If that created a conflict for you, we are sorry for that.

Not our doing, and we appreciate your continued interest.

Thank you very much.

Thank you, sir.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation.

You may now all disconnect your lines.

Everybody have a wonderful day.