旅行家集團 (TRV) 2009 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 questions until the completion of the formal remarks at which time you may be given instructions for the question-and-answer session.

At this time I would like to turn this call over to Ms.

Gabriella Nawi, Senior Vice President of Investor Relations.

Ms.

Nawi, you may begin.

Thank you, Lacy.

Good morning and welcome to the Travelers' discussion of our first quarter 2009 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 Web site at www.travelers.com under 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 prepared remarks and then we will open it up for question.

Before I turn it over to Jay, I'd like to draw your attention to the following on Page 1 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 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, efficiency of the Company's reserves and other topics.

The Company cautions investors that any forward-looking statements 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 SEC.

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

Also in response or remarks to questions we may mention Travelers' operating income, which we view as a measure of profit, and other measures that may be nonGAAP 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 we're all set and I'll turn it over to Jay.

Thank you, Gabi.

Good morning, everyone and thank you for joining us today.

In light of the overall environment and as it relates to investment performance recalling that the S&P 500 Index traded at 666 shortly before the end of the first quarter, our results this quarter were again quite solid and our financial performance speaks for itself in our release.

Our Management team is going to speak to some of the detail in our businesses, but if I could take just a moment or two and give a broad perspective on our business trends.

From an underwriting perspective, business insurance continues to gain momentum.

First quarter data continues to show an improving price trend and we've also seen the continuation of the opportunity we have had to quote on more new business driven we believe by a flight to quality.

It is particularly noteworthy that in this quarter we have been more successful at converting this flow to written business and Brian will speak to that important dynamic.

Exposure continued to decline, we suspect as a direct result of the weakening economy, and where appropriate on our part disciplined underwriting given general economic conditions.

Notwithstanding several quarters now of improving rate trends, we are mindful of cost pressures that all businesses have, so we will watch rate information carefully quarter-by-quarter, see how it goes and refrain from making predictions.

On the Personal lines front, during the quarter we announced our effort to launch a direct-to-consumer initiative leveraging the Travelers brand.

There's been much work to get to this point, the development of Quantum in addition to allowing us to offer a best-in-class product to independent agents was critical in giving us a product that can compete with the best direct writers.

In order to make Quantum successful we also needed to invest in and development the claim capacity that can serve as a broad array of auto customers.

Lastly the development of QuantumHome gives us a unique advantage in bringing a full product line directly to consumers.

The direct-to-consumer initiative did increase our Personal lines combined ratio in the quarter compared to last year and will continued to so for a number of years.

Nonetheless we are confidence in our ability to succeed and we believe this is an important step in our Personal line strategy.

We will however always be and remain an independence agent-based Company and our commitment to delivering the best product possible at the most compelling value to our agents is paramount in our minds.

Which we will of course speak more about Personal lines results and this initiative.

Alan Schnitzer will speak about our Financial, Professional and International segment, but I would share with you that the claim activity we are experiencing in our Financial and Professional lines, as it relates to financial related matters is consistent with what we were expecting and what we shared with you last quarter.

Consequently and positively there is no change in our outlook in that regard.

In the investment arena we continue to be pleased with our portfolio performance in this most difficult environment.

Our long-term fixed income portfolio produced returns very much consistent with expectations but our alternative portfolio posted negative returns for the third consecutive quarter.

We are pleased that we have had a low level of impairments relative to our $72 billion investment portfolio and we remain 94% fixed income invested with an average rating of AA+.

While in the past some might have thought our underwriting and investment philosophy to be conservative, we are pleased that the characterization seems now to have morphed to prudent.

As further evidence Jay will be sharing with you an interesting analysis of our exposures related to a group of companies Moody's has identified as "bottom rung".

It's another example of thoughtful risk management in our organization.

Finally given all the recent press reports on merger activity, including some mentioning us, let me reiterate our philosophy on transactions.

First we will not comment on any specific situation.

In addition, given our substantial experience, we believe we understand the risks inherent in an acquisition quite well.

Our financial objective is to deliver a mid teens return on equity overtime to our shareholders.

As a result we would only engage in a transaction which given all the risks inherent in the M&A environment we fundamentally believe makes that mission more achievable.

And with that let me turn it over to Jay.

Thanks, Jay.

Our investment portfolio, our reserves, our capital and our liquidity remain in very good shape.

As we have said over many quarters, operating company capital remained at or above all of our target levels, our debt to total capital ratio actually decreased to 18.9%, which is below our 20% target, a midpoint of a 15% to 25% range that derives from our AA ratings.

Holding company liquidity increased to over $2.5 billion which is approximately $1.5 billion higher than our target of one years worth of interest and dividends and this is after using existing funds to retire $141 million of debt that matured in the quarter.

We have negligible amounts of debt maturing through 2011 and still do not rely on the commercial paper markets.

Book value per share of $45.12 inclusive of a net unrealized investment gain of $543 million after tax increased 5% during the quarter while book value per share ex FAS 115 of $44.19 also increased by 2%.

And we closed the quarter with approximately $26 billion of common equity.

We updated the list on Page 5 that shows areas of market disruption and their impact or lack thereof on Travelers.

And we have added valuations of preferred and hybrid securities issued by global financial institutions to the list this quarter of which have we currently hold only $56 million after having taken impairments of $55 million in the current quarter.

Overall we continue to be unaffected in any significant way from these areas of market disruption.

We continue to look for and evaluate any information that could suggest investment valuation risks.

Moody's recently issued a publication entitled "Bottom Rung" in which they provided a list of 283 speculative grade non-financial U.S.

issuers with high default risk.

We hold investments in only 14 of these names with an aggregate book value of only $26 million and a total market value of $23 million.

Our bond business also reviewed its exposure to the entities on this list.

Our commercial and construction surety business have aggregate-exposed limits to the identified entities net of reinsurance and collateral of approximately $270 million.

If in a worst case, and of course unrealistic scenario, every account had a full limit loss our after tax exposure would be about $175 million.

And as a result of disciplined underwriting practices we believe our actual exposure to losses on these accounts is actually negligible.

Our high-quality $72 billion investment portfolio, which remains well diversified across industries, investment types and individual issuers, ended the first quarter with an $803 million pretax unrealized gain.

Fixed income investments continue to comprise 94% of the total investment portfolio with a AA+ rating a 4.2 duration.

And below investment grade investment comprised only 2% of the fixed income portfolio.

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

During the first quarter we recorded net realized investment losses of $137 million after tax, including impairments of $120 million after tax comparable to the fourth quarter of 2008 and representing a very small percentage of both our investment portfolio and our capital.

The information that appears on Page 7 is based on a schedule that will appear in our Form 10-Q showing unrealized losses on investments for which estimated fair value was less than 80% of amortized cost.

This amount has decreased from the fourth quarter of 2008 and now stands at $673 million due in large part to the impairments taken in the quarter.

While still a small fraction of both total investments and shareholders equity, we do closely monitor these investments since these are the most likely source of future impairments.

I'd also like to make one other important observation that is reflective of the discipline and rigor of our investment impairment process.

We have no investments for which fair value is less than 80% of cost for more than 12 months and those that are in the six to 12-month category add up to less than $100 million.

Finally I would point to you Pages 23 through 26 of the webcast, the appendix, in which we provide supplementary information about our commercial mortgage-backed securities and the composition of our private equity hedge funds and real estate portfolios.

As shown on Page 8, our operating income of $799 million declined 21% from the prior year quarter, primarily due to a $176 million after tax reduction in net investment income, which I will discuss further in a minute, margin compression that we had anticipated in our plan based upon recent pricing and loss cost trends and lower net favorable prior year reserve development all partially offset by a $40 million reduction in our estimate of Texas Windpool assessments related to Hurricane Ike and $69 million of tax benefits resulting from a favorable resolution of prior year tax matters.

That losses were fairly comparable quarter-to-quarter ex cats and net favorable prior year development, our GAAP combined ratio was 93.9% and after adjusting to the change in the TWIA estimate, which was worth 1.2 points, it was 95.1%, so we remain pleased with the underlying profitability of our businesses.

First quarter net investment income of $474 million after tax, which is shown on Page 9, was down significantly from the first quarter of 2008 but up slightly from the most recent quarter.

The long-term fixed income portfolios after tax yield was 3.7% consistent with prior periods while the short-term portfolio yielded only 40 basis points due to the very low interest rate environment for short-term investments.

The nonfixed income portfolio yielded a negative 11.1% as private equity, real estate partnerships and hedge fund valuations continue to be challenged by financial market conditions.

And consistent with our practice we updated as best we could our nonfixed income returns through March 31, despite the usual time lag in which investment managers report results.

Page 10 of the webcast shows the three major contributors to our operating return on equity, fixed income, NII less interest on corporate debt, what we refer to as the passage of time component contributed 8.2 points in the current quarter down slightly from prior years due to the lower short-term interest rates.

Nonfixed income NII, a much smaller contributor to operating ROE, the one that varies from period-to-period, contributed a negative 1.7 points in the current quarter and underwriting income contributed 5.9 points.

Cumulatively from January 2005, we produced an average annual operating ROE of approximately 14.4%, consistent with our stated longer term goal of mid-teens ROE.

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

Thanks, Jay.

Turning to Slide 11, Business Insurance operating earnings of $547 million were down 20% from last year, primarily due to the drop in investment income.

The underwriting results had a lot of moving pieces but in the aggregate a pretty good story.

Net favorable prior year reserve development, although lower than last year, was still considerable at $118 million after tax and cat losses were light.

Net of these items our combined ratio improved 0.5.

We reduced the estimate of our Texas Windpool assessment from Hurricane Ike lowering our expense ratio nearly 1 point and large losses, which were running heavy in first quarter 2008, return to planned level.

Absent all these impacts the rate and loss trends in Business Insurance resulted in about 2 points of margin compression, which was consistent with our expectations.

I'll talk about the rate trends as I go through the top line.

On the left side frequency trends are relatively flat and loss inflation remains benign in the low single-digits.

We are watching for the impact of a more challenging economic environment on our loss activity and to date there hasn't been anything of significance.

So we feel good about the bottom line story, but just as good about the top line.

Turning to production, net written premiums increased 2% from the first quarter 2008 as we had reported last quarter, the economic slow down has negatively impacted those businesses in the construction, construction fields as well as large property accounts.

However in spite of the broad economic contraction, many of our businesses are indeed experiencing premium growth.

We are pleased with the overall production results which underscore our ability to find opportunities in difficult conditions.

As shown on Slide 12 retention remains high across all our domestic commercial businesses, uniformly exceeding first quarter of last year and at or higher than the fourth quarter.

In the face of significant instability in the marketplace these results reflect customers' flight to quality and are an important component of our continuing success.

The renewal price change data indicates that prices on these renewed accounts are relatively stable and in general show an improving trend.

Slide 13 takes the price change data and splits it into its two primary components, the pure rate and exposure change.

The trends show rate changes in moving up and in the aggregate is now approaching zero.

At the same time exposure change has been dropping and in most of our businesses has turned negative.

This of course is a reflection of the contracting economy.

On slide 14 we display our new business results, and this is an area where our story has begun to shift very positively over recent quarters.

In the aggregate new business dollars are up 1% from the first quarter of 2008.

This is the first quarter-over-quarter increase in new business in over two years and a significant improvement from the down 7% to 8% we were experiencing early last year.

The improvement is being driven by two factors.

First and clear from the numbers on the slide, our new product and platform roll-out in Select is having a strong impact with new business dollars up 20% from first quarter 2008.

The second is less obvious from slide and that is that throughout the quarter we have seen an improvement in the quality of deal submissions in our middle market businesses.

For over a year now we have had a consistent new business message in Business Insurance.

That is, very strong submission for the flow of new business opportunity, fairly constant quote ratios and slightly declining hit ratio.

We were comfortable that although this resulted in less quarter-over-quarter new business dollars we were getting more opportunities and maintaining our underwriting standard in tough market conditions.

So what's changed?

Well, across a broad array of our middle market businesses these trends have improved with not only greater submission flow but more importantly an improvement in the quality of that flow.

We are now seeing more of our competitors' premiere accounts, those $250,000 to $1 million accounts that are stable, well managed businesses who are conscious of risk management and value quality partners.

Slide 15 shows the amount of new business we are writing in commercial accounts and other business insurance as a percentage of our expiring base for the last five quarters as well as month-by-month in the current quarter.

The reason we show the new business as a percentage of the expiring base is to take the impact of seasonality out of the numbers.

You can see that in both February and March we saw a significant increase in our new business ratings.

We usually don't focus too much on monthly data but here we think the trend in the last two months speak to a real new business opportunity for us and is worth some emphasis and explanation.

First, I want to emphasize that we feel very good about the profitability of the business.

We have lots of metrics around pricing and our increased writings are hitting target return levels for new business.

Second, the increase is not accidental.

It is a result of a very conscious strategy to a expand product offerings, better align our capability and more proactively seek opportunities in the market.

We've been talking to you about this for several years and we believe market conditions are now such that we can see some real benefit.

Third, the flight to quality is very much agent broker driven.

Although somewhat anecdotal it is clear to us that agents are focused on insuring that their customers, especially their best quality accounts, are with very high-quality markets like Travelers, and this dynamic has been much more noticeable in recent months.

Fourth, the improvement in the rate environment has been an obvious enabler for these results.

And, lastly, our success is being driven by a confidence in our people at the point-of-sale.

Unlike many of our competitors we are not on our heels but are well-positioned and looking for ways to invest and drive opportunity.

Our front line staff is fully focused on the marketplace and is energized by our collective success.

So we're not going to predict where the market will go, but we are encouraged by the quarter's results.

Although exposures are contracting, the rate trends are improving and the flight to quality is impacting both the amount and quality of our opportunities.

The result is that the Business Insurance segment produced an improved topline and continued solid margins.

Given the broad economic contraction we are very pleased with these results.

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

Thanks, Brian.

Turning to Slide 16 in the Financial, Professional and International Insurance segment, operating income was $148 million for the quarter as compared to $208 million in the prior year.

The adjusted combined ratio for the quarter was 91.6%, up 2.8 points from the first quarter last year.

This was primarily driven by a small number of large losses in our international business.

These losses were consistent with our expectations but higher than they were in the first quarter of 2008.

To a lesser extent, a mix change as a result of lower construction surety volumes also impacted the combined ratio.

Adjusting for the impact of changes in foreign exchange rate net written premium declined 6%.

In bonded financial products the decrease in net written premium is primarily due to lower volumes in the surety business.

In the international business, the decrease resulted from changes in foreign exchange rates as well as the timing of reinsurance treaties in 2009 versus 2008.

Turning to Slide 17, in our management liability business in the quarter retention remained high and consistent with the past four quarters.

Renewal price change was positive at 2% reflecting positive rates partially offset by decrease in exposure.

New business was a little lower than in the prior year driven by declines in new business in both financial institutions and private nonprofit largely due to discipline underwriting.

This decrease was partially offset by an increase in our public company liability business primarily due to a flight to quality.

In the International business retention was at 78% in the quarter, in line with recent quarters and down four points year-over-year primarily due to intentional underwriting actions.

Renewal price change was flat as slightly positive rate was offset by decreased exposure.

Adjusting for the impact of changes in foreign exchange rates new business was ahead of the prior year.

In our fourth quarter earnings call we updated you on the impact of the financial market disruption on our management liability business.

As we told you we continue to monitor that analysis on a monthly basis and our conclusions remain the same.

Due to a well diversified portfolio and disciplined management of the exposures, we expect that the management liability business will continue to be profitable in 2009.

With that let me turn it over to Joe for a discussion of Personal Insurance.

Thanks, Alan.

Personal Insurance had a good quarter with solid earnings and topline growth.

Despite some adverse weather and a challenging auto marketplace, the business continues to demonstrate sounds results, something I'm especially pleased with given these difficult economic times.

Our Personal Insurance business continues to benefit from a balanced mix of auto and property business.

If you turn to Page 18, you can see the first quarter had strong combined ratio of 93% and a 3% growth in net written premiums.

Prior to the first quarter of 2008, operating income is down $27 million driven primarily by lower levels of net investment income and increased in weather related losses and reduced underwriting margins related to do pricing, loss cost trends and mixed changes partially offset by net favorable prior year development and our previously discussed reduction in the TWIA assessment.

Before getting into product specific results I'd like to share some details on our exciting direct-to-consumer initiative.

As Jay mentioned earlier, during the quarter we announced our intention to expand, strengthen and broadly deploy our capabilities to market directly to consumers.

Travelers is a leading independent agency Company and is committed to enhancing our leadership position with agents.

While we believe that the independent agency channel is and will remain vibrant, we also recognize that a growing population of consumers is choosing to purchase auto insurance directly.

With our execution strength and by being respectful of the value that independent agents deliver we're confident that we can successfully distribute through both channels simultaneously.

Successful introduction of our Quantum products and the investment in our claim infrastructure, has enabled to us competitively serve a broad cross section of consumers.

We have experience in distributing products outside of the independent agency channel through our robust affinity business.

We have been expanding our existing capabilities and increasing our activities to market insurance directly to the consumer.

We have already successfully expanded our Web capabilities in advertising and in the second quarter we will expand our marketing with a multi-media campaign including television advertising.

We recognize the results of the direct-to-consumer initiative will have an impact on our combined ratio for a number of years.

For the full year 2009, it is expected to have a combined ratio impact of 2.5 points for auto and 1point for homeowners and other.

We believe this initiative will better position us to profitably grow our business and is well worth the investment.

We are excited about both our prospects and our early progress.

Looking specifically at our auto results, our combined ratio for the quarter was 102% or 3 points higher than the first quarter of 2008.

As you can see on Page 19, this increase was driven by 2 points from the results of our direct-to-consumer initiative, and by an additional 2 points from net unfavorable prior year reserve development related to New Jersey, PIP and bodily injury.

The New Jersey results were driven by a difficult PIP environment, exacerbated by the fact that we had a number of operational missteps and recognizing and responding to the local environment emerging trends.

We believe that we've identified those underlying issues, reset our organization and are executing the steps necessary to fix these issues.

Excluding the impact of our direct-to-consumer initiative, our full year 2009 guidance assumes an auto combined ratio in the high 90s.

As I mentioned earlier, the direct-to-consumer initiatives is expected to impact the auto combined ratio by 2.5 points for the full year.

For those of you who wonder how we perceive the 98 combined ratio it would meet our return threshold albeit at the low end of the range.

Looking at our auto production results on Page 20, retention was 82%, policies in force grew 1% over the first quarter of 2008, and renewal price change increased to 5% reflecting proactive rate filing activity.

We are seeing a decrease in new business volumes, and looking at policies in force stated in our statistical supplement, you can see the sequential quarter policies in force declined.

We believe that in these challenging economic times more consumers are demonstrating increased sensitivity to auto premiums.

Similar to previous quarters we experienced auto loss trends declining slightly, severity trend was slightly increasing and was offset by modestly decreased frequency.

Turning to property results, we produced an excellent combined ratio of 83% which was 2 points lower than the first quarter of 2008.

Production results for the quarter were strong but policies in force, growth, a consistent 3%, retention stable at 86% and renewal price change of plus 6%.

We remain pleased with the continuing growth of the QuantumHome product and its ability to drive profitable new business despite very challenging economic condition.

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

Our property business remains a great strength of our Personal Insurance franchise and one that we will continue to leverage.

While the marketplace remains competitive we are seeing increasing signs of firming in the auto line, we are continuing to monitor loss trends, profitability and marketplace conditions, as well as the changing economic climate as we adjust our tactics going forward.

We remain pleased with our overall results and look forward to building our next success.

With that I will turn it back over to Jay.

Thanks, Joe.

Page 21 sets forth our annual guidance for 2009 along with certain supporting information.

We continue to project 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 approximately 10% to 11%.

Based upon the limited visibility we have of the investment environment, today we would guide you to the lower half of this range.

Our guidance assumes full year cat losses of $360 million after tax or $0.62 per diluted share, no additional prior year reserve development either favorable or unfavorable, no significant changes in private equity and hedge fund valuations for the remainder of the year as we are assuming unchanged capital markets condition, lower real estate partnership valuations due to a continuing downward trend in commercial real estate values, share repurchases of $750 million taking into account potential investment opportunities for which returns more properly reflect risk and the uncertain economic conditions that all businesses face rather than a shift in our capital management strategy.

Also no significant change in average invested assets ex FAS 115 and a weighted average diluted share count of approximately 585 million shares.

With that let me turn it over to Jay.

Thanks, Jay.

Just a quick closing comment before I turn it back to Gabi to take your questions.

We are obviously a very fact-based organization and we tend to report on statistics very heavily.

But I'd like to make an observation that's somewhat anecdotal and really reflects much of what Brian and Joe and Alan have been speaking about for the last half hour.

There is a sense of enthusiasm and confidence and a real upbeat feel in our field organization that is really quite remarkable, it is palpable.

And a combination of the dynamics in the industry and in our business meeting up with that sense of confidence in the field just gives us a real upbeat sense of where this organization can head over the near term.

I can't give you a specific.

There's no emotional meter that we can measure but when you sit with any of our field folks you see it and you feel it and you understand it.

With that, Gabi, let's take some questions.

Great, just for you all we know there are conflicting calls today so we're prepared to stay on and answer whatever questions you have.

And with that, Lacy, we can open up the questions although I'd ask that you limit it to two if possible.

Thank you.

(Operator Instructions).

And our first questions will come from the line of Matthew Heimermann with JPMorgan.

Please proceed.

Hi, good morning, everybody.

I'll try to-- since I'm the first, I'll try to make it good.

With the direct strategy, can you talk a little bit about, and I think you mentioned this in your comments, how much of the direct market you feel like your product will address on kind of day one?

And also whether or not, I know you talked about platform and Quantum and all these other end claims that play a role in you being ready to roll-out, but is there also now kind of a significant shift in kind of the preferred customer shopping directly as well?

Two good questions, Matt.

I'll try to hit them separately.

Our Quantum product has the capacity to address a very broad cross section of the marketplace.

We don't target the real meat of the non-standard marketplace but it does have an ability to hit a broad cross section.

What you'll see us do more early though is more a function of brand.

As we use the Travelers brand and we think about its positioning, we will send our target marketing their to the meat of that brand appeal which will be a little bit more towards a preferred end and it will have a little bit of a recognition of folks who are buying a value proposition that isn't cheap, it's buying quality.

So that target will not hit the full range of what folks think about in the direct marketplace and we'll expand from there.

It's a thoughtful way to enter the marketplace, expand our capability, build out our experience and do it leveraging our position of strength.

It'll also leverage our homeowners capacity, which we really do believe is a unique competitive advantage that we have, and will recognize consumers who are trying to think about the full breadth of their risk.

Well to your second question on shopping behavior, we're seeing increases in shopping behavior.

I wouldn't describe the preferred or highly preferred market moving to levels as you typically see in a standard market.

I do think you're seeing increases, albeit in that case from a lower starting point.

But there is a general economic environment where people are a little more sensitive to their expenditures and they're probing and asking questions, they're thinking about exposures, they're thinking about how to impact that premium and they're more sensitive to rate increases.

We haven't seen, it's not like we've seen a huge percentage of our book calling and checking things but we have seen increases in call activity and inquiries.

And that's helpful.

And with respect to the homeowners product, is it-- I mean obviously, well I would guess there would be kind of a package discount for people buying booth, but should we think about the homeowners being a driver of the auto or the auto pulling the homeowners?

Does that make sense?

I think it does and let me-- you tell me when I answer if I got your point.

We will in all likelihood in our marketing lead with the auto and we will closely bring in any sales processes at some of the marketing the ability to cover all of your needs.

And the fact for you to have those products integrated and work together.

We do offer discounts when you buy both an auto and a home and a discount to the auto and a discount to the home, we offer that today.

So that's running through our pricing.

It's running through our results.

We will highlight those items and we will likely rollout the things that help them interact together a little bit more.

I think we'll lead with the auto.

I think the benefit of having them together will cause both of them to improve both of their production results.

And Matt, I would just add from experience watching Joe and his Management team develop QuantumAuto and QuantumHome, this is really an exceptional group of test and learn.

All of the things that we've done in this venture have been slow, methodical test and learn and one of the things that we're going to do as we move forward here is try any number of different marketing concepts and see which pulls harder.

And we don't necessarily know the answer and frankly we're going to be doing some things that other people either can't or don't do because they don't have the product.

But in these early days Joe is exactly right, we are going to lead with the auto product.

But don't be surprised if you are watching a commercial in a state and see a pull for home because we're going to be testing to see how it does.

All right, thank you very much.

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

Please proceed.

Good morning, everyone.

During the opening remarks where you said that you weren't really going to talk about rumored acquisitions, I won't even go there, you mentioned the whole point was to get a mid-teens ROE.

And we're not there right now, I realize there's some hope of that things are improving in the marketplace.

But if rates sort of stay where they are right now when you don't get interest rate improvement, what is the forecast for ROE for the next couple of years and how will you get that up?

Our financial goal is actually a mid-teens return on equity overtime and the last two words are really extremely important.

Not only because of the cyclicality that our industry has experienced historically, although there's been less cyclicality over the last several years, we've talked about that a lot and perhaps those who have been involved in the industry for a long term recall, but obviously also because of the weather dynamic.

We price product to produce returns over a long period of time, and sometimes the wind blows, sometimes it doesn't.

Observation for the four year period 2005 through 2008 is that we actually have a 14.5% after tax operating return on equity over that four year period.

So we're in a cycle for a combination of reasons.

Obviously the investment arena is more challenging at the moment.

We are obviously focused on pricing and we're going to see how the extent to which we can maintain that strategy.

But we run the business for the long term.

We price our product for the long term, we make long-term investment decisions.

So we're not going to react in any particularly harsh way to drive returns up.

We believe that the industry has the dynamics that enable the best companies to produce those mid-teens return on equity overtime and we think we're one of them and we're on track to continue to do that.

Okay.

Well, let me try and tag it from one other way and then I'll give up.

I think that the media might just have been looking for a quote and they wound up picking on you in order to make their point, but it said that Travelers would be happy to participate in the PIPP or PPIP as a buyer of securities and not as a seller.

Maybe you're just being open minded about that but do you have thoughts about getting investment returns up over the next year?

Is there less risk out there, will you be at all oportunistic in this marketplace?

First in respect to the comment about the government program we were called about 30 seconds after the announcement of the program and before there were any materials about what it meant to be in the program and what the opportunities were or wouldn't be.

And our response to that was perhaps not as elegant as it might have been but we'll consider anything, we'll certainly consider looking at any program to the extent that there's an opportunity to produce returns.

As it turns out it doesn't look to us like it makes sense for us to participate in that program.

The comment about being as a seller was that we had no need to, our investment portfolio was such was that there was no need to participate in it as a seller.

For the moment our investment profile remains as it has been.

There isn't anything that we're doing with our cash flow today that's different from what we were doing six months or a year ago.

We run the business for the long term.

Yields and returns are perhaps returning to more normalized long-term levels, but I'll ask Bill, there isn't anything that we are doing differently, William Heyman.

Hi.

We have always attempted to benchmark risk as opposed to return.

So we like to maintain a relatively constant level of risk in the portfolio and to get whatever the best return is that is possible with that level of risk.

And right now that return over the last year or so has been lower than we like.

We think it might start to get a little higher but we're, we're using cash in much the same manner as we have.

We're staying pretty high up the credit scale.

I think everybody can agree there has been the equivalent of 100 year flood but the debate is whether the water is receding or still gently rising and we think it's still gently rising.

We think that there's a lot of debt in the system that will have to be liquidated, equitized and the consequences to debt holders in that process may be pretty severe and we're determined that as few of our securities as possible be subject to it.

So we're concentrating on corporate and municipals with an average quality of AA or better.

Let me attempt to answer your question more specifically, we don't chase return.

Page 5 of this webcast is what it is because we've had a long-standing discipline of not chasing return.

We don't chase it on the underwriting side and we don't chase it on the investment side.

One of the reasons that we actually stopped buying residential mortgage-backed securities at the end of 2004 was that the difference between a Fannie Mae 10 year security, obviously rated then AAA, and a then AAA residential mortgage-backed security structured without the implicit guarantee of the U.S.

government, the difference was 25 basis points.

Now anyone can say, gee AAA is AAA and those 25 basis points might be worth it.

We tend not to reach for yields.

So you're not going to see a dramatic shift in what we do either on the insurance side or on the investment side.

Well thank you for all the response and good luck to you.

Thank you.

And our next question will come from the line of Jay Gelb with Barclays Capital.

Please proceed.

My question has to do with the pace of pricing improvement in commercial lines.

We've heard some carriers be more robust in their view of what's going on currently in the rate environment than Travelers and some of the brokers seem to be less optimistic.

And we're trying to get a sense of why you think there's so much disagreement about what's going on currently and the pace of the rate of change on pricing?

Say I don't-- this is Jay Fishman and I am going to ask Brian to step in, I don't actually think that there is much disagreement amongst different companies.

The data is what it is and we present the data, we're one of the few companies that actually presents the data very clearly so that you can see it and understand it.

I real everyone else's reports.

I don't hear any inconsistency.

Where there is an inconsistency is there are some companies that are very comfortable declaring that we're at a turn and they've been very bullish and very optimistic about the near term.

The circumstances that we are in specifically lend us, bring us to the conclusion that that's not the most prudent thing to do.

Economic environment is still very difficult.

Exposures declining.

Cost pressures on every business.

If anyone things they've been in this specific circumstance before they don't understand the complexity of it.

So what you're hearing from us is restraint on declaring a turn.

We are going to report the data to you and I am going to ask Brian to comment again on the rate gains but the only thing you're hearing from us in the context of robustness is a willingness to make predictions without the benefit of a crystal ball.

Yeah, and I think Jay, when we've talked about it in the past and so have a lot of other people, there's a difference between statements that are made by companies based on real data and there is a difference from anecdotal surveys.

I would argue that the anecdotal surveys are always by their nature going to be heavily driven to new business or a business that's actively in the marketplace and that's not true of each and every account.

Looking at the stuff we presented I think that we feel very good about the momentum especially in the core middle market and broadly, very broadly speaking the commercial businesses.

And we've gone from a couple 3, 4 point to negative on pure rate to something that's pretty close to zero.

The small commercial always moves a little slower up and down, so it's moving a little slower up than some of those other markets but we feel great about the margins in that business and are pretty happy where we are and the direction we're going.

And Jay, the underlying mix may be some of the discord that you hear which is if you're speaking to someone who is representing a small agency business they're going to be more strained as you look at our select numbers and they didn't go down nearly as much and it has yet to come up very much.

And toward the middle market end you see that it did decline and now it's moving up pretty robustly.

Another dynamic that's important here is all of this data is obviously the average of thousands of different accounts which are all over the place.

So one perspective, a year ago in our middle market business broadly speaking, about one out of every four accounts were getting a price increase and in today's environment about half of our accounts are getting a price increase.

And obviously the remainder is going the other direction.

But it's a blending, we look at every account especially in the individually underwritten account stuff, we look at every account individually, and so broad brush comments are hard to come by.

My follow up, and thanks very much for that answer, my follow up has to do with the trends in pricing for new business.

Can you talk about that especially in the core middle market, is it more aggressive for new business, the renewal business on pricing?

No more so than normal.

It is always more aggressive pricing for new business than renewal business.

We, again we can talk clearly about our business and the data we have.

We agonize over looking at what we believe the returns are on new business that we're writing.

We compare it to renewal accounts.

We try to adjust that for mix and market and everything you can imagine.

We continue to feel pretty good that the business that we're seeing and the business we're writing is still hitting the returns that we would have for writing new accounts.

One of the comments I tried to get across, I feel that we, and I suspect not everybody, is seeing an improvement in the quality of the stuff that's out there in the market.

And that's made us feel even better about our prices.

But new business is always competitive and there is a spectrum and it's been at one end of it for awhile but we feel good about what we're writing.

Thank you.

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

Please proceed.

Good morning and thank you for the call.

Maybe a little history will be helpful for at least me.

Once upon a time Travelers actually tried to get a direct model going and clearly the existence of Quantum is a big difference between then and now but maybe you could chat about how the process has really changed and why; I think at point in time there was some pretty convincing arguments that it was sort of not worth the while where you obviously have changed your mind, and if you maybe just compare and contrast the two periods.

Sure, and I assume what you're talking about is some of the work we've done back in the mid-to-late 90s with our PFS cross-sell in the secure program and some of the cross-sell with our Citibank credit card business.

Yes.

And what we had there--

I would just add to Joe's point, is that at that point the Company was a subsidiary of Citigroup, that is Travelers, and the program that Joe is about to describe was a very structured program designed to take the Travelers product and make it available to PFS agents.

Quite different, just to contrast, quite different than what we're about to undertake now.

But recognize we were part of the Citigroup at that point.

Those are programs again, as Jay described, very specifically not going to a broad consumer population but leveraging existing populations and existing relationships and sort of shoe horning that distribution platform into our product.

And at the time the complexity of dealing with that shoe horning process and the less effective product that we had relative to Quantum today, those combined perform-- to produce results that were not great results.

We had very much had a product that was tuned towards preferred, highly preferred customers distributed through independent agents and didn't have the operational infrastructure to deal with the differences that came from this different distribution platform.

What we have today is really different on almost every front.

The product is meaningfully more sophisticated.

We've got the folks in-house that know how to deal with that and manage that product and have the management information to handle it.

We've rebuilt our claim organization.

And their ability to manage high-frequency cases with greater efficiency and to manage the severity on those programs.

So we have the capacity to deliver that.

And we've rebuilt a good chunk of our systems infrastructure to be able to deal with the other operational impact around us.

So it's almost a different Company than it was ten years ago when we tried some of those efforts.

So there's not a lot the same other than the fact that we're still selling auto insurance.

I'd make sort of two observations.

One is that it really wasn't a direct sale.

It was a sale through a captive agent.

PFS had a group of captive agents and they were selling the product.

So it was not really direct-to-consumer, this is.

That's quite different.

Two, that effort, the captive agent program, was not successful and one of the terrific things about lack of success is what you learn from it.

And so the learnings from that experience are substantial.

And in fact form the basis for much of the operational and tactical thinking that Joe and his group have done to position this one to be successful.

But a good question but a very, very different program.

A lot what have we've done in the last six or seven years has been tuning those items and what we really have as the opportunity here is we have not spent a lot of time marketing direct-to-consumer and that's the learning effort that what you're going to see us working on right now and the core buildout that we have left on the initiative is how to be more effective marketers with the program.

And that's again, as Jay mentioned before, where you'll see our test and learn.

Are you going to have different prices and product tweaks for direct versus agency?

Right now we've got one product, one pricing platform and we're going to leverage that and use that in both environments.

Great.

Thank you very much.

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

Please proceed.

Thank you and good morning.

Can you quantify what the non-cat weather was in the quarter?

The bulk of it was personal lines related and it was just an increase in general weather activity, things that didn't classify as cat by our definition of cat.

Whether it was storm activity, basic thunder storm activity, hail, tornadoes, I'm looking for the number as I'm answering it, keep talking.

Okay.

If you'd like to give us a minute to find the exact number, Larry and we'll get it.

On the business insurance side it was a modest positive.

The negative variance was on the personal side.

Okay, okay.

Great.

And then just a numbers or accounting question the Texas Windstorm, that's accounted for in the expense ratio as opposed to the loss ratio?

And then secondly, on the discussion on the direct-to-consumer, the press release kind of describes the impact as the results, not the investment in it.

So going forward, when we see what the impact is, is that going to include both underwriting results and the investment in the new program?

Let me try to hit all of those and I'll do them in reverse order.

It is describing the result which includes the underwriting and the expense and everything around it.

So it's a total view there and that's what we intend to talk about because that's a more full some disclosure.

And to that point, in the early period, Larry, of the program, we will have underwriting losses likely in it.

The experience in the direct channel is that you test and learn and that test and learn experience will have in itself we believe has underwriting losses in the direct channel and so we intend to give disclosure and clarity to it in its entirety.

Great.

Just on that point do you have an expected breakeven period?

There's-- and you know the complexity underneath this.

There's breakeven on an economic basis and there's breakeven on a reported basis.

It will be, it'll be several years before we get to that number and we are not a point where we're disclosing that projection.

It will hit economic breakeven obviously before it hits a GAAP reporting breakeven.

Right, that's fair.

Thanks.

This is Jay, Larry, just in terms of the small weather impact, for round numbers on an after tax basis, it looks like it's about $20 million if you look at it on a period-over-period basis, so that would be the delta.

And relative to your accounting question with regard to assessments, you are right, the accounting that we do is to take assessments like TWIA and put them through the expense line because there will be recoveries in the future associated with taxes, license and fees accounting.

So that's where it all is.

Great.

Thank you.

(Operator Instructions).

And our next question will come from the line of Michael Nannizzi with Oppenheimer.

Please proceed.

Thanks a lot.

Just a couple quick questions.

One, would it be possible to break down the change in unrealized just by a couple of the large categories, maybe your non-agency mortgage backs, the corporate debt and maybe offsets in some of the other asset categories?

And I have just one follow up.

Thank you.

In broad strokes, I mean I just, I just want to understand like where, I mean where did a lot of the mark come in one group or in another just to understand how the quarter stacked up?

The primary change in unrealized came about because of the muni portfolio.

If you looked at the marks on the muni portfolio as of the end of the year they were different than where they were now.

I think that would be the primary driver of the change.

It was largely an improvement in the ratio of yield to treasury yields because as you remember the ten year backed up from 221 to 266 in the first quarter.

All right.

Great.

And then as far as the select business and on the business side was there any segment that benefited from improved penetration there over any other, like any of the kind of main line, GL, comp, or any of those other reporting segments?

Thank you.

Yeah, in select we've seen all of our lines of business experience increased quote activities and increased sales and growth.

Our comp business particularly relative to say a year ago or two years ago has seen probably the most significant amount of growth.

And there as a result of a very intentional strategy.

Yeah it's a very intentional strategy to bring our Travelers express operational model and pricing model and capabilities there.

We feel very good about the underlying margins and track them in a whole variety of different ways very specifically.

So we feel good about that underlying growth.

Right, is the profile of that new comp business any different than the profile of the existing book of business that you have or just more penetration into the same market?

Particularly on the Travelers Express side it is consistent or better than the profile of the book of business that we had?

Thank you very much.

Ladies and gentlemen, this concludes your presentation for today.

You may now disconnect.

Thank you for joining us.