旅行家集團 (TRV) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the first-quarter earnings review for Travelers.

We ask that you hold all your questions until the completion of the formal remarks, at which time you will be given instructions for the question-and-answer session.

At this time, I'd like to turn the call over to Mr.

Michael Connelly, Vice President of Investor Relations.

Mr.

Connelly, you may begin.

Good morning and welcome to The Travelers' discussion of first-quarter results.

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

All of these materials can be found at our website, www.travelers.com, under the Investors section.

Today with us, we have Jay Fishman, CEO; Jay Benet, CFO; Brian MacLean, COO; Joe Lacher, head of our personal and select businesses, as well as other members of senior management.

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

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

Before I turn it over to Jay, I would like to draw your attention to the following.

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 maybe forward-looking statements.

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

The Company cautions investors that 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 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 and responses to questions, we may mention Travelers' operating income, which we use as a measure of 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 Investors section of our website, travelers.com.

With that, I'm going to turn it over to Jay.

Thank you, Mike.

Good morning, everyone, and thank you for joining us today in our first quarter reporting as The Travelers Companies.

It's good to be with you all.

For the first quarter, we produced another strong result.

We generated nearly $1.1 billion of operating income or $1.55 per diluted share, up 10% from last year's very strong first quarter.

Operating return on equity was an impressive 17.5% and an overall combined ratio of 89.2%.

And we are particularly pleased that our margins, as we measure them and reflected in our accident year loss ratios, remain at levels that are generally consistent with what we produced last year.

The bottom line included an increase of 10% in net investment income from the prior-year quarter.

Obviously, we continue the very strong profitability we experienced in the four quarters of last year.

Our top line was also very strong, with net written premiums increasing 8% over the prior-year quarter.

Each of our segments reported solid growth.

It's very important to note that our retentions continued at the high levels we experienced last year, and our overall renewal price change was in line with the fourth quarter.

As we indicated in our press release, many of our agents have confirmed to us that access to our organization and our industry-leading breadth of products has become easier, and we have succeeded in linking many of these products together.

And as a consequence, new business submissions from our agents, which began to rise last year, continue to be up.

Combine that with our long-standing emphasis on sophisticated business analytics, and we have an important competitive advantage to capitalize on the opportunity in a new business marketplace that is becoming somewhat more competitive.

But as a result, we can continue to grow our business thoughtfully and profitably, realizing the benefits of the strategies that we began putting in place several years ago.

On the agent compensation front, during the quarter, we met with each of our distributors to discuss their compensation arrangements for 2007.

As you know, compensation for personal insurance business is now on an entirely fixed program.

We offer the same program to our distributors for business insurance on a voluntary basis.

And we are very pleased that a very substantial majority of our distributors who were offered the option recognized its value and took the opportunity to switch to the new fixed program.

Also during the quarter, we continued to execute on our capital management strategy, buying back $725 million of our Company stock under our share repurchase program, bringing us to approximately $1.85 billion over the last four quarters.

We're very well positioned.

Our product diversity, our size and broad expertise remain important, but it is also clear to us that the analytical infrastructure that we have built over the last 15 years provides critical competitive advantages to us.

Our distributors really appreciate our ability to see opportunity and to continue to respond and be available to help them grow their businesses.

While it is too early to predict revenue growth for the rest of the year, and weather is obviously always unpredictable, we're feeling good about our earning prospects for the year.

With that, I am going to turn it over to Jay Benet to take you through our financial highlights.

Jay, thanks very much.

Page 3 of the webcast summarizes our first-quarter 2007 financial performance.

Earned premiums continue to climb in quarter-over-quarter comparisons, increasing to $5.3 billion, or 6% when compared to the first quarter of 2006, and operating income exceeded $1 billion for the third consecutive quarter and for the fourth time out of the last five quarters.

I'd also like to point out that our first-quarter share repurchases of 13.9 million common shares helped to reduce our weighted average diluted share count from 711 million shares in the first quarter of 2006 to 701 million shares in the current quarter.

As we have done in prior quarters, we highlight on page 4 two items that created differences between consolidated operating income and GAAP combined ratios for the current quarter and the prior-year quarter.

Cat losses were $29 million in the current quarter compared to no cat losses in the first quarter of the prior year, and net prior-year reserve development was favorable by similar amounts in the current and prior-year quarters, both resulting from our business insurance and personal insurance businesses.

Overall, the most significant contributor to the quarter-over-quarter growth in operating income was the 10% increase in net investment income.

Underwriting results continue to be very strong, as evidenced by our combined ratio of 89.2%, and overall we continue to experience high retention levels, moderately positive renewal price changes, and in many of our businesses, increased levels of new business.

There were two other items worth mentioning at this time.

The quarter included a $47 million after-tax timing benefit resulting from the switch for all of our personal insurance agents and a very significant portion of our commercial agents to a more contingent commission program, which is not subject to deferred acquisition cost accounting, to our new supplemental compensation program, the cost of which is required to be deferred and amortized over the related policy period, generally six or 12 months.

It's important to note that the total payout we expect to make to our agents is unchanged by this program change, and the full-year accounting benefit in 2007 of this difference in the timing of commission expense recognition is estimated to be approximately $100 million after tax, and that includes the first-quarter amount of $47 million.

The current quarter also included an after-tax benefit of $28 million for the favorable resolution of various prior-year federal tax matters, and that compares to an after-tax benefit of $49 million in the prior-year quarter for the favorable resolution of prior-year tax matters at that time.

On page 5, you see our prior-year reserve development for 2006 and for the first quarter of 2007.

We continue to experience net favorable prior-year reserve development in personal insurance, primarily due to the auto claim initiatives that we described to you in previous quarters.

Additionally, in our commercial businesses, we're benefiting from a more favorable litigation environment and better than expected non-cat property results.

Brian is now going to provide further insight into our business results, so why don't I turn it over to him.

Thanks, Jay.

We'll now take you through the business performance for the quarter.

I will speak to the commercial results and then turn it over to Joe Lacher, who will cover personal insurance.

Overall, we are very pleased with the performance of the commercial business.

Margins remained strong, and we have been able to find opportunities to grow the top line without compromising our underwriting discipline or profitability.

I will briefly review the highlights of our results across the businesses and comment on some specific initiatives we have in progress.

As you can see on pages 6 and 9, our operating income and combined ratio results for the quarter were very good.

The bottom-line performance was driven by great underwriting results and the record net investment income that Jay Benet mentioned.

In addition, we had top-line increases in a number of business segments at healthy underwriting margins, as demonstrated by our combined ratios, 91.5 in business insurance and 89.4% for financial, professional and international.

The loss ratios are basically consistent with last year's first quarter.

The modest increase in the business insurance loss ratio is primarily a function of typical winter weather this year compared to last year's very mild season.

Underlying loss trends continue to be modest and consistent with the favorable results we experienced throughout last year.

The higher expense ratios in both segments represent investments we are making in our marketing and branding, along with enhancements to our platform capabilities with our agents, and we're beginning to see the successful results of these investments in our premium growth.

As you can see on page 7, we had a strong premium quarter, with business insurance core net written premiums up 6%.

The growth was pretty consistent across the segment, with most all the businesses showing growth.

Looking at the production statistics on page 8, retentions remained strong and very stable, with modest changes to renewal pricing.

New business was strong, particularly in select and commercial accounts.

In the select market, one of the drivers of the new business growth is the rollout of Travelers Express, which is our Quantum-like program targeting the smaller half of the small commercial marketplace.

Travelers Express is designed to do three main things -- first, to utilize industry-leading analytics in a multi-variant pricing program to deliver top-tier product sophistication; second, to increase the breadth of our risk appetite into classes historically outside of our sweet spot; and lastly, to redefine the standard for an efficient, easy-to-use delivery platform for our agents.

The program is in its early stages, and to date we have rolled it out for commercial multi-peril or our CMP product in 10 states.

The results so far have been very encouraging, so let me share a few of them with you.

Again, in those 10 states, we've had a 50% increase in new business, an 86% increase in submissions and a four-fold increase in the percent of accounts processed through our automated underwriting platform.

So now, over 70% of our accounts go straight through the system.

We are generating the broader risk profile we were expecting.

This, along with the increase in ease of processing for the agents, are driving an increase in the quote activity, resulting in more sales.

So it's both the product strength and the execution advantage that are driving the sales growth.

We expect to roll out the CMP product to all 50 states in the next 12 months and also begin a pilot of Travelers Express for workers' comp by the end of the year.

In addition to the select platform rollout, we have seen increased new business flow in most of our commercial businesses and especially in our core middle market businesses.

Jay mentioned earlier our multi-year product and distribution strategy.

We have systematically been working to more easily and actively connect our agents to all of our applicable industry-leading product breadth.

The greatest strength of our organization is our business analytics, our underwriting skill set and our execution abilities.

Quite frankly, these strengths were so expansive that it was sometimes difficult for any one agent to access them all.

That is a high-class problem to have and one that we have been working on for a while.

Across the enterprise, for the last six months, we have seen an increase in flow coming from a broad array of initiatives, including new product rollouts, increased sales of workers' comp and auto coverage to existing customers, increased penetration of product lines with existing agents, and increased new agency appointments.

These initiatives have combined to give us a significantly increased flow of new business opportunities -- for example, submissions up 32% in commercial accounts in the first quarter -- and these initiatives have led to an increase in new business writings without simply competing on price.

We believe that we are in touch with the current market conditions, and we're confident that, given the long-standing emphasis on business analytics that Jay has already mentioned, our new business is generating acceptable returns.

Turning to the financial, professional and international segment, here we had a strong top-line quarter, with net written premiums up 17%.

Much of this growth came from reduced ceded premium due to a combination of factors, including increased retentions, favorable reinsurance pricing and changes in treaty inception dates.

But even after adjusting for these ceded changes, written premium growth was solid, with gross written up 4%.

The increase in bond and financial products' new written premium is due to the growth in executive liability and construction security.

Market conditions for the financial and professional products were very competitive, which is reflected in the price change and new business stats on page 10.

Bond and financial products' retention of 85% has continued to improve nicely.

I would point out that the statistics on this page, on page 10, don't include surety, and the results in construction surety were very strong in the quarter.

International and Lloyd's retentions of 85% is consistent with the past few quarters and down only slightly compared to prior-year quarter.

New business was down due to difficult pricing in both the international and Lloyd's operations.

In summary, we are very pleased with our first-quarter commercial insurance results.

We feel good about our production, given current market and the market conditions during the first quarter.

Retentions continue to be strong and are what is driving our overall production, and renewal pricing is basically flat.

We are effectively leveraging the strength of our commercial franchise, and I believe we are extremely well positioned to thrive, whatever the market conditions.

So it is a great start to the year.

And now I will turn it over to Joe for the personal insurance results.

Thanks, Brian.

I am going to refer my comments to page 11 and 12 of the webcast.

Our personal insurance segment delivered very strong earnings this quarter, with operating income of $266 million and an 85.5% combined ratio.

Catastrophe activity was in line with our expectations at $29 million.

We also had favorable prior-year reserve development of $23 million.

Excluding catastrophes and prior-year development, our reported margins improved versus the prior-year quarter.

This was driven by the last 12 months' pricing increases and declining loss trend.

Our results continue to benefit from increases in business volumes, with net written premiums growing 6% over the prior year, consistent with our growth in the fourth quarter.

Across personal insurance, we continue to see strong retention and renewal pricing, in line with recent periods.

Consistent with our growth strategy, we continue to increase the pace of agent appointments.

In the first quarter, we appointed over 450 new agents, a 17% increase over the new appointments in the prior-year quarter.

Continuing to actively appoint agents in strategic areas is one of the ways that we will fuel our growth in an increasingly competitive environment.

Turning specifically to our auto results, our combined ratio was 87% for the quarter, an improvement from the prior year's 93%.

Net written premium growth for the quarter was 4% over the prior year.

Policy in force growth was 7%.

Retention remained strong and stable, and RPC increased to 3%.

We remain pleased with the result of our Quantum Auto product, which now represents about 28% of our total auto annualized written premium.

The product continues to provide a level of sophistication and nimbleness which sets us apart from much of the competition.

Quantum Auto allows us to strategically price a broader cross-section of the market, with the ability to monitor and quickly move based upon our data and our results and the pulse of the local market.

The program continues to deliver quotes and sales from a broader spectrum in the marketplace than our historic products.

It continues to produce loss results somewhat better than our initial expectations.

We are focused on further leveraging our organization's analytical strengths and our operational nimbleness to manage the program to deliver strong performance in a increasingly competitive environment.

We are enthused by the results.

At the end of the first quarter, again, Quantum Auto was active in 38 states and the District of Columbia.

Our results continue to benefit from modest auto loss trends.

Our frequency remains generally in line with what we're seeing in the broad market.

We did see some increase relative to the prior-year quarter in physical damage and collision coverage frequencies.

At an absolute level, frequencies do remain very low.

Severity was also up slightly quarter over quarter.

Our results continue to trend favorably as compared with the industry.

We attribute this favorability in large part to the success of our claim initiatives.

These initiatives are widespread.

They have improved our customer responsiveness as well as the level of personal contact that we provide our claimants.

The results that they are providing are significant -- customer satisfaction scores are increasing and loss trend is generally in check.

One example of these initiatives is our ConciergeClaim service, currently available in 14 states and at a total of 39 locations, including two owned locations.

Customer feedback for concierge claims has been outstanding, earning nearly a 99% customer satisfaction rate.

We will continue to look for opportunities to expand this and other programs into additional markets.

Across the broader auto marketplace, we continue to see increased competition for new business.

This more aggressive market has had some impact on our new business writings.

We will leverage the sophistication of our Quantum Auto product and our business analytics, as well as our extensive distribution reach, to take advantage of targeted market opportunities while maintaining our pricing and profitability discipline.

Shifting to homeowners, production results remain consistent, despite a roughly 10% decline in existing home sales nationally.

Policies in force increased 7%.

That growth continues to be generated across diverse geographies.

Retention remains stable at 87%, and renewal price change was up slightly higher than previous quarters at 9%, due largely to targeted rate changes.

Quantum Home has been implemented in seven states.

We expect to roll out the majority of targeted states during the remainder of 2007 and early 2008.

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

Though early, production in Quantum Home remains solid and in line with our expectations.

We continue to closely monitor our results and anticipate the continued launch of this program in additional states.

Marketplace and homeowners remains complex and very much driven by local issues.

Outside of wind-exposed areas, the marketplace is generally stable.

We continue to observe a competitive environment that I'd describe as disciplined.

In Atlantic wind-exposed areas, most carriers are continuing to execute combinations of exposure reduction, changes to terms and conditions, and rate activity.

We continue to execute in homeowners very locally to ensure that our risk/reward equations are appropriately balanced.

Again, we are pleased with our homeowners results overall, and we anticipate capitalizing on our strength to profitably grow this business.

With that, I'll pass it back to Jay.

Thanks, Joe.

Page 13 indicates that while average invested assets grew by $3 billion in the past four quarters, they were relatively unchanged from the fourth quarter of 2006, despite strong operating cash flows, due mostly to the timing of debt refinancing activities and share repurchase activity.

The quality of our investment portfolio remains very high.

Below-investment-grade securities are only 2.6% of the fixed maturity portfolio, and the duration remains pretty much unchanged at 4.1%.

After-tax NII as shown on page 14 was a record $737 million in the quarter, up 10% from last year's first quarter.

The fixed income portfolio benefited from the increased invested asset base, as well as the higher reinvestment rates, while the non-fixed income portion of the portfolio benefited from strong performance for private equity and hedge fund investment, along with certain large gains within our real estate portfolio.

Our after-tax yield of 4.1% was at its highest level in the past three years.

Page 15 contains information about our investments in residential mortgage securitizations.

As the data shows, the portfolio is very high quality, and we have very little exposure to the subprime lending sector.

For those of you interested in the details, within our $68 billion fixed income portfolio, residential mortgage-related investments totaled $7.6 billion or 11%, consisting of $5.2 billion in U.S.

government and government-sponsored enterprise guaranteed securities and $2.4 billion in nonguaranteed securities.

Of the nonguaranteed securities, only $107 million relate to the subprime sector and another $56 million would be considered Alt-A.

The rest of the nonguaranteed securities relate to prime collateral, and most of them are super-senior positions with over-subordination.

I would like to point out that since 2004, our purchases of nonguaranteed mortgage securitizations were limited to super-senior tranches with extra subordination.

This action was taken due to concerns we had about bubble-like conditions in residential real estate markets and the associated decline in mortgage underwriting and securitization standards.

Beginning in 2005, we strategically avoided subprime and unenhanced prime securitizations, and have continued to do so through today.

On the insurance side, we don't have significant direct exposure to subprime lending and related areas in either our surety or financial products operations.

We have not historically targeted subprime or mortgage banking operations, and so do not believe that this will be a major exposure for us.

As page 16 indicates, we ended the quarter with $24.8 billion of common equity ex FAS 115, up 1% since the beginning of the year, and book value per share ex FAS 115 of $37.26, up 3% since the beginning of the year, each, after the impact of $725 million of share repurchases and $174 million of dividends.

Book value per share ex FAS 115 was up 14% from a year ago.

Our debt to total capital ratio of 19.7% was favorable and below our target of 20%.

Our stat surplus was over $21 billion, and our holding company liquidity stood at $1.69 billion, exceeding our $1.1 billion target of one year's worth of interest and dividends due to the timing of our debt refinancing activities.

All said, our balance sheet remains extremely strong.

I will repeat what I said in recent quarters now -- given current market conditions and barring unforeseen events, we expect to continue to generate more than enough capital to support our business, and we remain committed to both growing book value and returning excess capital to our shareholders.

Page 17 summarizes our updated guidance for 2007, which we are increasing.

We now expect fully dilute EPS for 2007 to be in the range of $5.60 to $5.85 versus the guidance we provided last quarter of $5.20 to $5.45.

This revised EPS range assumes the following -- cat losses of $530 million pretax or $355 million after tax; no additional prior-year reserve development, either favorable or unfavorable; the estimated $100 million after-tax full-year timing benefit that resulted from accounting for the change to the new fixed supplemental compensation program; the purchase of approximately $2 billion worth of our common shares for the entire year; invested asset growth in the low single digits after share repurchases and dividends; a second-quarter 2007 after-tax charge of $25 million resulting from the payment of an early redemption premium and the write-off of unamortized issuance costs in connection with the redemption of our convertible junior subordinated notes, which we refer to as the CoCos; and weighted average diluted shares of approximately $675 million after share repurchases, employee equity rewards and the redemption of the CoCos.

One final note -- we have included on page 18 of the webcast the major adjustments you will need to make to your models due to the redemption of the CoCos.

Beginning on April 18, our fully diluted share count will drop by approximately 16 million shares.

A second-quarter charge of $25 million after tax will be reported.

And the interest rate on debt used to replace the CoCos will be approximately 175 basis points higher than the 4.5% rate on the CoCos.

All in all, we expect the refinancing of the CoCos will increase 2007 EPS by $0.01, and 2008 and subsequent-year EPS will increase by an additional $0.06 or $0.07 in total.

With that, I would like now to turn the microphone back to the operator to begin the Q&A session.

(OPERATOR INSTRUCTIONS).

David Small, Bear, Stearns.

Just the first thing is you had mentioned earlier a large real estate gain.

Could you just quantify that for us?

We don't really disclose the individual gains within the portfolio, but that is one of the drivers associated with why the investment income is as strong in the non-fixed income portfolio as it is this quarter.

And then the second question I have relates to the data you have in the supplement here on pricing changes.

We have heard over the last few days from a number of brokers of price changes anywhere down 10% to 12%, and we're hearing a very different, at least the data you are showing us looks very different.

Could you just maybe help us understand why we're seeing the difference?

It is a question, David, that has been asked of us before.

The renewal price change data that we provide you here is actual data.

It is quite literally policy by policy, transaction by transaction, analyzing rate and exposure in the new policy compared to the expiring policy.

So this is a real data, and it is not subjective; it's very, very objective.

Now, we have also talked about the fact that the new business marketplace has been somewhat more competitive.

When business ends up in the marketplace, it does, and always has, historically, traded at a level that has been at a discount to what we think it otherwise would have had it been renewed, and we have referred to that previously as a new business penalty.

I think that is a bad term for it, but that is the term that is used in the business.

During the quarter, our sense is -- and some of this is sense, this is a little less objective and a little more subjective -- is that that new business discount widened some, that the marketplace for business that was in the market became somewhat more heated, and we saw that as well.

So I wouldn't disagree with the notion that business that's in the market is somewhat more competitive.

Having said that, and we have talked about this before as well, the retentions in all of our businesses are either at or just below historical highs.

And that is really a very important measure for us.

We see very little of our business actually ending up in the marketplace being bid.

And so I think, and now you're getting my opinion on this, that many of these surveys are based upon anecdotal evidence or sort of instinctive answers to what happens when an account ends up in the marketplace.

And I certainly wouldn't disagree with that.

When an account ends up in the marketplace it can trade at a pretty good discount.

But for not only us, but for the entire industry, retentions remain at very high levels.

There is not a substantial amount of business that actually ends up in the marketplace.

And as a consequence, on an overall basis, pricing remains pretty attractive.

I think the other thing that is worth noting at this point is that we are at margins at this point where, notwithstanding the discount, it continues to make sense to write business.

Brian made that point earlier -- that the analytics that we have allow us to understand where new business opportunities are, and we're not at a point where the discount for new business changes the return to a point where you have to consistently have to say no.

We're simply not at that level.

In fact, we are quite a far way from it, as evidenced by our basic return on equity.

We're looking at a return on equity of 17.5% on an operating basis.

So notwithstanding that new business penalty, margins remain pretty robust.

I hope that is helpful.

Again, I think what we have is an objective view of the world.

The data is real and not anecdotal.

But we do understand the business in the marketplace, and the new business front is somewhat more competitive.

That is helpful.

Let me just ask you one last question.

You made a comment earlier about the favorable reinsurance terms.

Are you starting to see on the casualty side the availability of more reinsurance and maybe cheaper reinsurance?

Not dramatically.

So the comment earlier about favorable reinsurance terms is just more on the margin than anything?

Yes.

And it was -- yes, it was specifically in the professional liability area.

And partly, our dynamic is that's a business that in the three years post our merger, we'd still been working about a year ago in putting together our professional liability businesses.

And so this year, we are really seeing some of the benefit of consolidating those two programs and getting better terms through that process.

Alain Karaoglan, Deutsche Bank.

I have a couple of questions.

The first one, regarding your prior guidance, did it contemplate the $100 million benefit from changing the compensation system?

The second question relates to reserve releases.

Were the reserve releases that we've seen this quarter -- were they a net of some adverse reserve development and favorable releases, so the net was positive?

And if it was, where did the adverse reserve development come from?

And related to that, based on the 10-K information, last year there was $1.3 billion of reserve releases from the 2005 accident year.

Could you give us a little bit more perspective on why you're so comfortable releasing so quickly after 2005 and 2006?

We're going to give you those questions.

I will take the first one.

Our prior guidance did not include the benefit of the timing of the conversion.

And the reason that it didn't was that when the guidance was given, we didn't know what was going to happen.

We were making an offer to our commercial lines agents.

We didn't know to what extent they would actually find that offer attractive and acceptable.

It turned out that they found it very attractive and very acceptable.

And as I say, a substantial majority have opted for it.

So that provided a meaningful impact here.

And at the same time, we had not, if you recall, when we gave the guidance the last time, we had not finalized what our plan was going to be in respect to being tipped.

The personal lines were tipped at the very end of December, and we were still, in the middle of January, trying to figure out what the nature of our plan would be and the specifics.

So we didn't have the information at the time we gave the guidance last time to actually make an estimate of it.

So that is the complete answer there.

I think as far as the other questions that you're asking, relative to reserve development, our reserve process is, as you can well imagine, a complicated and very comprehensive process that takes place every single quarter.

So if you are asking is this a net of positives and negative, the answer is always yes.

We're always looking at our reserves.

We are adjusting some up where we think that they are developing a little unfavorable and some down where they are developing favorable.

And the net is what you see here.

Net-net, as you can see, we have had very favorable development over a long period of time now.

As it relates to what are some of the things that cause us to look at increasing reserves, as an example, we are always looking at unallocated loss adjustment expenses and making sure we have the right numbers there.

So there is nothing that is in any of this that is alarming in any way as it relates to this process.

Getting back to your other question with regard to the 2005 accident year, I think the way I would approach that is that there's the 2005 accident year and then there's everything that happened before the 2005 accident year that impacts the loss picks that we had for 2005.

And I think what you are seeing in 2005 is not looking at the data itself in 2005 emerging and saying in a very short period of time we are drawing a conclusion that the reserves are generally favorable.

I think what you are seeing is that in part is happening -- there are property components of the reserve where it is very apparent early on as to whether or not the reserves are needed.

And I think our property results have developed very favorably.

And you have heard us talk about in the auto business some of the many initiatives that we have in managing claim costs that have also led to early indications of favorable reserve development.

And then beyond that, in the liability businesses, you had things happening in years prior to '05 indicating that the initial picks that were generating the reserves for '05 were probably too strong as well.

So I think that is pretty much the way we would look at that, Alain.

Thank you very much, and good quarter.

Charles Gates, Credit Suisse.

My first question -- could one of you elaborate on the structure of this new performance-based fixed supplemental compensation program?

Sure.

And I'm not going to speak to the accounting of it; I will let Jay, but just the basic structure.

The program, first, is entirely fixed.

We pay a fixed commission for a given product, and then each of our producers is assigned a fixed -- a supplemental fixed commission payment that is based upon historical performance and it is based upon profitability and retention and growth, so that we can pay more to those agents who have created greater levels of profits for us.

And then what we will do is periodically, and that really does come down, I think, to once a year, we will take a look at what the historical performance of that agent has been and we will see if we should be making an adjustment to that fixed supplemental commission.

So to use an example, if the base commission on a product is 15% -- let's just do an easy example -- let's assume an agent gets 15% fixed for all of those products and we've made a decision to pay an extra 2.5% to that agent for all of 2007 on a completely fixed basis, so they will get 17.5 points for everything they write, nothing contingent and nothing variable.

It's all fixed.

At the end of the year, we will see if the 2.5 ought to be moved for 2008.

And if the performance has seriously deteriorated, that 2.5 will come down.

And if the performance has improved, we will take the 2.5 up.

So it really is a real simple program.

It is all fixed.

And we change the fixed periodically to reflect performance.

And it is as simple as that.

I didn't understand why you have the big benefit in this year's quarter -- the $47 million.

That has to do with DAC accounting -- deferred acquisition cost accounting.

Fixed commissions are required to be capitalized and amortized over the policy period, and variable commissions are not allowed to be -- contingent commissions are not allowed to be capitalized, and they have to be expensed on an incurred basis -- on an accrued basis.

In our case, the way our contingent commission program worked, the performance period was defined in a certain calendar-year basis.

So that is the period over which it was earned.

So if you think about somebody in, say, 2006 writing business, the contingent commission was earned as of the end of 2006, and there was nothing that happened in 2007 that related to the payment or the earning of that.

So the performance period under our contingent commission program was '06, and by the end of '06 it would be fully accrued and paid out in early '07.

That is different from the performance period with regard to the fixed, as Jay said.

The supplemental is earned at the time -- on a prospective basis in much the same way as a fixed commission would.

So one is subject to DAC accounting and the other one just isn't.

Very important -- it is not a cash benefit.

The total amount of commission that we expect to pay to agents, assuming volume stays the same, is the same as it would have been.

This is not a reduction in any way in the compensation in the aggregate that is being paid to agents.

It is simply, in effect, a one-time deferral of the expense and it rolls over into subsequent periods.

So I think by the time we get to '08, we will be, in effect, back on the same expense level that we would have otherwise been.

We will, except for --

To the extent of the changes.

To the extent anyone else opts for that supplemental commission or required to go with it.

My other question, I think it was possibly Mr.

Lacher made reference to increase in auto claims frequency.

Could you elaborate on that and what you think is contributing to that, and your expectations for tomorrow?

Sure.

The auto frequency for the quarter was a little bit ahead of our expectation, and it was up some from the first quarter of last year.

Part of that was the first quarter of last year was an abnormally light quarter, and this quarter was a little more than normal than what we would have expected.

And a fair amount of that is related to winter weather and driving conditions and has seasonality to it.

So it's not something that we think triggers a fundamental change in the environment.

We think it's just the normal volatility of weather patterns and seasonality.

I think that is something that often gets missed -- the impact of weather on auto frequency.

More winter severe storms, higher numbers of fender benders, just fundamentally.

And that is what I think we saw in the first quarter of '07, which really was a more normal winter weather year, and 2006 was an unusually benign winter weather year.

So when we say that it was up, we are really talking about up as it relates to the weather dynamic, as it relates to automobile.

When we peel it down and look at it geographically, it is state-specific, and it supports that underlying thought process.

We don't see any sort of fundamental event change going on, if that is the question that you're asking.

Jay Gelb, Lehman Brothers.

I was hoping you could give us a little bit more sense on the net to gross premium retention for the rest of the year.

It was stronger than we expected in the first quarter, and I think part of that was due to the London effect.

I'm just trying to get a sense of whether that will carry through for the rest of the year.

I am trying to understand the question better.

Sure.

I will come at it a different way.

Net written premiums up -- I'm sorry, gross written premiums up 4%, net up 8%.

So I'm trying to get a sense of whether the retention trends will continue in that.

Jay, specifically in the financial and professional segment, you can see it the most clearly or most dramatically, where gross was up 4%, net was up 17%.

That was a function, as I mentioned, of a variety of reinsurance issues -- retentions, price, restructuring programs, etc.

And that activity in that segment is pretty much done.

Most of our reinsurance treaties are first quarter in that segment.

They are actually booked on a when-booked basis.

They are not -- this is an important element -- they are not -- reinsurance net to gross is not booked on an amortized basis; it is booked on an as-written basis.

So without giving you a projection into the future, the 4% growth rate on the gross in that segment is a better indication of how we look at external growth.

Now, obviously, if we decide to increase retentions and retain more of the business, that's another way you can grow your business.

But I think that is what you are getting at.

Other than that, I don't think there was anything dramatic in the quarter.

And we are not aware of anything yet for the remainder of the year that would in any way distort a normal gross to net comparison.

But let's be clear -- we are not giving you a projection of what the net written premium is going to be.

The market is the market, and we will respond to it as it develops.

And then second one -- if you could give us your sense on the potential impact from the April Nor'easter, the storm.

We don't have any particular data available in any thoughtful way yet on that.

And then finally, on a broader issue, can you give us your thoughts on surety exposure to the homebuilder industry, given the problems in that industry and what seems to be some pretty significant industry surety exposure there in terms of financing the construction projects and how Travelers falls into that?

That typically is not a surety exposure.

Surety for construction work is typically government-driven.

It is a bond that is required by a municipality, by a turnpike authority to guarantee construction -- completion of a public works project.

There really is no, that I am aware of, surety exposure to the residential home-building business.

Well, the way we pulled that out and looking at a lot of the publicly traded homebuilders, they have significant surety bond coverage in order to complete some of the projects, which may be the municipal-related piece, but it was just kind of staggering, the amounts we were able to pull out from there.

I can send you the report and maybe we can follow up on it.

And again, folks around the table are looking at me and saying there is some exposure.

I am not -- this is new to me.

I am not aware of surety exposure to the residential home-building business of any real consequence.

But we will look into it.

And consistent with everything we do in construction surety, which I would say is one of our strongest businesses, I mean, we are very proactively monitoring the credit exposures there and in the aggregate feel very comfortable with where we are.

We have exposure to virtually everything in the construction industry through that business, but we feel very good about the quality of what we have there.

I will send you a report and I would be happy to follow up.

We can follow up as well.

Jay Cohen, Merrill Lynch.

I've got a number of questions, but most are fairly short.

The first is, in business insurance, the other line, other premium line, jumped up quite a bit, and I'm wondering what is in there, and should we expect that kind of number going forward?

And that one is an easy answer.

No, we had a commutation in that line and it was a one-time blip.

Really, going forward, we should have very little from a premium perspective in business insurance other.

Very good.

And then secondly, in the financial/professional business, the change in the timing of the reinsurance treaty -- will that have any impact, a negative impact, in the second or third quarter of the year?

From a premium perspective?

Yes, net to gross premium.

Anything that didn't happen in the first quarter that's going to happen in the second quarter, the cost of that reinsurance treaty will be in that quarter.

So it will have an impact on the gross to net relationship.

But in terms of the economics of what happens and what risks and what profit streams we have going forward, there's really no impact on something of that sort.

And there won't be any dramatic impact like there was in this quarter.

And then the last question, on the price change within middle market commercial, I guess you addressed the issue of why you are not seeing the sort of decreases we hear about from the brokers.

But what seemed interesting was that the price change actually got better in the first quarter versus the fourth quarter, when everything we hear tells us directionally the market is getting more competitive.

I don't know if that is a business mix issue, but I'm wondering if you can address that.

Honestly, Jay, going from a minus 3 to a minus 1, we would look at pretty much an unchanged environment.

Now, even that, you could say, is different than the mood from the brokers, which is, as Jay commented before, more of a new business-focused dynamic.

We've also got some of the property cat stuff running through the businesses, affects our numbers.

But I would look at this versus fourth quarter as basically the same marketplace conditions for our renewal book that we have seen.

And with that said, as Jay Fishman said, we look at the new business market and think that is softening a bit.

On the previous question, by the way, as to surety, Maria points out to me that in certain residential environments, the builders agree to do roadwork as part of approval with respect to the overall project.

And then they have to deliver a surety bond in respect of a road or a sidewalk or curb.

So I don't think of it as residential home-building construction in the same way.

I think of it more, again, as I mentioned earlier, an obligation with a counterparty with respect to constructing a road.

But we will look into that and we will have more specifics for you.

But we will have more -- if it is in any way consequential, we will have something to say.

Larry Greenberg, Langen McAlenney.

Two questions.

First, the data from the brokers and some of the surveys also indicate that we are now seeing a pretty major slippage in terms and conditions.

And I am just wondering if you could elaborate on that as far as commercial lines go.

And has your appetite increased at all for more excess and surplus-oriented business?

And then secondly, I know you are investing in the business and marketing and branding.

I wonder if you could just talk generally about your expense ratio, which has been drifting up the last couple of years.

And Jay, I know you come from a culture of extreme expense discipline.

Has your thinking about this industry changed in any major way?

Just generally talk about that.

Thank you.

That is actually a great question, and something that we spend time on frequently, making sure that we've got our hands on what we're doing.

The answer to the question about the expense culture in this organization is that it is as robust and as a strong as I think it ever has been.

If we ever see waste, it gets eliminated.

And frankly, we see such little of it because it really is fundamentally embedded in the culture.

And I think that is something that, even without attention, would take a long time to work its way out of here, and it continues to get lots of attention.

But when Brian spoke earlier about Travelers Express, and when he used that as an example and its impact on the business, and if you listen to those statistics, that is a big deal.

That really is a big deal.

Travelers Express doesn't come free.

It comes with relatively high-priced, mathematically oriented people building models, developing multi-variant techniques in the small commercial arena.

I'd make an argument to you that without that investment, a business that is very big for us -- what are we doing, almost $3 billion a year in small commercial -- and very profitable, if we don't make that investment, those profits and that volume erodes.

And it will, because others will -- others will make that investment.

So as we look at it, that is an investment that is just extraordinarily important, makes all the sense in the world, and we're going to go ahead and we're going to do it.

The same thing holds true for Quantum.

The results that we had in personal auto are significantly impacted by what's going on and what has gone on in Quantum.

And Joe and the folks who envisioned that and built it did terrific work, and it really -- the impact on the business, on the profit of the business, on the top line -- it would be difficult to overstate it.

So I would the put the whole branding and advertising thing relatively low on the list.

What I mean by that is, we told folks that we were going to spend somewhere between $50 and $100 million in advertising and branding, and that is still very much where we are.

But we're spending a lot more than that on technology and systems and infrastructure and people.

The claim initiatives that Joe has talked about that produces industry-leading severity -- you know, frequency tends to be an industry phenomenon, but severity is very unique to a company's own claim-handling procedures.

That comes with an investment of people and therefore expense.

And so you see the expense and maybe you get the offset in losses over time, but these things have to be invested in up front.

So I am very comfortable, honestly, that the discipline around the investment process here is significant, that we're doing the things that are right, that are smart, that really make sense, that have real value associated with it.

And I wouldn't look at our commercials and somehow think that our expense ratio is going up because they're running commercials.

That is just not the case.

And the kinds of things we're doing are the things that, actually, given our size and power now, we are able to do.

We're able to attract the folks and we're able to get them in, and we are doing a lot of this work -- frankly, a lot of the development work has been done in India.

So I think we are being very thoughtful and very smart about it and feel very comfortable with it.

Let me jump to his early questions.

On the terms and conditions stuff, we are seeing some softening, not nearly as dramatically as the words you used, and very different marketplace to marketplace.

For example, very large national property risks, yes, we're seeing some significant change in terms and conditions there.

And that's a marketplace that traditionally sees fairly significant ebbs and flows in those things over time.

In other markets, the small commercial world, we are really not seeing much if any change.

So yes, a softening in terms, we would not say dramatic, and different place to place.

And as far as the E&S world goes, we are not significantly changing our appetite there.

We play in some of those markets, but not dramatically.

Brian Meredith, UBS.

Two questions for you.

The first one, I believe your property cat reinsurance program comes up for renewal here mid-year.

And I guess the question is, given the increase in capacity we have been seeing in the property reinsurance world, do you expect to perhaps maybe increase the amount of property reinsurance you are buying?

I know you increased your retentions last year.

Do you see that as an opportunity to maybe decrease some of your exposures going into wind season?

We really haven't gotten into the detail of it yet to that level.

But everything we see now, we wouldn't anticipate any significant changes in our reinsurance programs or retentions or coverage costs.

I think where we ended up last year, now with hindsight, particularly, feels about right.

And that is where we will end up, I think.

And second question, Jay, given that the international economies are clearly growing better than the domestic economy, longer-term outlook is better there, I am wondering what your thoughts are on taking your expertise in the small and middle market commercial lines area and really expanding it more into the faster-growing areas of the world, be it through M&A or organically?

Well, I talked before about, and this is truly a long-term plan, that we're looking very carefully at trying to be a participant one way or another in the Indian marketplace, as well as the Chinese marketplace.

Those are both inconsequential in size.

The entire Indian marketplace right now is $4 billion in premiums.

So that's the whole market, which is less than our personal lines business here.

But I think 20 years from now, that will be quite different, and I think that that market is still very much up for grabs, and it is important for us to be there.

Those are active projects for us.

In terms of taking our product -- we are in Canada, we are in the UK, we are in Ireland, we are in Lloyd's -- I just can't figure out when you say faster-growing areas, certainly in continental Europe, in much of Asia, the insurance world is already carved up.

They need another property casual insurer like we need another credit card issuer here in the United States -- there's just nothing there.

We don't bring any particular competitive advantages.

We don't bring any reason why we would do business there that is different from anybody else.

So I can't figure out for me why we would venture out there.

And so I think the answer is largely no to your question.

As I say, India and China very much remain on the list.

We think a lot about the fact that notwithstanding our size here in the United States, we are still like maybe a 7% market share company.

And that still leaves 93% that we don't have.

And that offers plenty of opportunity with the distribution force that loves us and feels good about what we're doing.

So that is our focus.

Dan Johnson, Citadel.

Two questions, please.

Jay, is there any way to get any sense of what the pricing changes are on the new business that you bring in?

There is, and we watch it very carefully.

The reason that we don't disclose it, obviously, is because it is our pricing strategy.

Now you're getting right to the core of the issue of what we do.

So if you're asking us, do we know what we are pricing new business at, you bet we do.

And do we watch that over time, and the answer is, you bet we do, and very, very carefully.

I am just not ready to tell competitors what it is we're doing or why or in what areas.

But the answer is yes.

So you actually have the expiring premium data?

No, we do not have expiring premium -- what we typically measure, we measure the relationship of renewal pricing to manual pricing, which we obviously have, and new business to manual pricing.

And the difference in that, in effect, is the new business premium -- new business discount.

We then, over time, go back and verify that by actually aging books of business and making sure that that relationship between renewal and manual and new and manual actually stands up, that it lasts the test of time.

I guess the reason for the line of questioning here is around the -- just going back to the anecdotal commentary.

I can certainly understand how profitability is holding up very well with the renewal book, given very modest price declines.

But versus a year ago time period, was there enough excess profitability in the business over the last years to see companies taking 10, 15 points out of business when a competitor loses it and someone else calls it new business?

Whoever is taking that new business, let's say a 10 discount -- is there still that much excess profitability in the business?

And will there be that amount through the remainder of the year?

I never like the phrase excess profitability.

We are an industry that is an industry that has underperformed return on equity against the Fortune 100 or 500 for, like, decades.

So I'm not sure that there is any excess profitability that you describe.

There's a couple of things.

First, if you remember, over the last couple of quarters we have actually given you a grid of our pricing targets and current pricing levels.

We put that up last quarter, we put it up, I think, even the quarter before that, certainly at investor day last year.

There are some businesses that we were showing where the current returns in that business exceeded 25% on an allocated capital return on equity kind of concept.

So there were some businesses where loss trend has developed in a way that was quite different than we thought it would have years ago, and that continues to roll forward and have an impact today.

So there's lots of businesses that were individual lines here that continue to be robust margins.

There's another dynamic to this, which is it's not all about price.

We work with distributors, and our attitude and our approach to supporting our distributors in their business comes back to us in their relationship with us in terms of their business with us.

This isn't like the New York Stock Exchange, where there is a bid and an ask price, and the transaction exists completely in a vacuum.

Transactions exist as part of an agent or a broker's book, which exists as part of a relationship with the overall company.

And we look at profitability not just on the transaction -- we look on the profitability of the book, the profitability by agent, the profitability by line, and we make tradeoffs all the time.

So just because an individual particular transaction may not meet a threshold that you have in your mind doesn't mean that it doesn't make a lot of sense for us on an overall management basis.

Great.

And then just a second numbers question is, Joe, in terms of what you would call the overall loss cost environment in auto, which I realize can vary geographically, but a rough thumb in the wind, what would you say we are looking at now?

I'm trying to answer the question.

What you are really looking for is a forward look?

Yes, for this year or however you care to define it.

I think we have in our head an expectation of a low-single-digit cumulative loss cost trend.

Matthew Heimermann, JPMorgan.

I had two questions.

First, is it too early to ask whether or not there has been any difference in production levels for agents who have switched to supplemental commissions relative to those who have not?

And I guess maybe what I am asking is does that strengthen -- a sign of strengthening a relationship with an agent?

I think the short answer is yes, it would be too early for us to have measured anything.

But anecdotally, we would tell you that the feedback that we have gotten from agents, both in the percentage of whom opted into the program on the commercial side and then all of the anecdotal feedback that we have gotten, because we have obviously tried to take a lot of time to talk to agents about this, has been overwhelmingly positive.

So I think we would be pretty surprised if it was going to be a negative for our production.

And whether it is going to be a positive, who knows.

Agents have a great capacity when they are troubled to let us know, and they are not.

They are reacting very positively and enthused.

And some folks in the financial community seem to think that somehow agents will manage their book of business and drive high-profit business to those that pay contingencies and take low-profit business to those who don't.

That is an extraordinarily naive view of our marketplace.

First, there's a perception in that that agents somehow actually know what is profitable versus not as opposed to the fortuity of events.

Fires happen randomly.

Automobile accidents happen randomly.

And somehow, there is a perception that on an individual account-by-account basis that they have insight to that and can manage their business accordingly.

Two is, I will tell you that if any of our agents were to do something like that, it would be very quickly visible to us and we would have a very difficult and very stern conversation with an agent.

That is simply not a partner that we want to have.

Anybody who is going to manage their book of business that way or attempt to, it's going to be extraordinarily visible to us, and quickly.

And so while I can certainly see some financial analysts commenting on it, it is just not -- it is really a naive understanding of our business and how it acts.

We see ourselves at the moment on this in a competitive advantaged perspective.

Agents appreciate the fact, particularly since litigation against agents and brokers has continued -- not just against the markets, but against agents and brokers, and you all can look and see who they are -- agents appreciate the fact that we've offered them a solution which meets the regulatory concerns.

They feel very good about that.

I think my own speculation is that you'll see more companies beginning to embrace a fixed structure.

Fair enough, as long as I wasn't in that group of financial analysts.

The other question I had was just on the guidance, and that was the change in the share count -- is that a function of a change in your buyback expectation or purely a function of the debt repurchase?

The lion's share of the change that is taking place is because of the retirement of the CoCos.

That's a big chunk out of it.

The guidance that we gave at the end of the fourth quarter was based upon $2 billion of share repurchases for the year, and that number is unchanged with this guidance.

At this time, we have no more questions in queue.

I would now like to turn the call to Mr.

Jay Fishman for closing remarks.

Thank you, operator, and thank you all for joining us this morning.

We look forward to your commentary, and we are available to answer questions or provide any other insights that we can.

So thank you all very much.

Thank you for attending today's conference.

This concludes the presentation.

You may now disconnect, and have a great day.