旅行家集團 (TRV) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the fourth quarter and full-year earnings review for Travelers.

We ask that you hold all 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 would like to turn the call over to Ms.

Gabriella Nawi, Senior Vice President of Investor Relations.

Ms.

Nawi, you may begin.

Thank you, Lacey.

Good morning to everyone.

Welcome to the Travelers discussion of the fourth quarter and year-end 2008 results.

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

All of these materials can be found on our website at www.travelers.com under the the Investor Section.

With me today is Jay Fishman, Chairman and CEO; Jay Benet, Chief Financial Officer; Brian MacLean, President and Chief Operating Officer; Alan Schnitzer, Head of our Financial, Professional and International Insurance Business; 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 the prepared remarks and then we will open it for questions.

And before I turn it to Jay, I would like to draw your attention to the following on page one of the webcast.

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 fact, may be forward-looking statements.

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

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 current form 10-Q and 10-K filed with the SEC.

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

Also in our remarks or 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 supplement and other materials that are available in the Investor Section on our website; travelers.com.

With that I will turn it over to Jay.

Thank you, Gabi.

Good morning, everyone.

Thank you all for joining us today.

We have a lot to cover, and I think it is important to put today's reported results as well as some of the other topics that we will be discussing today into the broader context of our organization.

This year's performance is reflective of Travelers long standing approach to managing risks in order to achieve our targeted results over time.

I have said many times before that our fundamental business is one of managing the balance between risk and reward, both on the liability side as well as on the asset side of our balance sheet.

What you see in our results today, an operating return on equity of 12.4%, and importantly, a four-year average annual operating return on equity of approximately 14.5% comes from this core cultural value.

And this is so important, decisions we have made and actions we have taken, or not taken over the past several years, not just this year.

Looking back to what we said this time last year, we assessed the insurance market place more or less correctly.

We expected it to be more challenging from a margin perspective, and it was.

With that said, we are very pleased that our initiatives over the last few years have paid off.

For example, an increased flow.

We are also pleased that other metrics suggest that we continue to maintain our underwriting discipline.

On the investment side, market conditions were clearly much more challenging than anyone anticipated.

However, all things considered, I could not be more pleased with our performance and the position of our investment portfolio.

We have received a number of questions in the last few months on how we're able to avoid so many of the investment issues which plagued the market this year.

The answer is not that we saw everything coming, but in many areas we believe that risk was underpriced.

In that regard we were fortunate, as I have also said if certain asset classes had been better priced, we would likely have been somewhat invested in at least a few of them.

As it relates to pricing, I have noted in the last six months that the world feels like a riskier place.

Recent data suggests that we may now be starting to see an improvement in the pricing environment.

We are by no means ready to declare a bottom, but we like the data and we will discuss it in more detail with you this morning.

On the investment side, we are still seeing a big spread between the bid and ask but the conditions in some investment areas in 2009 may provide more opportunities.

Our results over the last few years have demonstrated a consistent and successful approach to assuming and managing risks in order to achieve an appropriate return for our shareholders.

Nothing in that approach or in our culture has changed.

I believe we continue to be well positioned to meet both the challenges and opportunities posed by the current environment, and deliver on our long term strategy.

While I will not go through the specifics of the quarter, I just want to highlight our strong results, superior returns and importantly, increased book value in 2008.

With that let me turn it over to Jay.

Thanks, Jay.

Turning to page four of the webcast.

Let me start by saying that our investment portfolio, our reserves, our capital and our liquidity continue to be in fine shape despite the continuing turmoil in the financial markets.

Our operating Company capital remained at, or above, all of our target levels, our debt-to-total capital ratio of 19.5% was below our 20% target, the midpoint of the 15% to 25% range that derives from our AA ratings target.

Holding Company liquidity was $2.1 billion remaining at almost twice our target of one years' worth interest and dividend.

This after contributing $450 million to our qualified pension plan which was funded at a 92% funding level at year end.

We have negligible amounts of debt maturing in the next three years and do not rely on commercial paper.

Book value per share ex FAS 115 of $43.37 increased 5% for the year after purchasing over $2.1billion of common shares and paying $712 million of common stock dividend and once again, we closed the year with over $25 billion of common equity.

On page five, we updated recent areas of market disruption and their impact or lack thereof on Travelers.

Overall, we continue to be unaffected in any significant way.

Note that we have no direct investments related to the Madoff matter and are not aware of any indirect investment exposures we may have based on inquiries we made of our fund managers.

Page six shows that Cats and net favorable prior year reserve development continue to play a meaningful role in our quarterly results.

Prior year reserve development favorably impacted our fourth quarter GAAP combined ratio by 5.1 points and a downward adjustment of estimated costs associated with current year Cats, mostly related to Hurricane Ike, which included the Texas Windpool Assessment and Hurricane Gustav favorably impacted this quarter's combined ratio by 1.6 points.

I would also like to point out that we recorded an $89 million tax benefit related to the sale of Unionamerica, our UK run-off business subsidiary.

The sale of Unionamerica also produced a small realized gain in addition to this tax benefit.

It eliminated $790 million of net reserves which included $265 million of A&E and it freed up supporting capital.

Ex Cats and net favorable prior year reserve development, our GAAP combined ratio was 92.5%, and we remain very pleased with the underlying profitability of our businesses.

Page seven of the webcast shows the three major contributors to our operating return on equity.

Fixed income NII plus interest on corporate debt remained the major driver.

This passage of time component contributed 8.7 points in the current year, down slightly from the prior years entirely due to lower short term interest rates.

A much smaller contributor operating ROE but one that does vary from period to period is non-fixed income NII which contributed a negative 0.6 points this quarter - - negative 0.6 percentage points this quarter due to the difficult investment marketing conditions we face as compared to a positive 1.4 to 1.6 points in the prior years.

Underwriting income contributed 4.3 points for the year below the last two years due to the high level of weather-related losses.

Cumulatively from January 2005, we produced an average annual operating ROE of approximately 14.5%, consistent with our stated longer term goal of mid-teens ROA.

Fourth quarter net investment income of $438 million after tax is shown on page eight, was down significantly from recent quarters.

The after tax yield on our fixed income portfolio was 3.7%, consistent with prior years.

That is the long term fixed income portfolio I should say, while the short term portfolio yielded 1.1%, due to the actions taken by the Fed to lower short term interest rates.

The non-fixed income portfolio yielded a negative 14.9%, giving back a third of its 2007 NII, as private equity real estate partnership and hedge fund valuations were impacted by the challenging financial markets.

Consistent with our practice, we were diligent in updating our non-fixed income returns through December 31, despite the usual time lag in which investment managers report results.

Accordingly, our fourth quarter non-fixed income portfolio loss of $164 million after tax included $56 million of after tax losses that were recorded based upon information requested by us and recently made available to us by certain of our investment managers.

As you will see in our guidance, we are hoping for considerable improvement in our non-fixed income returns in 2009 but fully realize that they will be subject to evolving market conditions.

The composition of our $71 billion investment portfolio remains unchanged from recent periods.

At year end fixed income comprised 94% and non-fixed income 6% of the portfolio.

The quality of our fixed income portfolio remains at AA plus.

Its duration was 4.2 and the below investment grade portion was only 2%.

And given movements in treasury rates, credit spreads and equity markets during the quarter, our after-tax net unrealized investment losses were reduced to $144 million at year-end, an improvement from $818 million at the end of the third quarter.

Our investment portfolio remains well diversified across industries, investment types and individual issuers.

We continue to apply very rigorous processes to identify investments which write-downs should be made.

So during the fourth quarter, we recorded net realized investment losses of $138 million after tax, including impairments of $129 million after tax, bringing full-year net realized investment losses to $271 million after tax which represents a very small percentage of both our investment portfolio and our capital.

The information that appears on page nine is bases on a schedule that will appear in our Form 10-K showing unrealized losses on investments which estimated market value is less than 80% of amortized cost.

This amount has increased from this third quarter.

It now stands at $744 million with a vast majority in this position for 30 days or less.

While this - - still represents a small fraction of both total investments and share holders equity, we do closely monitor these investments.

And with that let me turn the microphone over to Brian.

Thanks, Jay.

To give some context to the business results I would like to start by offering some broad comments and then address the business insurance results specifically.

Obviously the economy is in a turbulent state.

It has impacted our industry broadly, and for many individual companies, in a profoundly negative way.

Yet as our results will show we are favorably positioned for, and have effectively managed this environment, delivering positive results for our customers and for our shareholders.

As an industry we are sensitive to macro economic forces such as increased demands for goods and services and higher unemployment.

These and other pressures drive down payrolls, receipts, and consumer and business spending, thereby limiting the overall growth and insurable assets and impacting insurer's ability to grow the top line.

In addition, the current economic environment has also resulted in significant dislocation in the financial services industry driving customers, agents and brokers to more strongly than ever consider the financial and operational stability of their business relationships including with their insurance carriers.

This flight to quality has complemented the fundamentals we have developed during recent years including our broad risk appetite, underwriting specialization, ease of doing business and claim effectiveness.

The resulting stability we have experienced has allowed us to focus on the consistency of our strategy, and to deliver superior products and services as well as solid financial performance in these turbulent times.

Given that context, let's review the details beginning with the Business Insurance results on slide 10.

Business Insurance delivered operating income of $619 million, compared to $729 million in the same quarter last year.

The combined ratio as adjusted on the page was 93.2 for the quarter a deterioration of 1.8 points from the fourth quarter last year and still at a healthy level.

The deterioration is primarily due to the earned impact of the modest rate decreases and loss inflation we've experienced throughout the year as well as some large loss activity, which in the fourth quarter was again, above normal levels.

Net written premium as shown on slide 11 declined slightly, or 1% overall from fourth quarter of 2007.

The overall economic contraction is affecting the top line of all of our businesses.

But most dramatically, in Construction, Builders Risk policies and Inland Marine, Large Property accounts and Trucking business.

So given the impact of the environment, we're very pleased that in the aggregate we have basically flat top line.

As we look at the production details on slide 12, we can see how we have been able to maintain level premiums in a contracting economy.

First, retention remains high across all our domestic Commercial businesses, and has increased to 88% in Commercial accounts, our core middle-market unit.

We have been speaking all year about the importance of high retention and these results are a direct outcome of our conscious strategy to maintain stability across a variety of market place conditions and are a critical factor to our success in today's environment.

They also speak to the slight to quality dynamic and the value of our product services and brand in the market place.

Looking at renewal price change data for BI segment, you can see that the changes generally consistent with recent quarters.

That this data is not total price change, and we thought - - this data is total price change and we thought it was important this quarter to look at the components of the change, to see what is really going on with pricing.

So on slide 13 we graphed the two components of price change.

That is rate and exposure, and here we see two distinct trends that essentially net out in the RPC.

That is for us, rates have been generally improving over the last four months while exposures have been generally declining.

So although premium is relatively flat, all other things being equal, our margin picture is improving.

The magnitude is different by customer group or line.

In businesses like National Property, the shifts have been significantly, with rate change improving dramatically in recent months, while in Commercial Accounts rate improvements and exposure declines have been more moderate but steady.

Even in small Commercial, which is not shown on the slide, we have seen a shift with marginal month-over-month improvement in rate change and offsetting deterioration in exposure growth in each of the last four months.

Obviously, three or four months of activity is not enough to declare a change in the market.

And we always remind you that we don't have a crystal ball on where things are going, but the run rate for these measures has clearly shifted since September.

Turning to slide 14, the amount of new business written, in aggregate is down slightly from the fourth quarter of 2007.

In Select, our small commercial business, new business in the second half of the year increased as the result of the product and platform expansion we have spoken to you about in the past.

Across our other domestic commercial businesses, new business dollars are down or flat reflecting the current economic environment and competitive new business pricing dynamics.

In analyzing new business, it is important to speak to the new business opportunities or flow of new business that we see.

Flow statistics were up in nearly all of our businesses this quarter.

This increase follows the trend we have been seeing throughout the last two years and is the result of both our strategy to drive more opportunities across all our businesses and the flight to quality we're seeing in the market place.

Some of the quarter's increase in flow is attributable to other carriers instability, but most is a result of our new product offerings, platform enhancements and strong positioning with agents and customers.

Even though we are seeing strong new business deal flows, the new business pricing environment we have to compete in remains very competitive.

We have been rigorous in adhering to our underwriting standards, and therefore our hit ratio, or the percentage of quotes that we are writing, has declined.

As we previously emphasized on both new and renewal business, we are maintaining our disciplined underwriting standards.

So in the aggregate we are very comfortable with the quality of business we're writing.

So overall in the Business Insurance segment, basically level top line, and solid margins.

And in these market conditions this is a result we're very pleased with.

With that, let me turn it over to Alan Schnitzer for the Financial, Professional and International Insurance results.

Thank you, Brian.

Turning to slide 15, in the Financial, Professional and International Insurance segment, operating income was $154 million for the quarter, as compared to $184 million in the prior year.

The adjusted combined ratio for the quarter was 92.4%, up 2.7 points from the fourth quarter of last year.

The primary driver was a small number of large losses in the International business, although our large loss experience has improved from prior quarters.

Net written premiums in the quarter declined 3% from the fourth quarter of 2007.

In Bond & Financial Products, the decrease in net written premium is primarily due to lower volumes in the Surety business.

In International, the decrease resulted from foreign currency translation.

Turning to slide 16, in our Management Liability business in the quarter, retention remained high and consistent throughout the year.

Renewal price change was slightly positive at 1%, all attributable to rate.

And new business was strong.

The new business gains were driven by an increased flow of new opportunities from a flight-to-quality in the Public Company Liability business, partially offset by decline in new business in our Financial Institutions book due to disciplined underwriting.

In the International business, retention was at 76% in the quarter, down both year-over-year and over recent quarters primarily due to intentional underwriting actions.

Pure rate in the quarter was flat after eight quarters of negative rate change and other RPC was a positive 6%..

This time last year, we provided you with information about what we termed as subprime exposure.

Over the course of the year, we have broadened the scope of our attention beyond subprime to include management liability exposure, arising out of the disruption in the financial markets more generally.

Starting on slide 17, I would like to provide you with an update.

We have consistently focused on building a well diversified portfolio of management liability products, sold through various business units.

We believe that this diversification and more specifically, the lack of overconcentration in any one area such as large publicly traded financial institutions, provides substantial mitigation against shock coming from events such as the financial market disruption we have all seen over the past year.

As you can see, we write approximately $1.6 billion of management liability premiums.

In the current economic environment, many of these liability products are certainly subject to some level of increased exposure.

We have broken down our management liability exposure into four product groups; D&O, E&O, fiduciary liability and other.

And we have identified the amount of premium within each product group that we estimate is subject to a significant elevation of exposure, emanating from financial market disruption.

We estimate that the written premium from accounts at elevated risk as a percentage of our overall management liability portfolio is a modest 17%.

As a percentage of Travelers overall gross written premium it is only about 1%.

Turning to slide 18.

It is important to consider the specific characteristics of these products and our disciplined approach to underwriting.

D&O, E&O and fiduciary coverages are written on claims made forms that contain defense costs within policy limits.

Policies with elevated risk levels contain limits that are generally low, between $1 million and $25 million, but more importantly, average approximately $4 million.

These policies are about evenly split between primary and excess coverages.

Average attachment points for excess are relatively high, $46 million for D&O loan and $37 million when including fiduciary and E&O.

For larger accounts excess coverages comprise approximately 70% of the total.

We also note that we continue to use reinsurance to further mitigate portfolio risk.

Our current analysis of 2008 claims indicates little chance that we will approach the $375 million recovery cap.

For 2009, we have revised our treaty to respond to frequency more than severity.

On slide 19, I would like to walk you through the actions we have taken over time to address our potential exposure to financial market disruption.

Since the first quarter of 2007, we have been proactively incorporating the financial market environment into our underwriting discipline.

As we told you last year, we conducted an individual account analysis on all accounts which reported claims and for those individual accounts that we felt had a heightened level of exposure.

The scope began with accounts that included credit related announcements or individual accounts with elevated risk characteristics such as financial institutions, subprime lenders, bond insurers and home builders and suppliers.

Throughout 2008 on a monthly basis, we continue to update the analysis and expanded the scope to add more focus on community banks and consider exposures related to the Madoff matter as we continue to monitor the situation closely and revise our underwriting accordingly.

Considering our diverse book and the way we have approached the market and managed our exposure, we expect that any potential issue would likely be a more manageable issue of frequency, not severity.

On slide 20, let me tell you how all this translates into our results.

In case of claim notices arising out of financial market disruption reported in 2008 was consistent with 2007.

With average limits in excess attachment points slightly more favorable in 2008 as compared to 2007.

Our estimate of financial market disruption losses for 2007 improved from last year to this year, and excluding our exposure to the Madoff matter, our estimate of losses for 2008 is consistent with our current estimate of losses for 2007.

Although it is early days of the firms and individuals identified publicly as having exposure to the Madoff matter, we have identified accounts in our Management Liability business with total exposed limits of approximately $150 million net of reinsurance.

We currently estimate that our actual aggregate losses from the Madoff matter, including accounts not yet identified, will be less than $75 million pretax, or $50 million after tax.

Some of which we recorded in 2008, and some of which we will record in 2009.

We have recognized estimates for financial market disruption in Madoff losses in our 2009 guidance.

After considering all the items I have mentioned, we expect our Management Liability business will remain profitable as it was in 2008 and 2007.

With that let me turn it over to, Joe, for discussion of Joe for Personal Auto.

Thanks, Alan.

Personal insurance had a good quarter, strong earnings and growth in policies in force.

Business continues to demonstrate sound fundamentals.

Looking at Page 21, you can see that operating income is up $25 million compared to the fourth quarter of 2007, driven primarily by favorable cat results and offset by unfavorable net investment income.

The fourth quarter had a favorable GAAP combined ratio of 85.6% versus the fourth quarter of 2007 of 90.8%.

Our expense ratio decreased one point in the fourth quarter 2007 primarily driven by a favorable adjustment to our estimate for the Texas Windstorm Insurance Association losses from Hurricane Ike.

Adjusting for cats prior year development and current year re-estimation, our adjusted combined ratio is slightly better than last year.

Overall, our written premium increased 4%, despite challenging market conditions.

As you can see from our production results on Page 22, we continue to see solid business statistics in both Auto and Property.

Looking specifically at Property, production results for the quarter were strong, with policies in force increasing 3%, retention stable at 86% and a consistent renewal price change of plus 6%.

Homeowners new business is somewhat related to home sales.

Against the backdrop of significantly declining home sales, we remain very pleased with continuing growth of the Quantum Home products and its ability to increase new business products.

Quantum Home policies now represent more than 13% of our policies in force.

Shifting to Auto, you can see that our production results remain solid.

We continue to see increasing pressure on new business in the market place, but our renewal price change increased 4%, retention remained in line with prior quarters, policies in force grew 2% over the fourth quarter 2007, with new business premiums up slightly.

Our combined ratio for the quarter was 100.1%, or 5.3 points higher than the fourth quarter of 2007.

This is driven by a difference in prior period development, and after normalizing for this prior period development, the combined ratio was consistent with the fourth quarter of 2007.

Slide 23 provides a view of our Auto loss trends.

As you can see total Auto loss trends continue to be relatively flat in the quarter.

Severity trend was slightly increasing and was offset by decreased frequency.

While the market place remains competitive, we're seeing some increasing signs of firming particularly in the Auto line.

We're continuing to monitor loss trends, profitability, market place conditions as well as the changing economic climate, and will appropriately adjust our tactics going forward.

We remain pleased with the growth of our business, its underlying performance and look forward to building on that success.

With that I will turn it back over to Jay.

Thanks, Joe.

Pages 24 and 25 set forth our guidance for 2009 along with certain supporting information.

We're projecting fully diluted operating income per share in the range of $4.50 to $4.90, which in round numbers should translate into an operating return on equity of approximate 10% to 11%.

Our guidance assumes cat losses of $360 million after tax, or $0.62 per diluted share.

No prior year reserve development either favorable or unfavorable.

A 2.4% non-fixed income portfolio yield.

$1 billion of share repurchases, which would be a reduction from recent years, reflecting potential investment returns, to more properly reflect risk along with the uncertain economic conditions that all businesses face rather than a shift in our capital management strategy.

No significant change in average invested assets, ex FAS 115, and a weighted average diluted share count of approximately 585 million shares, after share repurchases and employee equity awards.

With that we will open it up for questions.

(Operator Instructions) Our first question will come from the line of Jay Gelb with Barclays Capital.

Please proceed.

Thanks.

Good morning.

I have a question on the guidance.

Jay, could you give us a bit more insight in terms of your comfort level with the 2.4% return on the non-fixed income portfolio.

And Travelers in my view will probably be one of the very few Property Casualty insurers that will be buying back stock in 2009.

Can you talk about your comfort level there as well?

First, with - - we will split this.

First with respect to the investment yield, the reason that we provided it, obviously, is because of the uncertain environment that we're in.

And one can be more optimistic or more pessimistic, and this was - - this really ties to our budget for the year, and it is premised on - - a real estate portfolio for which we continue to collect rents, that will provide a positive return that is offset by what I would characterize as a fairly nominal return in the rest of the alternative investment portfolio.

So it is a blend.

But it does not assume obviously in the aggregate a continuation of what we saw in the fourth quarter.

But one can obviously have a different view which is why we decided to provide the number more specifically this year.

You want me to cover the share repurchases?

Sure.

As far as the share repurchases, as we've said before, we manage our capital beginning with the operating companies.

And our operating companies are very well capitalized.

So we look at things that will impact that, and we've got earnings projections, and we have got, moving dividends out of the operating companies up to the holding companies.

- - we've got - - what we think is generation of excess capital in the place and we're going to prudently manage it.

We are saying that the billion dollars of buybacks, which - - it is not - - shouldn't be viewed as plan.

We're going to execute based on - - what market conditions look like.

And we're going to execute based on what opportunities look like - - to invest in our investment portfolio as I said earlier.

But - - for the purposes of guidance, and the overall feel of the place, we will be generating excess capital.

To the extent we don't have the investment opportunities and everything else including liquidity and - - having your corporate capital cushions covered.

We will return it to shareholders through buybacks.

And, Jay, just to add a bit to that comment.

It is possible that investment yields become more appropriately reflective of risk in 2009.

And there is a consequence, the alternatives for buying back shares "may" certainly not making a prediction, but "may" become more robust than they have been in previous years.

In previous years, the alternative was a relatively modest bond yield of let's call it 4.5%, even at its highest levels.

And it is possible given the markets and given the - - the credit market specifically, that returns in other highly rated, I am not speaking now about moving either down in credit quality or long in terms of return, I am really just speak being more appropriate returns for appropriate risk assets for a property casualty company.

They may be more robust.

So one of our alternatives this year as we go through the year is to evaluate what is the best for providing shareholder return over time?

If there are investment opportunities in the context of other fixed income instruments that are more reflective of long term returns, we will do that.

If not we have always said we would right-size capital and will return it.

I do think Jay's comment about being more reflective generally of - - of challenging economic environment is a real one.

The last thing we would ever want to do is to be buying back shares in one period, and then finding ourselves in a position of having to issue equity in it next.

That is just a head scratcher for us.

So we are going to manage that just judiciously as markets evolve.

Thanks.

If I could just get one more quick one in.

Could you update us on your outlook for the Surety environment in a tough economic environment?

Sure.

Tom Kunkel is with us today.

He's the CEO of our Bond & Financial Products Division.

Why don't we let Tom take that question.

Sure.

Thank you, Alan.

The outlook for the Surety business clearly there has been some level of drop off in public construction spending.

We are looking though to see what kind of impact any public works program may have on what we're going to see for Surety revenue going forward.

As far as the condition of the contractors in our portfolio, clearly, I think, the larger contractors still have some pretty robust backlogs.

The middle market people have seen some backlog shrink and they have seen some increased competition on bids.

All that said, the truth is, is that there is still showing the highest internal credit scores or near the top, that we have actually had.

And in addition to that, I would say that our underwriting continues to be very robust, we're doing comprehensive financial analysis.

We're investigating credit relationships.

We're closely monitoring new projects that are acquired and the margins that they are attained at.

And closely monitoring the progress of projects as they proceed towards completion.

All those things said and done, we know management very closely in these companies to the point where we're out walking job sites with them.

So I don't think any one could say that we feel that we're immune to what is happening in the economy.

But we do feel like our - - our people are still very well positioned going into it and being in the middle of this economy.

In the context of a loss perspective in that regard, though, is a credit sensitive business.

And it - - will likely show higher losses in a - - in a more challenged credit environment, than it would have in a less credit-challenged environment.

Tom, I think, is providing the perspective of an underwriting oversight and the way that the business is managed.

But recognizing that it is certainly a more challenging economic environment.

Absolutely, Jay.

It certainly is more challenging than it was 24 months ago.

Thank you.

And our next question will come from the line of Larry Greenberg with Langen McAlenney.

Please proceed.

Thanks and good morning.

Just curious, about your thought process and putting up about half of the policy limits from Madoff and what would have to change for that number to change materially in either direction.

Just thinking about the question.

We have gone through all of our accounts that we think have exposure to Madoff.

And we have identified the ones that we think are likely to make claims but haven't.

I think for this to really change dramatically we have to see accounts coming from a high frequency of accounts that we haven't yet identified as having exposure.

In terms of the amount we have put up, obviously we have analyzed the claims.

We have looked at the policies and we have recorded the amounts that we think are likely to be paid on them all.

I think the point there Larry is that it is not a 50% across the board assessment of limits.

It is actually a policy by policy review based upon the claim and - - and on the claim data and the information that we have so far.

There going to be policies that will be exposed.

There are going to be policies where there will be significant defenses.

There are going to be policies that may not even be exposed.

So the number that is here is not a prorata assessment of exposure but much more an account by account analysis.

That's right.

I think for their really to be a significant change from our expectation, we have to see claims from a large number of accounts that we're just not expecting claims from.

Great, fair enough.

Follow-up, Jay - - assuming that some of the positive pricing signs - - gets some legs and the market were to continue to firm.

There is always a - - an elasticity of demand in the industry, and as buyers see their prices rise they tend to reduce - - their buying habits.

Do you think, given the economy today, that under that scenario, there would be a materially greater - - let's say elasticity - - for demand?

Exposure is certainly - - I suspect going to continue to be negative.

As we think - - by the way, exposure for us means risk units for existing customers.

So if payrolls decline, workers comp premiums decline, that is a reduction in exposure.

Right.

If previously there were five trucks in the fleet and now they sell three, obviously less exposure.

New business is impacted by new accounts.

So you are going to have a few things here.

Going to have obviously less business growth and arguably, business shrinking.

In that regard exposure will be either less than it would have been or perhaps even negative.

And on the new business front you're really talking about - - moving of accounts from one carrier to another.

That to me is a - - is sort of a more predictable dynamic in that that is going to likely continue.

There is a flight-to-quality I think going on and it would be - - not prudent to not anticipate declining exposure.

I do think that as companies - - particularly on the commercial side and perhaps even on the consumer side tighten their belts you will see rising deductibles.

That is circumstances that we have seen before.

I don't know that we have - - seen - - I have to go back and look.

I don't know that we have seen declining limits.

Generally what we have seen is that people bought business in particular are willing to self insure more are the bottom than they are to buy less at the top.

But - - so you're trading more working layer oriented exposure, in that case, and its impact on profitability less than if it was at the top of the - - of the profile so to speak.

But I would certainly anticipate declining exposure and rate will see.

The last three or four months having encouraging and we will have to wait to see what happens.

But I guess just in terms of relative to historical cycle hardening, would you expect it to - - these trends to be much more pronounced given the economic climate today.

I am not - - not answering, I - - candidly, I don't know.

I am not sure that we have seen a circumstance before of the combination as you describe it your words now, not mine, a hardening market, and a declining economic environment.

The - - the last couple of times that we have faced changes in cycles, they have been in some relatively robust economic times.

So we are at least from my experience going back into the 90's.

I think this is somewhat unchartered and I just don't know.

I don't have an experience to look back to and point to.

I - - I have said before that I think that - - that the cycle - - there are plenty of good reasons to believe that the cycle behavior has changed.

We said that several years ago.

I think the statistics continue to bear that out.

If in fact rates beginning to change, you wouldn't have bet that that would have happened with retentions being at all time highs.

Historically, retention gets - - retention has been much lower.

I remember in the middle market again in the high 60's, before the market really began to turn, we have a middle market retention of 86.

So I think that this cycle has been and continues to be different than, behaviorally different, than cycles that we have experienced before.

And I just don't know how to answer your question because I don't have a basis to have a conclusion on it.

I do believe that exposure will continue to go down.

That's about as much as I - - I see in a personal call.

That's fair.

Thank you very much.

And our next question will come from the line of Jay Cohen with Bank of America - Merrill Lynch.

Please proceed.

Thank you.

Good morning.

Just a numbers question.

And it looked like the - - it was an unrealized gain in the quarter after tax of about $674 million.

However, if you look at the AOCI line in your balance sheet presentation, it didn't change that much.

Looks like there is some offset.

I am many assuming it is currency but could you discuss that.

Jay, this is Jay Benet.

It is not currency.

- - without getting into the details of the pension accounting, which as you know is very complex.

The AOCI is also going to be impacted by changes that take place in the pension plan.

Which are for actuarial purposes not fully reflected on an immediate basis.

Even though we funded the pension plan to get it up to the 93% funding level, think of that as a change in - - cash to investments the way the pension accounting works.

And then the - - the unrealized loss that the pension assets experienced this quarter, or the - - in particular this quarter, but - - for the year - - gets reflected as a downward adjustment in the AOCI to be recognized over time, as an actuarial loss in this particular case through the pension expense so - - but - - that's what is causing it.

Okay.

That's helpful.

And then secondly, it is probably too early to even have a comment on this but - - some of the claims that you have seen, related to the broader credit crisis, is there anything to read into yet, some of the decisions that have the - - probably very few decisions that have come out on the - - on the trials or settlements related to these claims?

I don't think so.

I think it's a little early for that.

It's too early to draw conclusions from that.

Yes, that is what I suspected.

All right.

Thanks a lot.

The only comment perhaps, and this is antidotal and not - - just kind of reacting to your question.

I think that there tends to be a - - emotional reaction to these things that eventually works there way through.

I'm thinking back to the perception that option back-dating was somehow going to be a very significant event in the D&O Professional Liability area.

And so far, it hasn't.

I think you can look back over the last few years of several events where the reaction - - analytical reaction tends to be, my goodness, there's significant exposure here.

And yet, when the cases come and the litigation begins, circumstances often turn out differently.

I think we are here way too early to come to any predictions, but just exactly how many conversations we've had over the last few years of issues that people perceive to be confronting the Professional Liability business.

Got it.

Thank you.

Your next question will come from the line of Vinay Misquith with Credit Suisse.

Please proceed.

Hi.

Good morning.

With respect to your Financial Institutions.

I believe you have around $274 worth of gross written premiums in 2008.

I was wondering whether you could give us the gross exposure that you have out there, and what level of reserves have you put on that?

I think the $274 you are looking at is not just Financial institutions.

That is the total of the gross written premiums that we have identified as having elevated exposure to financial market disruption more broadly.

So I just want to clarify that point.

In terms of the gross limits you are looking for, that is not a number we have disclosed in the past and I think not something that is really meaningful in terms of perhaps trying to draw the conclusions that - - you may be looking for.

And in terms of market share.

What do you think your market share Financial Institutions will be?

Let me ask Tom Kunkel to answer that question, but I think the thing you have to think about though is - - you had a sub segment of the Financial institution market - - our market share among the large Financial institutions isn't all that significant relative to our overall Financial Institution portfolio.

Tom, do you have anything to add to that?

Alan, I think you hit the key points.

So before estimating a figure, you would say we're in just various aspects and highly diversified across the whole financial market place.

So to say a market share really does lump everything together.

All that said and done, you could say that possibly there is an 8% or 9% market share.

But a lot of it is in community bank, smaller institutions, privately held - - you see some mutual fund business.

So it is really diversified across all aspects of that business.

And more so, that is a part of a more highly diversified management liability business across the place.

I think importantly - - it often gets confused but a meaningful position for us is in community banks.

I am going to go back.

My recollection is it is 85% privately owned.

Only 15% of which are public institutions.

We're talking about - - my recollection was again, total assets of - - was it 5 billion or less predominantly in the books?

We are going back to an old webcast where we gave the information on the community bank business.

But it has been - - it has been our experience at least so far, that these are institutions that are generally not exposed to the kinds of issues that many of these questions are directed to.

87% - - I have got the statistics here.

87% have assets less than $1 billion, and 11% from $1 billion to $3 billion.

And again, 85% of them are privately held.

The average limit of D&O coverage for that bank is $3.8 million.

So one of the comments that we have made is that we're not a severity book.

We're not writing significant numbers of $50 or $75 or $100 million of limits.

Where one account can become problematic to our results.

Our exposure and we have said this before in the financial arenas - - would be changed if in fact somehow the community banks broadly were dragged into the financial crisis.

We don't see that happen.

It is always possible it may but we haven't seen that happen yet.

We have some difficulty perceiving the circumstances that that could happen.

These are typically not institutions that underwrite securities.

These are typically local deposit-taking, loan-making banks that operate again very locally.

So it - - I think if you look just to the market share, can produce an inappropriate analysis of what our exposure to these events might be.

Sure, that's fair.

Just one follow-up.

Claim notices appear to be same in '08 vs '07.

Just curious given your exposure to mostly smaller accounts, would it be fair for a person to think that in the first instance, the larger financial institutions would usually be sued, but then later on, you would have more - - smaller financial institutions being targeted.

I think the answer to that would be typically not.

It - - the first half correct.

Where suits tend to go is where assets exist and where there are deep pockets.

And where the ability to martial class action suits can produce a significant outcome.

And so I think you will see, obviously, an attraction of these kind of litigation to larger financial institutions.

Many people will often ask who - - who insures them.

The answer, by the way, sometimes is in fact no one, or in fact no one in working layers.

These are institutions that often self insure.

Significant amounts of D&O exposure and they buy either - - they buy relatively high up and this is not a universal statement.

But it is true that larger financial institutions, the great big money center banks or at least the ones that used to be great big money center banks, often self insure working layers of exposure.

And it - - it is not been our experience, obviously it can be different any given time, but it has not been our experience that litigation starts at higher institutions, and indeed, inevitably filters down to smaller ones.

That has not been a trend we have seen before.

It may be different this time but again it is difficult to attach the community bank business, not impossible, but difficult, to attach it to these circumstances.

Now that's different from investment advisors, it is different from those institutions that Alan and Tom have spoken about.

Let's say specifically in reference to the Madoff matter where we have a name and we have a policy and we have identified it and put it on the schedule.

So there it is different.

But in the broader sense of the financial dislocation - - we continue to feel pretty good that our exposure is diversified and tends to be of a lower smaller institutions.

So that's good.

Thank you.

And our next question will come from the line of Brian Meredith with UBS.

Please proceed.

Yes.

Thanks.

A couple of questions here.

First, Jay, the fact that you guys are looking to potentially buy back a billion dollars of stock.

Does that at all indicate your appetite or - - your view of some of the properties that are available out there in the market place?

Just given the liquidity and excess capital that you have, I figured you would be in a pretty good position to pick up attractive assets.

No, it doesn't.

It is a number to be used for the purpose of establishing guidance.

We're looking - - we look at lots of things.

We look at - - Bill Heyman looks at investment opportunities that come along in our asset portfolio.

And to the extent that business opportunities come along, it would be imprudent for us not to look and evaluate and consider.

So no, it really is a number.

A starting point, if you like, for the purposes of calculating guidance.

Great.

And then next question, if I look at your guidance for this year, it comes out to be called a 10% to 11% return on equity.

Would you view that as kind of a trough ROE going through the market for Travelers?

Well, I would hope so.

That would be a pretty good outcome.

If you look at the bottom - - again, - - you're getting into certain questions about cyclicality and depths and all the rest.

The last time the cycle turned I think most people in the industry would have given their eye teeth to have produced a 10% or 11% return at the bottom.

So I don't know.

Again, it is a crystal ball question.

All I can do is tell you that the rate data for the last several months has been encouraging.

And it would certainly be a nice place to begin to make a bottom - - again with retentions at all time highs and with projected returns in that 10% to 11%.

It would feel pretty good to be making a bottom there if it happens.

Great, and as a last question quickly for Brian.

You mentioned the hit ratios continue to decline here although your flow is moving up.

I am just curious, can you get into a little bit on why you think that is happening.

Is it that some of the struggling carriers out there perhaps are getting even more aggressive in trying to retain business?

Do you see any kind of - - shift in the hit ratios during the course of this year?

Yes.

I think it is a function of two fundamental things.

One is - - there are clearly some distressed carriers out there and - - without question, more of their businesses in the market than would be traditionally so.

So a lot of business in play, and they are doing the logical thing which is competing very aggressively to keep it.

But we're getting our shot at quoting on it and we're writing some of it when we feel we can get it at the right rates, terms, conditions.

I think the other thing is - - we feel pretty confident about our capabilities in the marketplace.

And so really starting over two years ago we started to see more flow.

We have been much more aggressive in pushing out more products and being more proactive with the agents and I think that has really made a difference.

So I think it is those things together that are driving the flow.

And the market conditions are kind of as we just talked about so - -

I mean, on the hit ratio - - when you're losing a piece of business, are you finding that the delta between your price and perhaps the incumbent carrier is getting greater, is it less, are you barely missing it, or is it - -

- - in general, it is not barely missing it.

I would say we - - we win the - - the jump balls more often than not.

This is a bit anecdotal because we don't - - we actually do keep track of hit ratios very precisely.

What we don't keep track of because we don't always know, the extent to when we don't take business whether we lost for price or frankly we lost for something else.

So what we're answering here is anecdotal.

In some cases price may be the same but coverage limits may be a lot higher.

We don't know how to answer other than anecdotal observations from what we're hearing in the market place.

Our sense is - - and by market place meaning our own folks.

Sort of reports from our own folks saying when we're close we're in there and when we're not close we're not.

Don't take our comments to imply that the hit ratio is plummeting.

low is going up a good bit and hit ratios are coming down a little bit.

And forgetting about the hit ration for a second.

What I find encouraging, is that this has been - - in this more challenging market over the last couple of years, the product development whether it is Quantum Auto, Quantum Home, Travelers Express, the new products in middle market, these things have made a difference.

They have clearly - - and we have seen it, they have clearly made a difference in the amount of business that we have an opportunity on which to quote.

The more challenged competitive environment, and by that I mean the position of certain other companies, has certainly - - augmented that.

It is very difficult for us to sort out how much is a result of our product work in development and how much is a flight-to-quality but it is pretty clear to us they are both working.

And the notion that we could in fact see improving margins - - and Joe, by the way, made a very good point earlier.

Brian said improving margins.

Yes, improving from where they would have been if rate hadn't picked pup.

The rate is still negative.

We're still not above that zero line but nonetheless, that rate line picks up it is improving margins to where they otherwise would have been.

The combination of an underwriter's willingness to be more aggressive in the marketplace because they feel better about the rate picture combined with that increased flow has the potential - - no prediction here, has the potential of being pretty powerful.

And that's exciting to us and we will see.

Maybe it occurs maybe it doesn't.

But it is - - we are - - my comment about being well positioned really speaks to that.

We - - we're seeing more flow.

We've got the things we need to deliver on it and as price changes underwriters' attitudes will also and that can be pretty powerful.

Great, thank you.

And our next question will come from the line of Matthew Heimermann with J.P.

Morgan.

Please proceed.

Hi.

Just two quick questions, if I may.

First on the FI, or actually the way you term it, the high-risk professional lines book.

Can you give us a sense of loss ratio-wise, what you're booking it at, in the fourth quarter?

I don't think that we have broken down loss ratio at that level.

I don't have the data handy actually.

And I am not sure we're inclined to disclose loss ratio at that granular of a level.

Could you just maybe provide some color.

You made big comment with respect to the whole book that you still expect the book to be profitable.

I think you said in '09 in one of the comments in the press release.

So I would just be curious whether or not that comment would then hold for the at-risk book.

When we make that comment, we're making a comment with respect to the portfolio overall, and intentionally not breaking it out into any particular piece.

And really the sense we're trying to give you there is that from there are no shocks coming to that book and that will continue to be a profitable book as a portfolio.

We - - we weren't intending to give you a more granular - -

But it is insurance in the following sense.

Once you begin to identify the accounts that are likely to have losses, it becomes unlikely that that book narrowly defined would be profitable.

I mean ultimately insurance is a combination of those accounts that have losses, and those accounts that don't.

And what you have actually just kind of asked is, if you identify those accounts, that you think are going to have losses, do you think that they will still be profitable.

The answer I think is pretty obviously, no.

Yes.

I get the law of large numbers.

I guess my question is - - the one thing we're all sitting from here is - - it is one thing to say the losses in the Financial Institution book even if things go bad may not really be that material from an earnings standpoint.

And I frankly, I would agree with that, but I guess the only thing I'm trying to get at is trying to get a gauge of if I think there are going to be losses there, whether or not I am - - how big the delta is from me to you - - either side.

So that is what I am struggling with.

I understand the direction of your question, and I simply come back to kind of Alan's comments.

I think you can take a look at the FPII business broadly, and the details that's been provided here with respect to '08.

And I don't think it is terribly difficult to analytically make a projection on into '09.

There is an observation in here that '08 claim activity was about the same as '07.

We made a comment about how the '07 estimate has developed.

I mean - - short saying that - - accounts with losses have losses, I - - I think that we have really tried to give you - - not for the purpose of giving you information.

But there is enough information here to have a view on how FPII would perform next year.

Okay.

The other - - just with respect to the Lloyd's business.

Is that a business where - - and I know the capital is moving around a lot because of the currency, but it that a business where net net allocating capital in '09 you're likely to increase - - your appetite?

If you're holding constant the capital requirement from the - - appetite in the business, then I would say that - - you wouldn't expect to significant change in the appetite.

Maybe it would pick up a little bit but I don't think we would expect a wholesale change there.

The Lloyd's business just like all of our businesses is subject to internal capital allocations.

And the returns that - - we calculate based upon premiums and loss estimates going forward.

So we will factor in to those processes - - whatever the costs are associated with it.

And in the case of Lloyds - - what we and other carriers use instead of hard capital are letters of credit that support - - the Lloyds business.

So in our case - - what you will see is a higher - - cost associated with those letters of credit.

But again it is all factored into the pricing - -

And I think that is the relevant point.

We're not capitally strained in any way.

If there are business opportunities to write more business in Lloyds at attractive prices, we can and we will.

There is nothing that limits our ability to do more business, to write more profitable business there, or frankly in any line of business that we have.

We're in an unusual position, and - - as evidenced by the share repurchases of actually being in a position where we're still generating excess capital.

If we can write more insurance business, we're all for it.

We love the business.

And if we can do it profitably and thoughtfully, we will.

Okay.

And then last one if I can sneak it in.

We have four more other people.

Can you take it offline?

That's fine.

I was just going to ask whether or not - -

Go ahead.

Our next question will come from the line of Paul Newsome with Sandler O'Neill.

Please proceed.

Good morning.

There has been a lot of comments by many of your peers about hiring teams that have a number of companies including AIG.

But, was wondering if - - you are participating in that process as well as so many of your other peers are.

We've - - there are certainly people from AIG who have joined us.

There are people from other companies who have joined us.

And - - I don't know that we're out hunting for teams of people to bring in teams of people in books, but we're a 33,000 employee organization.

There are always people from other carriers who come join us.

So I wouldn't - - my answer to the question is, yes, we have had people from AIG join.

But I wouldn't particularly perceive it as hiring teams of people to bring in books of business.

Sorry, in the interest of time because we want to get everybody in.

Just if you could just keep it to one question and make it the one you really want the answer to.

So - - Paul, I didn't warn you so I will give you one more, but then we have a couple other people.

No, go ahead with the next.

I play nice.

Thank you.

Thanks, Paul.

Our next question will come from the line of Meyer Shields with Stiefel Nicholas.

Please proceed.

Thanks.

Good morning.

I hope you didn't discuss this already.

Are you seeing any changes in the frequency and severity of uninsured or underinsured motorists within Personal Life?

We didn't discuss it already.

And when you go in aggregate, not something that we're seeing that is significant.

When you get to individual local geographies there are always nuances.

But I am assuming what you're really asking is is there something related to the economy.

Right.

Which is causing there to be a higher number of uninsured or underinsured motorists in the environment.

At this point through our book, we're not seeing that.

Is that what you were targeting?

That's exactly it.

Thank you.

Don't know what is going to happen going forward but we're not seeing it in our experience yet.

And our next question will come from the line of Josh Shanker with Citi.

Please proceed.

Thank you.

The question is easy I suppose but maybe a longer answer.

What are you liking in terms of the investment space and how much risk is appropriate for Travelers in viewing itself as an investment corporation rather than an insurance corporation.

Well, I think I - -

This is Bill Heyman speaking by the way.

I start with two observations and that is the first.

We have always believed were an insurance company which invests its money rather than an investment organization funded by insurance premiums.

Second, as we look at the landscape, we're looking to buy assets of the type we bought before, at better prices.

Rather than to buy assets that we wouldn't have bought before, simply because they are now at lower prices.

In terms of looking at risks, I - - we think risk is a combination of price and reasonably expected scenarios.

And simply because price is lower, doesn't mean the combination has changed.

And paradoxically, we could look at assets selling at much lower prices that they sold a year or two ago and conclude that they are even riskier now.

But that being said, we think there will be - - we think there will be opportunities, believe it or not, in private equity, although the capitalize on them, one will likely have to have commitments to funds existing now which we do.

We think there will be opportunities in high-grade corporate debt.

We're worried about so-called distress assets not withstanding the - - the rush into them because we think that corporate reorganizes may be very different.

The lack of financing may mean that recoveries are lower, more companies are liquidating as opposed to reorganizing.

And the world you enter when an obligation defaults may be very different than the one you entered two years ago when it defaulted.

Therefore, we would like not to experience that.

We were certainly solicited by every opportunity fund in the last year or so, and passed on them.

They either performed poorly - - or blew up.

I guess the short answer is we're going to do very much what we have been doing and just hope we get better prices.

And no indications on which asset classes we should be referring to or you want to give us any idea.

I think you could make a case that every asset class is cheaper than it was.

Our allocation is not likely to change a great deal.

Okay.

Thank you very much.

And our next question will come from the line of Ian Gutterman with Adage Capital.

Please proceed.

Hi, everybody.

I just wanted to ask a little more about the impact of the economy on both your business and strategically what it might do to your competitors.

I guess I am thinking in a couple areas.

One is just is there less exposure in the industry and therefore less growth, but you have - - you still have to spend the same amount of time servicing an account.

That would seem to cause some expense pressures for yourselves.

And so how are you dealing with that.

And then competitively, you've obviously faced a large number of very small competitors.

Could this be - - a crushing blow to them in that they can't - - the lack of skill they have already.

Does this make the scale benefit you even more compelling?

And then operationally for you guys how - - how might we see - - maybe as claiming behavior changes, maybe some of those truckers are facing bankruptcy and become more aggressive in their claims, or maybe the automated underwriting box - - isn't quite calibrated for a different economic environment, doesn't perform as well as you like.

Are there things you're doing operational reviews to make sure people at the field level are aware that - - your business might respond a little bit differently than it would in a more normal economic environment.

I will take a shot at it.

Let me - - just to give everybody notice, Jay, after I finish the question or we finish the question, Jay Benet is going to I hope provide some other insight into the bond and financial products loss ratio.

Some of the questions I think have been centering around this and there may be some confusion.

And I think he can add some clarity to it so - - we will get to that as soon as we finish.

First, in the context of our own business - - I have enough trouble figuring out what is going on in our own shop - - forget trying to figure out what's going on in other people's shops.

But I can tell you in our shop that volume is up.

Not volume being written, but flow is up.

And so underwriters are busy.

It is not as if the moment we have a lot of excess capacity sitting around in the field waiting for something happen.

Universally, everyone I talk to in the field and - - the people I interact with, our folks are reviewing accounts, they are out in the market, they are visiting with agents.

It is not a quiet time at the instant.

That is driven again by our own product development over the last several years.

And I think some of the competitive challenges that you see in which have caused agents to shop certain accounts more dynamically than perhaps they might have in the past.

That's - - that's pattern that we talked about in the third quarter and it continued on into fourth.

The claim organization is in fact, I would say busy.

They have got - - there are still remnants of Ike and Gustav and all the rest of the cat season we dealt with this year.

So in terms of resources in our organization, people are hopping and there - - there is not a lot of idol time.

Are they getting paid less dollars for the amount of work they are doing just because the account that might have 500 employees now has 400 employees but doing the same amount of work but less premium dollars associated with it.

This is an important thing to understand.

As I said before, I would anticipate exposure continuing to decline.

But remember that a dollar of exposure, has lost cost associated with it.

One of the great anomalies of our business, if you lose $100 in premium with losses associated with it, you have got business that is even on the margin that an 85 combined ratio, you have $0.85 in saved losses and 15 points in commission that's saved and premium passes that aren't paid.

So the bottom line impact of exposure, it is not zero.

But it is not nearly as powerful as people think.

And of course you see that on the way up.

When we add exposure it doesn't change the bottom line as quickly or as dramatically as some people think it will.

The marginal costs for dynamic in our business is pretty high.

Make a distinction between that and rate.

Rate is extremely powerful from the bottom line perspective.

You pay 15 points round numbers of commission, and the rest falls to the pretax line.

So a point of rate, is quite, quite powerful in terms profitability, a point of exposure, far less powerful in terms of profitability.

So as we look at the situation, right now, and again, not forecasting but what we have seen in the last several months, is generally speaking improving rate and declining exposure.

That remains pretty powerful from a margin perspective.

And some of it is as Jay said we're obviously speaking through our lens.

So - - if your a company that has a significantly different, as in lower, retention experience than we have got, that pressure is going to be a lot more intense.

But - - we are - - we are keeping the business that we want to keep and we have lots of opportunities and so, we feel - - feel pretty good about it.

In the context of a recession, certainly we have talked about this before, our trucking business is already reflecting declining volumes and some higher losses and has for some time.

That's not a new dynamic in our Northland operation.

If you speak, very, very broadly about recessionary times experience suggests that workers comp losses tend to rise.

That is a phenomena that we have seen before.

And that may be I would say if I think about our book of business, the principal loss dynamic.

Again, I will put the Surety business also to the side for a second because that has its own unique dynamics that can be more severity driven.

You can have an individual name obviously get into financial distress.

But if you're look for a pattern, I would say workers comp loss is rising.

We watch for that, we try to underwrite to it.

And consistent with Joe's comment on the loss trends of the - - specifically the UM, UIM stuff.

But more broadly, we're obviously watching very, very closely our claim experience.

We see little but not dramatic impacts from the economy.

We expect that they will become more dramatic.

Many of those are negative.

Some of them are actually positive.

People drive less, et cetera,.

But we're watching closely but there haven't been big spikes.

Trucking is one where we have been seeing experience.

I know we're out of time but just quickly is it easier or harder for you to identify those changes now that you do more automated underwriting.

Basically does the automation make it easier to spot, or does the lack of underwriters - - going scrubbing every account one-by-one and you don't get anecdotal information make it harder?

It probably makes it easier, in the businesses where we're doing it because you can capture the data in a more consistent fashion, but it does make it different.

I am not arguing that one is necessarily better than the other, but it does make it very different in terms of what you have to do to see it and spot it.

Anecdotal information by its nature is anecdotal and colored and harder to assimilate rapidly and have a consistency to it.

And when you're dealing with smaller accounts, where the law of large numbers applies, that becomes very distorted.

So, we feel better about it there.

What you get in this, and it is why we built significant product management organizations and significant investments in our management information infrastructure, is - - is the ability to crunch all the data and look at it.

There are different things, symptoms, that push sometimes in different directions.

As Brian points out we may see less driving exposure in an auto environment.

But over time we're less likely to see less maintenance investment as people can't quite afford the brake job or the new set of tires.

So that may push up, one pushes down frequency, one pushes up.

They will come at different periods of time along that economic downturn and we're watching for all of those different components, very carefully.

Very thorough answer.

Thank you, guys.

This is Jay Benet.

The thing I wanted to add color to just to - - take some of Jay's comments about - - if you look at businesses that have losses, of course - - they have losses.

And if you look at other businesses - - within FPII in particular, as Alan and Tom had said, this is a very diversified portfolio.

We don't want to give people the impression that when you look at FPII's combined ratio of 87.2 that is uniform amongst all the different businesses within FPII.

We certainly don't close our eyes to the loss experience of any one of these individual businesses.

And what you're seeing in our numbers, or potentially not seeing in our numbers is - -

We're seeing that you may not - - you have access to.

When you look at things like the Financial Institutions book, the Professional Liabilities book, the Public Company liability book within.

I mean there are some higher loss ratios, combined ratios associated with those businesses that are being offset by very favorable results because of - - the lack of loss activity that is taking place in areas like commercial and construction - - commercial surety and construction services.

So - - this is all blending as Alan said to the 87.2.

We don't want to give anyone the impression that we're not fully looking at the loss experience that is taking place in some of these businesses.

The Financial Institutions portion on the financial products.

It is - - it is combined ratio reflects the loss experience that we're speaking about here.

So does the Professional Liability book within Bond & Financial Products.

And if you're asking if those were profitable as I said before, no in 2008.

Those individual books of business, within Bond & Financial Products were not.

But the Commercial Surety business was.

The Construction Services business was.

The private and nonprofit Bond & Financial Product business was.

So there is a big book with lots of lines and those two lines, to Jay's point do reflect the claims experience and the adverse development that we anticipate in those lines.

I think that will be helpful in understanding how the numbers roll together.

And ladies and gentlemen, that concluded the question-and-answer period for today's conference.

I will now turn the call back over to Ms.

Gabriella Nawi for closing remarks.

Thank you all for joining.

And before we go - - Matt Heimermann I owe you an apology and you will get first call next quarter.

Also if you have any or other questions refer to myself or Andy Hersom where our details are at the bottom of the press release.

Thanks very much for joining us.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day, everyone.