旅行家集團 (TRV) 2010 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 formal remarks at which time you will be given instructions for the question-and-answer session.

As a reminder this conference is being recorded on Friday, April 23, 2010.

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.

Good morning and welcome to the Travelers discussion of our first-quarter 2010 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 investors section.

Speaking today will be Jay Fishman, Chairman and CEO; Jay Benet, Chief Financial Officer; and Brian MacLean, President and Chief Operating Officer.

Other members of senior management are also in the room available for the question-and-answer period.

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 questions.

Before I turn it over 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.

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

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

Actual results may differ materially from our current expectations through 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 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 investors section on our website.

With that out of the way here is Jay Fishman.

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

All-in given the magnitude of catastrophes we experienced this quarter we were quite pleased with our performance reporting net income of $1.25 per diluted share, an increase of 13% from last year's quarter and a return on equity of nearly 10%.

Included in this number was $0.61 a share in catastrophes arising out of the multiple storms in the eastern United States as well as the earthquake in Chile.

Just to put this number in context the estimate for catastrophes for the first quarter included in our previously provided guidance was about $0.13 a share.

Offsetting the cats we benefited from favorable prior-year development and our underlying performance from both underwriting and net investment income was a bit better than our expectations.

The net result was operating income which was in line with our expectations going into the quarter allowing us to reaffirm our previously issued full-year 2010 operating earnings per share guidance.

Also, it's reflective of our continuing strong earnings power.

In an environment which remains similar to last quarter in terms of both economic and insurance market conditions, our business dynamics remain solid and were generally consistent with recent operating experience.

Renewal rate gains remain positive in each of our business segments, retention was strong, and new business in total remained on par with last year's quarter.

We repurchased $1.4 billion of our common stock in the quarter and announced an increase in our regular quarterly dividend by 9% to $0.36 per share.

As these actions demonstrate we continue to execute successfully in the marketplace, generate solid earnings, and return excess capital to our shareholders.

Given that our operating dynamics this quarter were generally consistent with recent quarters, our call this morning is going to be somewhat different than in the past.

We are still providing all of the same information in our presentation as we have previously, but we will not be going page by page with you so as to allow more time for questions.

Before turning over to Jay I want to take just a minute to acknowledge and thank our claim department for all of their exceptional work not only this quarter but over the last couple of years.

In 2008 we had Ike, Gustav, and Dolly, and while there were no major storms in 2009 it was still a quite active cat year.

And of course in the first quarter of 2010 and we were again faced with an exceptional number of claims due to the multiple storms on the East Coast.

Doreen Spadorcia and her entire claim team have been remarkably busy providing industry-leading customer service to our insureds and again demonstrating our commitment to providing high-quality service to all of our insureds during their greatest time of need.

And with that let me turn it over to Jay.

Thanks, Jay.

There are several points that I would like to highlight relating to pages four through seven, many of which you have heard me say repeatedly over many quarters.

First, our balance sheet remained extremely strong.

All capital, leverage, and liquidity measures were at or better than target levels.

Even after repurchasing $1.4 billion of our stock and paying dividends of $168 million in the quarter, holding company liquidity increased to over $3 billion, almost three times our target level due to the timing of dividends from our operating companies to our parent company.

Holding company liquidity is expected to move towards its target level during the remainder of the year as we continue our share repurchases.

Book value per share increased once again and on an as-reported basis operating income for the quarter did meet our expectations.

That is, operating performance ex the cats and ex the non-cat weather and also adjusting for the favorable reserve development but including net investment income, all of that was in line with our expectations going into the quarter.

Despite the high cat losses and the relatively low yields on short-term and non-fixed income investments, we recorded a double-digit operating ROE.

And, finally, our results included a one-time tax charge of just under $12 million or approximately $0.02 per share related to the recently enacted federal healthcare legislation that eliminated the tax benefit associated with Medicare Part D subsidies.

Brian is now going to provide some color about our operating performance.

Thanks, Jay.

We have included on pages eight through 16 all of the segment performance statistics that we traditionally discuss with you.

As Jay mentioned, we are not going to go through each slide but instead speak more broadly about the significant drivers for the quarter leaving more time for questions.

Obviously weather had a big impact on our results and will be the headline for the quarter.

We had six domestic cat events, the two largest being the February snowstorm in the Mid-Atlantic that paralyzed Washington, DC for several days and the nor'easter in mid-March that impacted New York, New Jersey, and southern New England.

In addition, there were several international events, the largest being the earthquake in Chile.

So all-in-all a very active catastrophe quarter.

But looking beyond the near-term impact of weather our production and core underwriting results continued to perform very well.

In Business Insurance retentions remained strong and were up slightly across the business.

Renewal pricing improved modestly with pure rate continuing to be positive for the segment.

Exposure change on renewed accounts was still down but the rate of decline moderated slightly from last quarter.

On the new business side we feel good about the continued flow of new opportunities, particularly in middle market and the small end of Select.

New business writings in the quarter were down from prior year primarily due to the pricing discipline that we are maintaining in the larger end of the Select business.

This segment of the market has been particularly competitive and reduced writings here reflect that position.

On a written basis premiums are down, a direct result of the impact of the challenging economy on our customers.

Some of that impact is seen in renewal premium statistics but the majority comes from reduced audit premiums and increased cancellations and endorsements.

These impacts either emerge over the life of the policy or in the case of audits aren't reflected until the end of the policy period.

Since we are generally auditing accounts we wrote a full year ago we expect this drag may continue through the next few quarters.

As the economy stabilizes and eventually improves we believe that, based on our historical experience, the audit premium will rebound.

There are a lot of weather and prior-year impacts in the combined ratio, excluding these we are experiencing the modest deterioration we had expected.

Frequency remains low, claims severity is relatively benign, and pure loss trend is marginally outpacing our modest rate gains.

This deterioration is somewhat larger than the 30 basis point change in the adjusted combined ratio on the slide because the first quarter of 2009 does not include the positive impact of the adjustment we made to the full year 2009 combined ratio in the second half of last year.

Moving to the Financial, Professional, and International segment.

Net written premiums after adjusting for the impact of changes in foreign exchange rates were up significantly for the quarter.

The primary driver of this increase was less ceded premium year-over-year resulting mainly from changes in the structure of our reinsurance that directionally aligned retentions in our international business with the Company's US retention practices, and to a lesser extent lower reinsurance costs.

For the second consecutive quarter we did see quarter-over-quarter growth in our construction surety book of business due to activity in our large national accounts market.

In our International business new business is up compared to the prior-year quarter primarily due to growth in marine and accident and special risk products in Lloyd's.

Operating earnings in the quarter were down from the prior-year quarter as a result of our exposure to multiple international named events, primarily the Chilean earthquake.

The losses we experienced were consistent with the fact that the Chilean earthquake was the seventh-largest recorded and was 500 times stronger than the earthquake in Haiti.

Turning to personal auto, agency retention remains strong and the renewal premium change continued to be positive.

New business improved significantly and it was at the highest level in the last five quarters.

We believe that the new business declines that we saw in the previous quarters were due to the fact that we were ahead of the market in seeking increased rate.

You can see from the change in agency auto's quarter-over-quarter combined ratio that profitability has improved as rate gains are now outpacing loss costs.

Approximately one point of this improvement was attributable to lower frequency, which we believe was a result of the winter storms' impact on miles driven.

After normalizing for the quarter's frequency core auto margins are improving and well within company targets.

Within agency property the story this quarter was clearly the weather.

Adjusting for the weather the combined ratio for the quarter was modestly higher compared to the prior-year quarter, a portion of which is the expected slight margin compression.

This compression continues to be driven by year-over-year increases in the cost of materials, primarily asphalt shingles.

Agency property production results for the quarter continue to be strong in spite of the difficult housing market.

PIF continues to steadily grow with strong retention and continued positive renewal premium change.

New business is up significantly compared to the same quarter last year.

So even with an extraordinary number of catastrophic events in the quarter we posted solid results.

Core combined ratios remain within company targets, new business remains robust despite the challenging macroeconomic conditions, rate overall remains positive, and retentions continue to be strong.

We believe that these results are a direct outcome of the long-term capability, competitive advantages we have built as exemplified by our claim response this quarter.

These capabilities are sustainable and will continue to differentiate Travelers with independent agents, customers, and brokers.

Now before I turn it back to Jay Benet let me touch on an issue that has gotten a good bit of press.

On page 17 we have outlined why we believe our exposure to Chinese drywall will not be problematic.

First, from a business profile perspective we have no direct liability exposure to Chinese drywall manufacturers and have virtually no general liability exposure to US residential contractors.

In fact, we have no general liability exposure to 37 of the 38 US residential contractors identified in Bloomberg and the one we do write has an SIR and our limits above that are minimal.

On the homeowners side we are disproportionately underrepresented in the states with significant impacts so we do not expect a significant number of claims.

But given our policy structure limits profile, we believe any losses should be contained.

Additionally, the fact that there is very strong product ID here is helpful.

That is we know where it is, where it came from, and when it got here.

All of this should help limit the spurious claim activity.

To date we have gotten 52 claims and we are comfortable our overall exposure is not problematic.

Now with that, let me turn it back to Jay Benet.

Page 18 sets forth our guidance for full-year 2010's fully diluted operating income per share which is a range from $5.20 to $5.55, unchanged from what we previously provided, which in round numbers should translate into an operating return on equity of approximately 11%.

We are now assuming cat losses of $640 million after-tax or $1.30 per diluted share, which incorporates our actual cat losses for the first quarter and our original estimates for quarters two through four; no further estimates of prior-year reserve development, either favorable or unfavorable; a low single-digit decrease in average invested assets ex unrealized gains and losses resulting from a reduction of holding company liquidity due to share repurchases; full-year share repurchases that are still within the range of $3.5 billion to $4 billion; and a weighted average diluted share count after share repurchases and employee equity awards in the range of 490 million shares to 495 million shares, which is a bit higher than what we had previously assumed due to the impact of the recent increase in the price of our shares.

Before I close let me explain in response to several questions we have been asked why we did not pre-release this quarter's cat losses.

We write cat exposure as part of the ordinary course of our business and cat losses are just one of a number of items that could impact the quarter's results.

We think it is more informative generally to release all of our results together so that the information is presented in context.

This is particularly true in a quarter like this when the cat losses came from a number of relatively smaller events and we had losses from seven cats in the quarter as Brian said, some of which occurred very late in the quarter.

It's also our strong preference to take the time to apply our regular quarterly closing process to our results before we announce.

This approach makes more sense for a company of the size that we are now, especially in a quarter when we had a number of moving pieces and our performance on an overall basis was generally consistent with our expectations.

Finally, this approach is also consistent with the overtime nature of the Company's stated financial objective and our previously disclosed intention to stop giving guidance beyond this year.

So with that I believe Jay has a closing comment he would like to make.

Thanks, Jay.

Just one more comment before we open it up to questions.

You may have noticed that a number of our senior executives have over the last year or so sold some of their shares and I wanted to take the opportunity to clarify our views.

Our senior executives receive a meaningful portion of their compensation in the form of performance-based equity.

As a result of that as well as our recent performance, all of our named executive officers and substantially all of our senior executives have equity positions that are well in excess of the Company's ownership requirements.

This actually has been the case for quite some time.

The recent financial crisis underscored for all of us the importance of prudent personal financial planning and diversification.

Given this and our significant executive ownership, we don't discourage executive sales driven by personal financial decisions as long as the minimum share ownership requirements continue to be met.

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

(Operator Instructions) Jay Gelb, Barclays Capital.

Thanks.

Jay, can you talk about the expectation for continued improvement in the accident year combined ratios ex cats?

We saw that in the first quarter and just given the current environment I am trying to get a sense of whether you anticipate that continuing through the year.

This is Jay Benet.

I think when we look at each one of the segments there is probably a bit of a different story.

We had talked about some rate gains in the BI segments that had been in our written premium back in the second half of last year, and of course that will get earned in along with the rate gains that we have seen in the first quarter.

Relative to loss trends, I think as Brian said earlier, loss trend, while it's running at a benign level, it's still probably running a little bit ahead of where the rate gains have been.

So we would expect in terms of just the underlying trend in our business to see some margin compression of a modest amount in the BI segment.

If you flip to the other extreme and look at PI, PI is in a different position.

PI has been experiencing rate gains for a period of time and as those earn in and loss costs remained pretty benign in that business I think we would see some margin expansion there.

Again, all things being equal.

All of this is going to be dependent upon the weather and loss activity that you have heard us talk about from quarter to quarter.

But I think just overall slight expansion overall.

Brian, do you want to add something?

Yes.

And Jay's comment there in PI is auto.

As I said in my comments on the homeowners' side there is a little bit of margin compression.

On the auto side we have definitely got expansion.

Jay, and if you go back to the guidance, the previously issued guidance that we issued and are reaffirming this morning, what we said at the time is that we expected for the organization overall, total consolidated, that we expected modest, I think was the word we used, deterioration in the loss and LAE ratio for the organization overall.

And that is still our underlying premise embedded in the guidance.

The other segment that we should comment on is the FPII segment.

Of course there is a very diverse mix of business there, but I would say like BI perhaps there, a slight level of margin compression as well.

Okay.

And then my follow-up is on the expense ratio now heading towards 33%.

Are you comfortable with that level of expense ratio?

And if so, maybe you can talk about what investments are driving that?

Jay, this is Brian.

The exact ratio is going to bounce around quarter to quarter as premium volumes move and there are other miscellaneous things going through on the expense side.

But we have been making significant investments in our platforms across a lot of our businesses, probably the most obvious are in small commercial and in the personal arena where the product and platform are a significant part of our marketplace proposition.

But even across middle market we have been doing a lot of different things to connect the capabilities that we have in the marketplace.

So that has been another area of investment.

We always get a little reluctant answering with respect to specific elements of the cost structure.

Loss dollars are mitigated or generated by investments and expense and loss ratio just can't be looked at, we don't think, in separate pieces.

So we get back to returns on equity and are we satisfied with our overall returns in our business, current returns as well as long-term prospects.

And the answer is, yes, we very much are.

Thanks.

Brian Meredith, UBS.

Good morning, everybody.

Two quick questions here for you.

First one, Brian, can you talk about PIF trends in personal auto insurance?

And given that your combined ratios now are down to a more than acceptable level, should we expect to start seeing that number stabilize maybe given some of the dynamics right now in the personal auto insurance market where there are some competitors with fairly high combined ratios and perhaps maybe picking up some share here going forward?

We definitely do feel that way.

Greg Toczydlowski is sitting here.

Why don't I throw it to him and have him talk about that a little bit?

Yes, Brian, as you indicated we are feeling comfortable with the margins.

We watch two primary factors, that is the flow of our quote information and we can clearly see that our quote flow is up.

And then we look at the competitiveness of our quote activity, specifically in comparative raters and we can see that our close ratio is also up this quarter.

If you will look at the stat supplement you can see the output of that that we do have sequential gain in PIF from the fourth quarter to the first quarter.

So as we have got those margins right in the middle of the target where we want them to be, we are going to continue driving that growth.

And you can see that in some of the data that we reported this quarter.

Great.

And then my second question, Jay, is I noticed that you said that you took an extraordinary dividend down to the operating companies this quarter.

I am curious, why did you take the extraordinary dividend?

Does that also mean that you still have your regular dividend capacity available to you this year to the holding company?

This is Jay Benet.

We ended up very, very -- in a very, very strong position in our operating companies at the end of the year.

Profitability in the fourth quarter was extremely strong.

We do an analysis of what the capital levels are and decided that we were just over capitalized based on that profitability.

So rather than leaving it there to take out in the normal course, we went to the various states that regulate us and showed them what our capital levels were, what we wanted to do, and then just asked if we could take it out sooner than later.

And we did.

So it's at the holding companies so we have the flexibility now going forward to just execute on our share repurchases.

And we just think it's prudent management to do that when the operating companies have excess capital.

That is great.

What is your kind of regular dividend capacity that you still have available for this year?

We had about $3.5 billion that we could take out without regulatory approval.

I should say, though, that that becomes -- without getting overly complex about it this is a rolling calculation to the extent you get regulatory approval and increase the amount that you take out in the quarter, it will change for the remainder of the year how much you could take out without regulatory approval.

But we are confident that whatever we would like to take out of the operating companies, barring the unforeseen catastrophe or whatever, we will be able to do this year.

Great, thank you.

Keith Walsh, Citi.

Good morning, everybody.

First question, just with respect to the guidance, you have maintained your projection for the year despite the incremental $0.50 a share in cats, the slightly higher share count even if we net out the benefit of the reserve release.

Is this guidance or better guidance driven by business trends or is it the jump in non-investment income?

It's actually I think kind of more simple than that, which is when you look at the results for the first quarter, the $1.25, $1.22 was absolutely consistent with what we had incorporated in our original full-year guidance of $5.20 to $5.55.

So the all-in first-quarter results were very much consistent with our own -- the embedded number for the first quarter in the annual guidance.

And so it's just a reaffirmation of the same underlying trends.

As you would expect for a company of our size and sophistication we are constantly looking at what our plans are for the future.

And in this particular case, as Jay said, we have incorporated the actuals for the first quarter into our revised look on investment income, looking at margins going forward.

And based on hitting what we had expected to be operating income or thereabouts in the first quarter, we haven't seen anything that would change the overall look for the rest of the year.

And then just with regards to the non-fixed income part of the portfolio, if you could talk a little bit about the volatility.

I know it's hard to give maybe a normalized rate of return for that, but what is sort of the long-term expected rate of return for that part of the portfolio?

Hi, this is Bill Heyman.

I guess it begs the question of what is long term.

We make private equity fund investments with the expectation that our capital will be out for an average of seven or eight years.

I don't think we would make those investments if we didn't think there was a reasonable chance of low double-digit returns, although our estimates are more conservative than that given the current climate.

With respect to hedge funds, which are now only $500 million in a portfolio of $70 billion, the same hurdle is used but for estimating purposes we are in the mid to high single digits.

But over the long term we would require 12% or so to stay in these asset classes in any size.

Okay, thanks a lot.

Larry Greenberg, Langen McAlenney.

Thank you.

Good morning, everyone.

First, just a quick cleanup question.

The tax charge in the quarter was that in the interest and other line?

Yes, it was, Larry.

Okay, thanks.

And then on reserve development, in the FPI line it appears in the second -- the last two quarters favorable reserve development has jumped up a bit from where it had been running.

And I am wondering if there is anything that you might be able to isolate to explain that.

Then more generally on reserve development, can you talk at all about the complexion and the favorable development and whether the balance between reserve releases associated with case or IBNR reserves has changed over the last, let's call it, six quarters or so?

I will take a shot at it.

As it relates to the first part of the question looking at FPII, FPII goes through the same processes as the rest of our businesses.

Each quarter we are looking at changes in actuarial views associated with very granular levels of our reserves.

Whether it's in the International businesses or whether it's in the Bond and Financial Products businesses, we will take positive reserve development or negative reserve development when we see a need to do that.

I don't think there is anything in particular that has been driving the reserve development in FPII but it has been a part of, depending upon the quarter, partly Bond and Financial Products and partly International.

The longer the tail associated with the business the more we wait.

So I think in the Bond and Financial Products business it has probably been more of the early 2000 type events that have been reserved for and we have seen claim activity just settling out a little lower than what our expectations were.

As it relates to just the rest of the businesses, I am not sure I can really answer your question as to whether it's development on case reserves versus rethinking of the IBNR.

Because as you know, as time goes on there is less and less IBNR and more cases so we tend to look at it in its totality but it's the same phenomenon.

Whether it's looked at by an individual business line or a particular accident year, what we are seeing is that as time has developed on some of the longer tail lines we are seeing favorable reserve development that is dealing with less payments of claims than we anticipated.

Some of the development is the roll forward from older accident years to more current accident years, if in fact the reserve analysis is indicating that the original loss picks were higher than what they would seem to be.

But that is not the major driver of it.

The major driver is just looking at the claim activity.

I hope that is responsive to your question.

That is helpful.

Thank you.

Can I interrupt for a second?

I want to go back and just actually clarify an answer that we gave previously in response to the question about the expense ratio just as I have been reflecting on it.

I said were the returns in our business generally consistent with our expectations to produce long-term mid-teens return on equity that was the sort of shorthand that I was giving you.

And I said, yes, they were.

We always have lines of business, always have lines of business, where the returns are not at levels that we want them to be and we have been consistently public about seeking rate gains where we need them.

So I didn't mean to imply by that answer that every product that we have met hurdles in every specific way.

In a very general sense, responding to the question about the expense ratio overall, we feel pretty good about the overall returns that our portfolio of products generate.

But it certainly doesn't mean that we don't have products where the competitive environment is such that strategically we are seeking rate so that we can bring those products either into the range of acceptability, and there is a number of those that are not, or further up into the range of acceptability to meet our long-term hurdles.

I hope that is clarifying.

It was really a complex question asked in a very simple way.

We can go back to the questions, operator.

Thank you.

Michael Nannizzi, Oppenheimer.

Thank you.

Just a question on the management liability business, if I could.

For recent books has there been any loss emergence outside your expectation, either in 2009 or so far in 2010?

And could you talk specifically about the community bank portfolio?

Thanks.

Sure, it's Alan Schnitzer.

In the more recent years I think the loss experience generally as a portfolio across all the management liability businesses has been within expectations.

So there is nothing there I would say that as a trend has surprised us.

Okay, great.

And then just a question on the commercial business.

So if we do the math on renewal plus new business on the commercial segment it doesn't quite match up.

Is that because that renewal rate is calculated based on policy count?

And I guess to follow that, does that mean that you are getting more growth at the small end of commercial rather than the large end?

I am trying to make sure that I have got the questions straight.

This is Jay Benet.

The statistics that you are referencing aren't based on policy count; they are based on dollars, premium dollars.

And if I understand the question, if what you are trying to do is look at the sum of business retained plus new business and rates what you are missing is what we had disclosed in the fourth quarter in a bar graph that we presented -- what is the impact of exposure, changes, cancellations, endorsements, and audit premium.

And that is what gets you to the dollar amount of the premiums in the first quarter.

So if you were to do that with Business Insurance, what you would say is about 82% net retained business, another 19% new business, approximately 1% of rate; all of which would have been a 2% increase in net written premium.

What is taking place is about a negative 6% relating to exposure, cancellations, endorsements, and audit premium that translates into the negative 4% overall.

Great, thank you very much.

And just one last question if I could on leverage.

How important is operating near that one-to-one premium to surplus?

Is that a target or is that more just a result of other things that you are doing?

Thanks.

It's absolutely the result.

What I have indicated before is that we have the various rating agency models that we apply along with risk-based capital.

Whether it's investment par ratio or the S&P or Moody's models or Fitch models, we evaluate what the operating company capital requirement should be for a strong AA company as we are.

From that we then look at the leverage of the holding company, the holding company cash, to come up with the actual capital position.

And the fact that premiums to surplus is approximately one-to-one is not something we look at, it is absolutely the result of that process.

Let me add comment and, Brian, make sure I am right on this about the -- because we tend to lump them together, this exposure, audit premium, and it's a function of the way that our arithmetic is done.

There are several different dynamics operating there but the two principal ones are audit premiums, which one should think of as retrospective in nature.

Clients make estimates of what their ratable factors are at the inception of a policy.

At the end of a policy we come in and we do an audit.

It turns out that the ratable factors -- it might be payroll, it might be sales, it might be trucks on the road -- but it turned out to be less than they had originally anticipated because of the speed and depth of decline in the economy and so we have an audit premium, a return of previously written premium to us.

We think of that as almost a retrospective adjustment.

Then there is embedded in our renewal business change in exposure on a renewal basis, which is not always entirely factual because once again clients make estimates of what their ratable factors will be.

And it wouldn't surprise any of us if in fact given the economy that there is a tendency at the moment to continue to overestimate, if you like, the impact of the economy and so it becomes difficult --

And understate the exposure.

And understate the exposure, which is something we believe is happening today but we can't prove it and we can't obviously find it in the numbers.

It will be interesting as the economy levels out and ultimately returns to watch -- our sense is that the retrospective audit premium dynamic will be the first to change because in fact the catch up will occur.

Then we will begin to see the renewal dynamic of exposure a little slower and a little bit longer.

But those are two very different dynamics of the economy that just tend, given our arithmetic, to be lumped together.

Maybe that is helpful in thinking about it.

One of the other interesting thoughts here as you look at our data and probably broadly across much of our business but certainly in the Business Insurance side, we are growing our customer base.

It's hard to see in the premium because --

Just number of customers.

Right.

Because our typical -- and I am not just talking about we are writing a whole bunch of small ones so the numbers are larger.

We are in the aggregate growing our customer base.

The premium is struggling because our typical customer might need a little less insurance than they do in normally robust times and that typically comes through on the AP side, audit premium side.

So it's an important note though that we feel good about the business growth.

It's a bit forward-looking and obviously may not happen, but if in fact we come out of this with more customers than we had coming into it, when the economy does recover we think we will be reasonably well-positioned to anticipate a growth in premium.

But a lot of factors got to happen obviously for the economy to get -- to recover it has to continue to stabilize first.

But at the very basic core of it we think we are going to be coming out of this with more Business Insurance customers than we went coming into it.

That is very helpful.

Thank you so much for the answers.

(Operator Instructions) Vinay Misquith, Credit Suisse.

Good morning.

On the personal auto front you had sequential PIF growth quarter over quarter.

Could you give us a sense for what the competitive dynamic is within the industry and how you are managing to grow the business now versus the last few quarters?

Certainly.

Vinay, this is Greg Toczydlowski.

I think in Brian's comments he talked about us being in front of some of the rate cycle in late 2008 into 2009 and you can see that in our RPC statistics.

We spent quite a bit of time really looking at filing activity across the country and understanding what the competitors are doing in terms of simple metrics, like the ratio of increases of filings to decreases.

And we see an environment where increases are still outpacing decreases and by quite a bit closer to four-to-one right now.

So as we moderate some of our rate as the market moves with some of theirs, probably to the levels we were at in 2009.

Again as I talked about our quote and close ratios we can see we are becoming more competitive in the marketplace and feeling very good about our margins underneath that.

And that is driving some of the sequential PIF growth.

You just said becoming more competitive.

It's easy to come to the conclusion from that statement that we are lowering price.

What you really mean is that the pricing that we have established is that the market seems to be catching up to it.

That is an important clarification.

Thank you.

Sure, fair enough.

Your margins have also improved this year versus last year.

Could you give us a sense of whether this is purely because of rate or do you think that there are some elements in the loss cost trends, either frequency or severity, that is also helping you?

It's a combination of both.

We have been very disciplined in our pricing in a very segmented level and you can see that in the RTC trends.

The loss trend we are watching very closely and some of the mileage driven data and information that is out there is showing that there has been a slight improvement in frequency in the first quarter.

The loss trend is right where our expectations are and we are going to continue with our very focused and disciplined pricing.

That is great.

One last question if I may.

Some of the excess and surplus lines players have said that the combination among the standard players is growing.

Could you give us a sense how Travelers is ensuring that you are not writing business that is normally being written by the excess and surplus lines?

We watch very closely who we are taking business from, where it's coming from, and are very confident that we are not out there writing any significant number of accounts that belong in the E&S markets.

The one place that I will comment that sometimes some competitors who are in that space will talk about people taking accounts, sometimes there are accounts that are in that marketplace because the agent that is the only way in the small commercial side they can access markets.

And so one of the other reasons why business moves out of excess and surplus lines, wholesale businesses, into traditional distribution is the agent, hopefully for all appropriate reasons, get appointed and come directly to us.

So that is one -- but that is not, I think, the issue you are talking about, which is there are accounts that belong in that marketplace because they are complex risks and shouldn't be written in standard markets.

We are very comfortable that we are not taking that business.

And from time to time we will have a program, because we have talked about these before, where it's written both in excess and surplus markets as well has in admitted markets and standard markets.

And so we do have an amount of business that we have had for a long time that has been around here, programs in particular, that are also written in the E&S market.

But again to Brian's answer, there has been no effort on our part to aggressively move business that has historically been in the E&S markets and move it over to us.

Quite -- just no.

Okay, that is great.

Thank you.

Matthew Heimermann, JPMorgan.

Good morning, everybody.

I was curious if you could just comment on the reinsurance changes you made internationally.

I guess just specifically clarify whether when you say you are changing the retention, the retention is at a similar level to like the US excess of loss treaty, which I think is 500, or, excuse me, the attachment point is there, or relative to capital you have scaled the attachment point similar to where it is in the US?

Yes, it's Alan Schnitzer.

Neither actually.

This is on a per risk basis.

We have been keeping lower net retentions internationally than we have in the US so really just conforming that up a little bit.

And then we have got some individual cat treaties related to our Lloyd's businesses that attach at much lower levels.

We moved those up a little bit from 35 to 70, nowhere near the numbers that you are relating from the US.

Okay.

So really directionally we are just aligning the practice with what we have got in the US.

And on the per risk, I guess order of magnitude and I guess I am anecdotally, is that you are moving from a 40% to 50% on your per risk or I guess can you give us some color there?

This is taking net per risk from $10 million to $15 million in one case and $10 million to $12 million in another.

Okay, got you.

So nothing huge?

That is dollars.

That is $10 million to $15 million per risk or $10 million to $12 million.

Okay, I guess if you translated that relative to the gross line that was put out on the contract how does that percentage change?

How does that translate into percentage I guess?

We would have to do the math quickly.

It varies, it varies literally transaction by transaction.

If we have a $20 million exposure instead of having a net pretax $10 million, we will now have a net pretax $12 million.

If we have a $50 million exposure, instead of having a net pretax $10 million, we will have a net pretax $12 million.

So it's specific to the individual loss.

Okay, I just wanted to make sure that you weren't expanding your gross appetite in concert with this or whether it was truly just a net without the gross line changing.

That was the only reason I was asking the question.

(multiple speakers) And it's worth reporting just given how accounting works that this change is disproportionate between gross and net in this quarter.

Yes, we have got some -- in the segment we have got a significant portion of the reinsurance that renews and obviously the premium gets booked in the quarter that it renews.

So it has got a significant impact in this quarter; it will earn in over the year.

There tends to be a presumption that these things happen ratably and actually it's not how it works.

The requirement is to actually see the entire amount from the gross at inception not over the policy period.

So this impact for written -- that it's correct.

Jay is saying for written.

It looks like a bigger impact than on an annual -- what you are looking at is the annual effect all being evidenced in one quarter.

Okay, that makes sense.

Just wanted to make sure.

Then I guess with respect to the industry-focused underwriting segment, are there any particular segments that you would highlight as being disproportionate drivers of the pressure in that segment?

When you say pressure --?

You have seen -- it looks like the economy is having a bit bigger impact given the rate trends there don't look dramatically different from the rest of the BI segment.

That it just looks like it's suffering a little bit more.

So I was just curious if there is any industry classes or segments that you would highlight as disproportionately driving it or if it's just kind of consistent across everything in that segment?

This is Bill Cunningham.

The two that come to mind are Construction and Oil and Gas.

The amount of construction activity on the commercial side is down fairly dramatically so we are seeing that impact, both in payroll and revenues for our contractors.

And there is obviously less drilling on the oil and gas side so those two classes are certainly disproportionate.

Okay.

Appreciate it.

Thanks.

Jay Cohen, Bank of America Merrill Lynch.

Thank you.

Good morning, two questions.

The first is if you could talk more about the new business environment, new business was up year-over-year and commercial accounts down.

You made some comments and I am wondering if you can flesh that out a little bit as far as competitive environment for new business.

And then secondly, one topic we haven't talked about in a long time is asbestos.

I hate to just cross it off my list as something to worry about.

I am wondering if you can give us an update on what is happening there.

Jay, this is Brian.

I will tag team a little bit with Bill Cunningham on the new business side.

And I assume you are talking specifically the Business Insurance there.

Correct.

A couple of different stories, I think the broad one is we have been doing a ton of things in the marketplace over the last three-plus years to drive more flow and more opportunities.

And a bunch of different funds; we have talked about them in the past.

That has continued.

We feel great about the amount of business that we are seeing in the marketplace and our ability to go through that in a pretty sophisticated way and find opportunities.

So broadly Middle Market we feel great about it.

On the small commercial side, on the small end, the platform that we have rolled out in Select and our Travelers -- I mean our express platform there has driven a lot of volume as we would have hoped.

And we are seeing a lot of opportunity there.

The challenge is the gap between those.

By that I mean what we typically call the higher end of small commercial where the marketplace is more competitive and that is the area where we are taking some pricing actions and seeing lower volumes.

We have got pricing actions upwards.

Yes, upwards.

Yes.

Right.

On the commercial insurance business what has happened to your hit ratios just to follow up on that?

The hit ratios are down.

The overall comment would be the new business environment remains competitive.

As Brian mentioned, our flow of opportunities is up, continues to be up year-over-year, even months this year compared to months last year.

There has been a consistent increase each month, each quarter.

We have worked through more opportunities.

Our quote ratio is about consistent; our hit ratio (multiple speakers)

You have got an increase in quotes-- so go through the pieces.

So flow today, just to give you some perspective, is up two-fold compared to what it was three years ago.

We are seeing (technical difficulty) volume in terms of number of account opportunities (inaudible).

And we are maintaining about the same quote ratio.

So the number of accounts that we are quoting is about double compared to what it was three years ago.

Percentage that we are actually getting an order on is down.

Got it.

And then any comments on asbestos?

This is Jay Benet, Jay.

The environment that we have seen in the first quarter has been very much the same environment that we have seen in recent quarters.

There has, literally, been no change.

We all would welcome the day when we could watch a sporting event and not see an advertisement from a plaintiff's attorney talking about asbestos.

So that continues in the marketplace.

But there really haven't been any major new developments.

Okay.

I will put it down on my list then.

Thanks.

Josh Shanker, Deutsche Bank.

Thank you.

Somebody asked my question but I didn't know how to get off the queue, so I will ask another one.

The advertising spend, how do you guys think about the payback in advertising spend and is it meeting your objectives?

The advertising spend is really -- you can look at it in two separate pieces.

There is an element of it that is pure brand and the spending that we have done on that over the last several years has been long-term investment oriented not action driven.

The ramp up that we had in advertising has been very specifically behind our direct-to-consumer business where we are doing a lot more.

The short story on our direct-to-consumer personal lines initiative is that it's a long-term program.

We have said that we would lose money along the way.

We continue to lose money on it.

In terms of driving customers from media to a quoting process that has been actually pretty encouraging.

So in the context of the effectiveness of the advertising if the measure of it is the response that people have to it that has actually been pretty good.

Then the next learnings that we have had and we have spoken about it, the next learnings that we have to take on is learning how to convert that response into higher numbers of quotes and then ultimately into higher number of sales.

In that arena we still have -- about consistent with our expectations, we have a long way to go before this becomes a successful business venture.

You know, some of your competitors, very few of them, say that they have a brand advantage in the commercial lines.

Do you think that the advertising can help with that for Travelers?

Do you see any indication from your customers that they are identifying with the brand on the commercial side?

I think the best way that we can answer that, and of course this is all anecdotal and could be wrong, but if you sit with a group of agents, particularly those in our Business Insurance arena, they all are aware of the advertising effort that we have undertaken.

They all comment on it and they all say that it makes their job easier.

Now they could be just talking about it; they could just be just telling us that and not have it be substantive.

But it is pretty clear to us that the agents do indeed see it, they appreciate it, and at least as they describe to us it's helpful to them.

I don't know is the specific answer with respect to customers.

If you do watch brand tracker data -- and we do but again this is a very long-term venture for us and I don't want to overreact to either good news or bad news in that regard.

But brand tracker data would suggest that our advertising is being effective in terms of customer recognition.

Now that is predominately in the personal side but again these are all long-term efforts to accomplish something over time.

Well, good luck with it and congratulations on the quarter.

Thank you.

Ian Gutterman, Adage Capital.

I guess two questions.

First one is could you talk a little bit about the decline in non-cat weather?

I guess that surprised me.

I thought when you have snow in all 50 states at the same time and not all 50 of those states were cat events, I would have thought non-cat and cat weather would be up this quarter.

But you and Chubb both were saying that non-cat was down.

So can you -- is there a categorization thing or last year things were just below the cat threshold and this year there were a lot of events just above?

Ian, this is Brian.

I think the fundamental dynamic is the last point you are making, which is this quarter -- the little, tiny, silver lining around the big, dark clouds was the events were so bad that they all flipped into the getting categorized as a cat event.

So our normal first-quarter flow of weather events is always there because there is always snow storms and there is always a little bit of wind and there is always some of that.

Most of that got lumped into a cat and therefore we had got an offsetting benefit.

Got it, okay.

Ian, that was the primary reason why we try to be very transparent on the fact that there was favorable non-cat weather.

We think it's important for you to understand what the underlying dynamics are in the business and to be able to look at combined ratios with that in mind.

Exactly.

That is why I just wanted to make sure of that when we are looking at accident year ex cats that there is a little bit of moving pieces in there so I appreciate that.

My other question is on auto.

I guess can you help me get more comfortable that the 95 this quarter is sort of that you are a sustainably back below 96?

The reason I ask it that way is each of the last couple of years you have been at 98, 99 and there has been a quarter in there that is below 96 then you go right back up.

To be honest when a look at your reserve triangles for auto you have had adverse development the last couple of years, your paid and IBNR trends, frankly, look a little weaker than your peers.

But on the other hand obviously you have got pricing coming through.

Where are we?

Are we comfortable that we are below 96 or is it we are hopeful and we need a couple more quarters to see?

So a couple of pieces, Ian, and then, Greg, you can chime in.

As I said in my comments we got about a point of good news running through there because of the weather impact on frequency.

So the 95 and change is, we think, from a run rate perspective a little bit understated.

We are seeing -- we have been taking some rate actions as we have talked about and we are seeing now that that rate is exceeding loss costs.

So we are expanding our margins there and we feel good about it.

There also is seasonality in how the ratios come through, and that is one of the reasons why they do bounce around a bit.

But, Greg, if you want to --?

Just to comment on that seasonality.

We typically see in the first quarter a little lower relativity and we certainly talk to you about the fourth quarter about a much higher relativity.

And so when you consider all that and to Brian's comment on the rate offsetting some of the loss trend and Jay's comment about we have target ranges of a return on capital for this line, based on all that we feel like the product is right in the middle of where we want -- of those targets.

We feel comfortable with it.

Okay.

So is maybe a fair way to say it that it may not be below 96 every quarter but hopefully it's a 96 for the year as the earned price keeps coming through?

We certainly price the product on a longer imputed basis, yes.

It's very difficult to do it at a quarterly level.

The range that we look at overall in terms of profit targets for the product line is closer to the 96 to 99 range.

So when we consider all of that we feel like we are right inside those targets.

Okay, got it.

I was just -- I am not necessarily questioning can you get there.

I guess the one thing that surprised me is even if I take Brian's comment and adjust the 95 back to a 96 I guess -- and some seasonality, it just seemed a big drop from where the full 2009 year was.

I would have thought the earned pricing would have come in a little bit more gradually unless there was some other benefits you were seeing possibly.

Do you see what I am getting at?

Yes, I mean

I think what might distort it though is if you are looking at it on a quarter-to-quarter basis, particularly sequentially.

And if you have the fourth quarter which has the higher loss content associated with it and then you flip into the first quarter which has, by its nature and the seasonality factors, the lower loss content.

So I think you have to see it developed over some more quarters I think.

Yes.

And it's a little bit (inaudible) when you are looking at quarter over quarter of this year for the 2009 period.

We did have some adverse activity in the first quarter of 2009 from the fourth quarter of 2008.

So when you adjust some of that, which we really look at more in an accident year the health of the business, the trends certainly come through.

I think the bottom line here, Ian, without giving you a precise number for what we think the full-year auto is going to be we feel better about the auto line.

There were some unusual seasonal things going through, but we feel good about the rate we are getting and the loss costs are controlled.

And relative to where we have been we see some real improvement here.

Great.

That is clear.

Thank you.

Ron Bobman, Capital Returns.

I guess there is no prize for being last.

I just had a question about your Lloyd's businesses and I was wondering how much hard and soft capital supports your Lloyd's businesses and explicitly how much in the way of LOCs do you use to make up those amounts?

This is Jay Benet.

There is a fair amount of LOCs supporting the Lloyds business.

I think proportionately it's probably about 80% LOCs relative to hard capital.

And what are the actual dollar numbers?

I am struggling with the number.

I think it's in our K.

It's in our K.

(multiple speakers) $500 million was what I was remembering, but --.

A little less than that but it's about $500 million.

It will go up and down based upon the expected writings at Lloyd's.

That is the total capital number, approximately, or the LOC number?

That is the LOC number.

It's $474 million; it's on page 117 of the K.

Approximately, thanks a lot.

Best of luck.

Ms.

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