旅行家集團 (TRV) 2011 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 Thursday, April 21, 2011.

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

Gabriella Nawi, Senior Vice President of Investor Relations.

Ms.

Nawi, you may begin.

Thank you, Chantel.

Good morning, and welcome to Travelers discussion of our first quarter 2011 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 Investor 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 explanatory note included at the end of the webcast.

Our presentation today includes forward-looking statements.

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 those projected in the forward-looking statements, 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 our remarks or responses to questions, we may mention some non-GAAP financial measures.

Reconciliations are included in our recent earnings press release, financial supplement, and other materials that are available in the Investor section on our website.

Thank you.

And now, to Jay

Thank you, Gabi.

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

By now, you've seen our numbers, and we're very pleased with our results.

At 14.1%, our operating return on equity for the quarter reflected solid underwriting and investment income, as well as the continuation of our strategy of returning excess capital to shareholders.

Our average annual operating return on equity since January 2005, coincidentally, is also 14.1%, within our over time return objectives and meaningfully, in excess of our average cost of equity over the period.

The total return to our shareholders over this period is also very strong, at 86%.

In Business Insurance, we are also pleased to see the continued success of the pricing strategy we have discussed with you previously, as well as a continuation of improving exposure trends.

While Brian will take you through the details in both Business and Personal Insurance, we were able to achieve gains in pricing, evidencing our view that pricing is an active pursuit rather than a passive response.

In our Business Insurance segment, almost every production indicator improved this quarter.

Retention was up, we achieved pricing gains, and exposure, which is unit demand by renewing customers, improved.

In addition, we continue to increase our number of accounts during the quarter.

We fundamentally believe that a number of these indicators are the result of active management and not the result of a rising tide lifting all boats.

Our pricing strategy is premised on real value added to agents and customers, and our industry-leading analytics which we apply to pricing and risk selection.

Most importantly, we have applied this strategy thoughtfully, and with the mindset not to be disruptive to either our agents or customers.

These analytics give us very important advanced insight into class and account profitability, not only at the management level, but critically at the desk underwriting level, allowing us to better determine account rate needs, risk selection, and produce superior portfolio returns over time.

The feedback we receive is that both agents and customers recognize the value proposition of doing business with Travelers.

It's not the insurance agreement, which anyone can write, but the combination of the agreement with market leading product breadth, superior claims execution, risk control skill, and our extraordinary people with underwriting authority positioned in the local market.

Simply said, we believe doing business with us creates value for agents and customers.

As we've been saying for some years now, for a number of reasons, we believe that the amplitude, that is the highs and lows of the so-called pricing cycle in our industry, may very well have moderated significantly.

Given our position, as well as the analytics skill we just discussed, we are not waiting for some change in the mythical cycle to seek improved returns.

We are increasingly optimistic about our ability to succeed in this regard, given the signs we see of a more receptive environment, particularly because we intend to execute this strategy in a targeted and measured way.

It is worth a look at slide nine, where you can see the actual results of this approach.

Brian will have more to say about this later, and we will discuss our view on cycles more at our upcoming Investor Day.

In short, we're pleased with the quarter and we feel good about our competitive position.

We've now seen two quarters of improving rate in Business Insurance and five consecutive quarters of positive rate, while growing policies, in Personal Insurance.

We like what we see.

With that, let me turn it over to Jay.

Thanks, Jay.

As the data we've provided shows, we produced first quarter operating income of $826 million, up 31% from the prior-year quarter and up 55% per diluted share, translating into a strong operating ROE of 14.1%.

The major drivers of these increases in operating income and operating income per diluted share were a significant reduction in catastrophe losses as compared to the prior-year quarter, cat losses were $122 million after tax, down from $312 million after tax in the prior-year quarter.

That said, we would still characterize the current quarter as having combined weather and quake-related losses, whether considered cat's or smaller events, that were higher than what we consider to be typical.

We also had tax benefits of $104 million in the current quarter, that mostly related to the closing out of recent tax years, and the very meaningful effect of our common share repurchase program on per share results.

Net investment income also increased, due to solid performance in our non-fixed income investment portfolio.

Partially offsetting these benefits was a $37 million after-tax reduction in net favorable prior-year reserve development.

Net favorable prior-year reserve development, which we once again experienced in each of our business segments, was $155 million after tax in the current quarter, as compared to $192 million after tax in the prior-year quarter.

So all in all, particularly in light of the higher than typical cat and non-cat weather and quake-related losses that I previously referred to, we are off to a good start for the year.

Book value per share of $59.91 increased 2% in the current quarter, after repurchasing $1.1 billion of common stock and paying $155 million of dividends, and increased 12% from a year ago, after repurchasing $4.7 billion of common stock and paying $657 million in dividends.

Our cash flow remains very strong.

Operating cash flow was $633 million in the current quarter, up from $531 million in the prior-year quarter.

And we could not be happier with our balance sheet.

And finally, our continued strong results and financial position allowed the Company to increase its quarterly dividend per share by 14% from $0.36 to $0.41.

We ended the quarter with holding Company liquidity of $2.9 billion.

That was once again well in excess our target, but down from the $3.6 billion we held at the end of 2010.

This reduction in holding Company liquidity was in line with our plan, and relates back to our $1.1 billion common share repurchases in the quarter.

Entering the year, our original estimate for full-year 2011 common share repurchases was based upon our estimate of after-tax operating income plus $1.5 billion, which translated into a particular dollar amount at that time.

Currently, we have chosen not to change that dollar amount for full-year 2011 share repurchases, notwithstanding the first quarter's favorable reserve development, which our estimates never incorporate, due to it still being very early in the year and the inherent uncertainties in our business.

Brian is now going to provide some further insight into our underwriting results.

Thanks, Jay.

We had a great quarter, and we're pleased to be starting out the year in such a positive way.

In addition to posting strong earnings, we are particularly pleased with what we are seeing in the underlying business dynamics.

Business Insurance delivered strong results this quarter.

Let me begin with operating earnings, which increased over last year driven by lower cat's and the tax benefit that Jay mentioned.

While cat's are lower than last year, it was still a very active weather quarter, and cat losses were higher than what we consider typical.

In addition, prior-year development was somewhat less than in 2010, but still significant at $93 million after-tax.

Core underwriting margins remained solid but contracted modestly, as loss cost continued to slightly outpace earned rate changes, in line with our expectations.

Net written premiums grew almost 7 points year-over-year.

The increase was driven by improved pricing, renewing customers purchasing more insurance as the economy improved, and account growth.

Higher business receipts and/or payrolls for these customers drove increased exposure, think units, in our renewal premium.

Additionally, audit premiums were positive for the first time since the second quarter of 2009.

Our price change, or pure rate, was positive quarter-over-quarter, and even trended up month-to-month within the quarter.

At the same time, retention rose 2 points to 84%.

New business flow remained strong, while new business written premiums were down slightly from last year.

Page eight demonstrates the significant improvement in renewal premium change that we've experienced since 2009.

Some of this is clearly driven by the broader economic environment, but it is also a result of how we execute in the marketplace.

Much of the market commentary implies that there's only one marketplace and that all accounts renew at the same or similar rates.

At least for us, that's not the case.

So we're not waiting for a market cycle change.

Instead, we believe in a much more active strategy, a strategy based on superior analytics, a broad breadth of products, excellent positioning in the distribution channel, and great local point of sale talent.

The data on slide nine shows the distribution of price changes on our commercial accounts business in the first quarter.

This is a mid-sized account business with over 5,100 accounts renewing in the quarter.

In the aggregate, two-thirds of these accounts got some level of increase.

But importantly, there is a wide distribution of price changes, with some accounts getting greater than 10% increases and others, 10% decreases.

So we believe this clearly demonstrates that it's not one pricing environment and that, given our competitive advantages, we can target the accounts that need price, and take the right actions deal by deal.

Through this thoughtful and targeted execution, we can get rate where needed and minimize disruption to our agents and customers.

We believe this dynamic is one that is not well recognized or appreciated by industry observers, and we believe it is meaningful.

Turning to Financial, Professional and International Insurance segment, operating income was up over the prior-year quarter, primarily due to lower catastrophe losses.

While written and earned premiums have been reduced in the current and recent quarters, the work we have done to improve risk and reward in the catastrophe-prone lines in our Lloyd's syndicate successfully mitigated losses this quarter.

Net and written premiums were down in the quarter primarily due to the Lloyd's initiative I just mentioned, the timing of renewals of some accounts written in the first quarter of last year that will become available for renewal later this year, and the termination late last year of an exclusive distribution relationship in Ireland that we mentioned previously.

Looking at bond and financial products.

In Surety, we continue to see a market challenged for growth, due largely to the continued sluggishness in construction spending.

In addition, we're beginning to see evidence of more aggressive competition, including relaxed terms and conditions in order to win business.

We will continue to maintain our underwriting discipline and look to grow where it makes sense.

In Management Liability, while growth remains a challenge, this is an area where we've invested in new product and technology, and we believe we are well positioned to grow as the market improves.

Finally, I wanted to give you an update on our joint venture in Brazil that we announced in November.

We continue to expect the transaction to close in the second quarter, and remain excited about the opportunity this arrangement gives us to leverage our leading US surety franchise to enter the growing Brazilian market and to expand more broadly into P&C, and to do so with the benefit of a local market leader.

Moving to Personal Insurance, we are pleased with our overall underwriting results and we had another quarter of solid production, with continued growth in both policies in force and net written premium.

From a financial perspective, reported cat's and prior-year development for the segment were favorable year-over-year, however underwriting results were impacted by a significant amount of non-cat weather that affected the industry in the quarter.

We remain pleased with the underlying profitability of the segment.

As with our Commercial Lines businesses, we manage Personal Insurance consistent with our financial strategy of delivering mid-teen return on equity over time.

As such, we are committed to maintaining target profitability as we look to achieve our desired growth within these confines.

To that end, we have been making some targeted but aggressive rate actions, particularly in the homeowners space, which has been adversely impacted by weather trends in the last few years.

We believe that our rate actions are well justified, given these loss trends.

In summary, we feel terrific about the results this quarter.

While we are still operating at a fluid and challenging market environment, we are clearly beginning to see some improvement and are cautiously, but increasingly, optimistic that this trend will continue.

Both execution across all our business segments and how we're positioning going forward are very strong.

With that, let me turn it back to Jay Fishman for a closing comment.

Thanks, Brian.

Just as I've said any number of times before, a lot of our own folks listen in to this call, if not today, then they will over the next few days.

It was a really busy first quarter for all of our folks in Claim.

And obviously, given the activity in April, it continues to be a busy time, and they are all out there hopping.

I just want to let them know that we know that.

And what they're going to do today, and what they do every day, really makes a difference for us.

And with that let's open it up for questions.

Absolutely.

Thank you.

(Operator Instructions)

And our first question comes from the line of Keith Walsh with Citi.

Please go ahead.

Good morning, everybody.

First question, just on Business Insurance, the pricing that we're seeing here.

I guess, you know, I was definitely surprised about pricing being up and your retention being up at the same time.

Could you just give us a little more color behind that?

Was there some potentially pent-up pricing, maybe from the recession, or using, you know -- is this expected frequency ticking up from a recovery that you're factoring in to your pricing?

Just maybe a little bit more color around that.

Thanks.

Lets tag team this a little.

It certainly, Kevin, isn't driven by a concern about frequency or anything of that nature.

I'd say if there's anything, at least in the back of it my mind, is that it's possible that this investment return environment may turn out to be longer rather than shorter.

And as I'd said on previous calls, when rates changed pretty dramatically, pretty quickly, we certainly didn't knee-jerk -- have a knee-jerk reaction with respect to our pricing.

That would obviously be disruptive to both agents and customers.

And now that we're 18, 24 months into it, I think it's prudent that we be thoughtful of the possibility -- mindful of the possibility that this could be longer rather than shorter.

And so it is targeted, it's moderate, it's thoughtful, and I think that that slide on page 9 really speaks articulately to the issue.

Two-thirds of the accounts, we were successful in getting rate increases, and yet with retention that stayed at historical levels -- historically high levels.

So I think it speaks to the value of the franchise, I think it speaks to the way in which the Company is regarded by agents and customers, and I think you always have to remember, there's a tendency of lots of folks to lump all of us together as one industry .

We are a small and middle market company.

And if you get a point and a half of rate on $100,000 premium account, that's $1,500.

And so if we do this thoughtfully and I think in a measured way, we're optimistic that we can be successful.

If there is there anything, Brian, that you would

No, I think that's the message.

Okay.

And then the second question would be, if you could speak to the RMS model changes on inland wind that we're seeing out there.

First of all, do use you use RMS?

And then secondly, if you could just talk to the changes in your PML in Florida, Texas, and the mid-Atlantic from the model changes that we've seen.

Thanks.

Yes, so this is Brian.

Yes, we absolutely use RMS, but we don't use it exclusively.

We use every available model you can think of, that we're out there working with.

So we work with a number of folks.

I'm not to be able to give you an answer as specific as what you asked for.

It's a significant change to their model.

It's a complicated process.

And we've been heavily involved, working with them for quite a while now.

Some of the things that they're contemplating in the model, like inland exposures from the storm, we'd already been looking at pretty significantly.

But there are a number of things that they're changing.

And like I said, we are working with them.

So it will be later in the year before we're going to come out with anything definitive, you know, as in well into the third quarter, probably, before we come out with anything on what the model changes will actually mean.

So would we expect changes in your -- the way you think about capital heading into next year then, January of next year?

Or late in the year, is what you're referring to?

What we've got to look at, obviously, is as we sort through all of changes in the model, we've got to look at what that does to our expectation of losses.

As I said, it's not the only model we use.

So we're going to take that out, we're going to look at the other models, we're going to look at all of our internal data, and we're going to assess where that is.

As it moves, you know, we can begin to conjecture on a bunch of different possibilities of what that could mean.

As it relates specifically to capital, we will be evaluating what we think the model has done to our exposure base, or -- our exposure base doesn't change, the model's measurement of it changes, perhaps.

But ultimately, we'll be in discussions, as I'm sure all of our counterparts will be, with rating agencies, and see what rating agencies think of the new models.

And we start, in all of our capital planning with, as we've said many, many times before, having operating company capital levels at the double-A level.

So we'll just continue to do that process.

Okay.

Thanks a lot.

Our next question is from the line of Mike Nannizzi with Goldman Sachs.

Please go ahead.

Thank you.

Could you give a little bit more color on the action at Lloyd's, and kind of what you're expecting from that business for the rest of the year?

And I just have one follow-up.

Thanks.

Sure, Mike.

It's Alan Schnitzer.

When you look at our experience over the recent years, we've just had more really severity and volatility out of that business than we'd really like.

So we've taken a step back, just to assess risk and reward.

And obviously, we're starting on the risk side and taking some exposures down as we think about that, and making sure that we're taking all the analytics and thought processes that we have in the US and driving it into those businesses as well.

So as we -- we started this analysis in 2009.

We worked through that, and slowly we've been increasing implementation.

And we will be working through it for a couple of more quarters, and starting to look more at the opportunity side as we start to put some of the analytics and thought process in place.

When you look at the decrease in written premium, anyway, in the international, if that's what you're looking at, only about a third of that relates to what we're doing on the Lloyd's book.

There's another, about third, that relates to some timing, some accounts that were 18 months when written and will be available for renewal later in the year.

There's a little bit of reinsurance, reinstatement premium.

And we've got the termination of the distribution arrangement in Ireland, which will continue for the rest of this year to run through the top line, although that piece won't have a significant impact on profitability.

Let me just jump in.

I think Alan, just because he's leading this efforts, tends to understate it a little bit.

We talked for years about the nature of analytical skill and our ability to evaluate risk and reward in the US and all of our operations here.

That skill base was not nearly at the same level in our international business broadly, but I think that was particularly true in Lloyd's.

Although maybe not, maybe it was more balanced than that.

And the effort that Alan has been doing is to bring the same level of analytics, as well as the same level of interpretation of those analytics, to the business that we do in our international operations.

And so ultimately, it will turn out, at least initially, to be a somewhat smaller -- I think it will give us an awfully good platform to move ahead and to build a business with a sense of confidence, the same sense of confidence that we have here in the US.

So it's very much a voluntary effort, designed to bring that risk and reward profile in line with what we do here in the US.

Great.

Thank you so much for those answers.

And then, I have one question in commercial accounts.

I noticed in your -- the Q, you had talked about margins being slightly narrower for the rest of the year in Business Insurance, I believe, and referencing kind of Brian's point of loss trend outpacing pricing.

And then, obviously in the first quarter, you saw a big increase in commercial accounts.

I'm just trying to reconcile those trends, make sure I understand the thought process behind the outlook and then the increase in exposures in the quarter.

Thanks.

I think again, Brian, and I will tag team this first, that you have to always keep in mind that our P& L, our GAAP financial statements, are based upon earned premium, and as a consequence they reflect more of the rate dynamics of the past 12 months than they do the past quarter.

If it's a 12-month policy, you book it for 12 months, and you amortize it in.

And so the rate picture that we're providing this morning is in the written premium arena, which obviously will affect earned premiums down the road .

And what really you're seeing here, at least in the GAAP statement, and what we anticipated, which is that the earned price -- the earned rate that's reflected in earned premium, we expected that to be less than what we were contemplating for embedded loss trend for loss reserving purposes.

So as a consequence, we were anticipating a modest margin contraction in Business Insurance, and we're seeing very much that.

It was actually reasonably predictable at the time.

So that's the -- that's the earned piece.

With respect to written

Just to restate some of the metrics, without being overly precise, but we've been pretty transparent.

Our last quarter, you know, our view on what we were seeing across our Business Insurance market from a loss side was relatively flat frequency and, you know, lower single-digit inflation on the severity side, and that has not changed.

You can see where our premium change numbers were, and you can kind of make whatever estimate you want on where you think premium change is going to go for the rest of the year, and see when you think those lines might be crossing, on a written basis.

But we still got a little bit of contraction going on, so I don't know if those pieces add up for you, but --

Got it .

Got it.

And then just -- worker's comp, it looked like, was a big driver of -- and it looks like just from the math, that most of that -- the change in commercial accounts was workers comp.

I guess first question, is that right?

And if you would just talk specifically about the decision to pursue more business there and kind of what that means.

And thank you so much for answering my

This is Brian again.

On the comp side, that is the line across Business Insurance that's growing the most.

It's also the line across Business Insurance where we're getting the most price improvement.

And I'd say in every line within Business Insurance this quarter, we got some price improvement.

But Comp was definitely at the front end.

You know, Comp's a line that's gotten a lot, a lot of publicity.

If you look at our results over the last 10-plus years now, we've run a pretty significant favorable delta to the industry on a loss and combined ratio side, so we feel great about our selection in there.

We feel great about our risk control capabilities and the claim capability that we have.

And so, it is a line that we feel good about, but very, very selective.

Spend 30 seconds on the national account business and the ability to export that skill --

We've got a very large, large account Comp business, which is primary loss responsive.

And so as in taking credit risk not underwriting risk.

And that has enabled us, over the last 20 years, really -- the scale of that -- has enabled us to build claim and risk control capability and pricing selection tools, which we would not have been able to afford to build had we just had the guaranteed cost book that we've had over the years.

So we think we've got a real scale and data advantage here, and a technology and tools advantage that make a big difference in the marketplace.

And we feel good about our Comp book

An example of that is out in the Claim organization, you'll actually see nurses sitting side-by-side with claim handlers managing claim -- I don't know, what do we have?

Close to $2.5 billion, $3 billion of claims under management in our national account business.

That provides two things.

Brian got it exactly right.

An expertise that we can export into the smaller guaranteed cost segments and also a scale, because Comp is fundamentally a state-by-state business.

There are -- and you've really got to get very focused and very narrow in your analysis of it.

So the combination of scale, and the expertise that exists predominantly in that national accounts businesses, is a real competitive advantage.

Great.

Thank you so much for all your answers.

Our next question is from the line of Jay Gelb with Barclays Capital.

Please go ahead.

Thank you.

Two questions for you.

First, kind of following up on the last question, can you talk about the potential for loss frequency to start to increase a bit as the economy recovers?

And I know that's kind of a broad issue, but I'm focused more on commercial, I guess as well as personal.

And then second issue, do you anticipate Travelers' reinsurance costs could rise?

And if that were to happen, would Travelers buy less coverage?

On the loss frequency side, Jay, clearly as we've talked about on the other side of the coin as the economy contracted, it actually creates a favorable dynamic within the Comp world, in that most businesses lay off the least experienced workers first, and safety gets a little bit better, and you're running fewer shifts, and all that kind of stuff.

If the economy really started to heat up, we would see some of that.

We look very closely, we haven't seen anything yet.

Although the movement's been positive, it hasn't been that dramatic that we think it's changed those dimensions.

Similarly, as you said, within all the lines, including personal lines, we are looking for any indications that economic growth is going to push frequency up, which it naturally will.

I think the bottom line is the same across all our businesses.

We're looking really hard.

We haven't seen anything yet.

And we think the magnitude of the pickup in economic activity hasn't been enough to drive that yet.

But it's a great question, and one that we'll be watching closely.

The reinsurance -- ?

Let me just -- Bill just handed me a note.

I think a better estimate of the claim.

I said $2.5 billion to $3 billion of claims under management.

$2 billion to $2.5 billion is a better estimate for the claims under management in national accounts.

Combination of loss responses and that which we have, well, fee for service and guarantee costs -- not guarantee costs, loss of funds.

We don't actually buy all that much catastrophe coverage, broadly speaking.

We have a $1 billion retention.

In the next $1.25 billion our recovery, and this is round numbers, is about $500 million or so, and that's obviously a pre-tax number.

So in a $2.25 billion loss, we'd have a $500 million recovery, pre-tax.

We've paid whatever we paid for the coverage on a net recovery basis in a first event.

Then you've got to pay the reinstatement premium.

We actually have modest recovery in that first event.

It's really a second event reinsurance program.

And we don't actually buy much, except the only are where it's important to us in the Northeast.

We actually have, obviously, the cat bond, and we have a separate Northeast wind cover that's meaningful, given our exposures.

And we wouldn't expect -- I don't know how to respond to the Northeast and the bond issue longer-term, but in the context of the standard reinsurance market, we wouldn't expect a significant increase in dollars because what we pay for the policies actually is not all that much.

So even if it goes up some, it's not going to be a meaningful change in dollars.

Said do you anticipate, and there's a lot of controversy right now in terms of weather, all the significant catastrophe losses in Asia-Pacific are going to sort of bleed over to the US.

What are your thoughts there?

I think you should ask the reinsurers.

I have no idea.

Okay.

Thanks.

And our next question is from Matthew Heimermann with JPMorgan.

Please go ahead, Mr.

Heimermann.

Hello.

Good morning, everybody.

Not to make this all about Work Comp, but I was just curious, on the non-guaranteed cost side, with the economy picking up, and presumably that would mean that balances under management would probably go up too, is the outlook for the fee income you generate on that business potentially going to get better over the next couple of years?

The short answer, Matt, is yes.

We're all anxiously watch the economy and what it actually does, but we're seeing a little bit of a lift, and we would expect that to continue.

It's actually interesting -- I think this is what I'm about to say is correct.

The private market workers compensation premium was $38 billion in 2007.

The estimate for 2010, once all the data is in, is $28 billion.

10 on 38, obviously almost a 25% reduction, driven by the combination of lower employment and some decline in rate.

So the change in Workers Comp in the market, broadly speaking, has been really quite significant.

And it will be interesting, to see to the extent that employment begins to recover, to what extent that $28 billion begins to lift back up in the direction of that historical high.

Okay.

Thanks for that.

And then just on the -- specifically on the management liability piece, when I was looking at the presentation in terms of the rate change there, that was one that stood out relative to a lot of the channel checks and market commentaries being a bit different.

Because most competitors, I think, are describing that as more competitive and rates moving down 5% to 10%.

I know some people are minimizing rate declines by changing kind of the position that they have on contracts.

So could you maybe just give a little bit more color on that book specifically, in terms of just the rate?

And maybe it's a product issue, too, but --

Sure.

It's Alan Schnitzer.

It's tough to answer those questions, because people think about management liability broadly again as one thing, and it's really not.

We've got different business units, so what we see in Financial Institutions behaves differently than what we see in Public Company liability versus what we see in Private Nonprofit.

D&O is different than E&O is different than Employee Practices liability.

So it's really hard to answer that on a portfolio basis.

If I think about what's impacting us, the majority of our premium there is in our Private Nonprofit book, so the smaller accounts.

And the rate dynamic there has been different, and I'd say less significant, than what we've seen in the larger account side.

So that's probably the distinction I would make on rate.

Okay.

And then how about on the FI and the Public Commercial D&O side, could you just give a little commentary to what you're seeing there?

Sure.

I'm not sure if you're-- if this is about -- you're talking about rate or the loss side, but --

More on the rate side

On the rate side, I think that as you get in larger account sizes, almost regardless of the industry or the product line, the larger account sizes the rate environment is more competitive.

So I think the same would apply in Public Company liability and FI, as compared to, say, a Private Nonprofit book.

Okay.

Thanks much.

You bet.

And our next question is from the line of Josh Shanker with Deutsche Bank.

Please go ahead, Mr.

Shanker.

Good morning, everyone.

Looking at the resolution of prior tax matters, the one-time tax item, it's consolidated under the underwriting gain, I guess the way you've defined it.

Can you sort of walk through a little bit how that hits the P&L?

In terms of the way we manage our expenses and income we, as a rule, take all of the items and allocate to the various business segments.

We don't have a large corporate component to our expense structure or our revenue structure, as you can see when you look through the information that we have on our 10-K and 10-Q.

So when we have things like tax matters that get settled, we go back to the segment that gave rise to them in the first place.

And to the extent there's a tax benefit, it just goes right back to the segment.

So that's what, you know, drives the earnings piece of it.

As it relates to other elements of it, like combined ratio.

Combined ratio is a pre-tax concept, so a tax benefit has absolutely no impact whatsoever on the combined ratio.

My apologies.

I misunderstood that.

Thank you for clarifying.

The same question I have, as I'm looking at the historical financials, I noticed in the past some of the previous slides from prior conference calls have different numbers and then the previous ones.

In terms of, is this audit premiums coming back and revising the past lines?

You're talking about the production statistics that we might have on rate and renewal price change and exposure, right?

Yes.

So those numbers develop just like, not a dissimilar concept to loss numbers developing.

So, as we go through, we're looking at the monthly/quarterly production numbers.

We are reporting the same numbers we look at internally, as to what we thinks going on with the pricing and the retention and the renewal.

But invariably, there are going to be accounts, for example, that we thought, at the close of the month, we'd retain.

And we find out two weeks later that we actually did not.

So those come out of the statistics.

So the numbers do move.

And we do put a notation on the slides, as well as anywhere where we provide estimates associated with, you know, statistics that we use to run our business, that these are in part actuarial estimates subject to change.

And when they change, we restate the past.

Very good.

And finally, one more question on Workers Comp.

Is there anything, broadly speaking, you can talk to how these statistics look different, excluding the Workers Comp portion?

No, we don't -- no, we don't have them -- I mean, we could calculate them, obviously.

But we don't disclose them.

Right.

We don't disclose it at that level of granularity.

Okay.

Thank you very much.

If I can remind you all to please limit yourself to two questions.

Thank you.

I would reiterate what I said before, though, is that across Business Insurance, we had great improvement across all the lines of business.

So it wasn't just Comp, but Comp had the greatest.

Our next question is from the line of Greg Locraft with Morgan Stanley.

Please go ahead.

Hello.

Thanks, and good morning.

My two questions are cap deployment and then the direct auto initiative.

On cap deployment, I just wanted to clarify that the guidance was indeed increased from the last time you guys give us your thoughts.

Specifically it was increased by the amount of reserve releases, as well as the after-tax impact of the tax gain.

Is that true?

Actually, I would say just the opposite.

We entered the year with a view as to what our share buybacks were going to be.

We gave you some insight in the first -- in the fourth quarter press release -- in the fourth quarter webcast, as to how to think about that.

It's very early in the year and we're, at this point in time, not changing our view internally as to what the overall level of buybacks are going to be for the full year 2011.

It's worth going back a little bit, because this is a little -- it's unusual and somewhat out of context.

A year ago, we said that we were going to stop giving earnings per share guidance 2011.

But we also said that we would provide meaningful insight into what we plan to do from a buyback perspective, because that's a number that we believed was not determinable from the outside looking in.

So the way we did that, back at the first quarter, was to say that at least for our own planning purposes, that we were assuming that the share buybacks would be our estimate of earnings plus $1.5 billion.

And that, of course, allowed observers to make their own estimates.

And so while it's funny that to be talking about guidance of an individual item that's not tied in some way to earnings guidance, what we are attempting to say is, notwithstanding the results in the first quarter whatever they were, at least for our own purposes at the moment, we continue to assume the same dollar level that we did when we gave that information three months ago.

Okay.

But I guess from my perspective, we all have different estimates of what the after-tax op income will be.

When we exit the year ,whatever year after tax op income is, plus $1.5 billion, is what the share buyback will be for 2011, is that --

The share buyback will be whatever it turns out to be.

And there's a lot of things between now and the end of the year that may in fact affect that one way or another.

But for planning purposes, what we again tried to give you was at least some guidance, so that you'd be able to make those estimates for yourself.

And I think -- not I think, what we're really saying to you is not to adjust that number on a very granular, quarter-by-quarter basis.

If we think something's changed, we'll certainly let you know.

But it's not -- it just isn't quite as formulaic as the notion of earnings plus $1.5 billion.

We wanted to -- the reason we did that was we were intentionally stepping away from the practice of giving earnings guidance.

And so we were trying to be as transparent as we could in this circumstance, and give you as much information as we could.

To the extent that there are circumstances during the year that arise, good or bad, that causes us to think about that share buyback in some meaningful different way, we will continue to give you the insight that we're capable of giving.

Okay

Our advice to you is not to over react to your perception of the first quarter.

Great.

Thank you for that.

And then also on capital deployment, could you just address the dividend?

The increase is a healthy increase.

And what is your dividend policy, and how did you settle in on $0.41 per share as being the right number, as opposed to something else?

Well you know, $0.40 could have been right also.

It's not again -- it's hardly that precise.

Our mindset has been to set a dividend level that reflects the fact that we're in a business that has great earnings volatility.

We always recognize that the one in 1000 event could happen this year.

And it could happen twice this year, just because it's one in 1000 doesn't mean that it's zero, right, it's possible.

So our goal is to evaluate our cash flows, recognizing that the share buyback has reduced the number of shares significantly over time.

Actually, I think about in half at this point.

We're down to about half of the shares from where we started.

So we're able to increase the dividend, I think thoughtfully, but always keep it at a level that, even looking out at of the tail risks of our business, it would be unlikely -- I don't want to say zero again -- we're not a zero-basis kind of company.

But it would be unlikely that we would be in a position of having to make a change in that regard.

And what we do is, to the extent that there's additional capital above and beyond that, we obviously deploy it in the share buyback program.

So that's the thinking and it really -- it doesn't -- it actually is not drive by a set payout ratio, because our earnings can change meaningful based upon natural events or otherwise.

It's set at a level where we have a reasonable degree of confidence that in a lot of scenarios that we would be in a position of being able to support a continuation of the dividend.

Okay.

Great.

Thanks.

And then, just on the direct business, the direct auto initiative, it's obviously growing very -- it looks like it's up almost 50% year-over-year, just premiums, you know there is a P&L drag as well.

But just curious, your updated thoughts on that trajectory and where this potentially could go over time.

Greg and I will tag team this as well.

When we set on this venture, we were very clear and transparent that this was long-term in nature.

And we are not yet at that long-term level.

We are still very much -- meaning we are still in the process of learning, and learning enough to what we hope ultimately will be -- put us in a position to deploy the resources of this Company in a thoughtful, substantive way, and actually grow that business, hopefully meaningfully.

We don't yet know enough to do that.

We don't know enough about the pricing of the product.

We don't yet know enough about how to convert quotes into sales at a level that's likely to produce a long-term profitable return.

So our investment in this regard is, as in effect as little as it can be, while still allowing us to learn as much as we're capable of learning.

And that's a real trade-off that we decide every year.

So it's still, I would say, at best -- it may not be the early days.

It's certainly further on than that.

You will see a change this year in our advertising program to be more of an "operators are standing by" type of advertising.

For those of you who aren't old enough to remember what that means, it's really the decades ago dynamic of call now, you know, call now .

We're going to, obviously not embrace the call now dynamic, but you are going to see more of a drive to action-oriented advertising, and we will see how responsive that is.

I think you talk about the digital world too, as long as we're at

Good morning, Greg.

This is Greg Toczydlowski.

Just to echo Jay's comments, start with the assessment.

We are as encouraged today as when we started the investment, around where the future value of that is.

We've spent a lot of time, as Jay talked about, in the advertising arena, not only in creating and executing ads, but trying to understand an attribute, you know, the sales across all the mediums.

The one that Jay just talked about was on the digital front.

We're spending a lot of time inside that arena and really work in the search optimization and display-type ads, and building good capability there.

And I certainly don't want to pick at your words, but there is a little bit of a bias in the industry.

I think your words were, the direct auto initiative.

If you look at the statistical supplement, you'll see -- do some quick math, and over 40% of the path is in the property lines.

And we really think that's where we have a long-term strategic competitive advantage there, with the breadth of our product and the strength of that property line.

And I think consumers have seen that.

So in the early days, we're very pleased with how we're building that capability and what the profile of the customers look like.

We've also hired two terrific leaders in the last year, for that business.

One out of Microsoft, and one out of the direct industry, not insurance, but someone with real skill in building a direct response business.

And so these are all steps in the right direction to building what we hope will be a successful venture.

Okay.

Thank you very much, and congrats on a great start to the year.

Our next question is from the line of Larry Greenberg with Langen McAlenney.

Please go ahead.

I know that most of the increase in your accident year, ex-cat, combined ratio for personal was non-cat weather.

But you had said in the first quarter -- excuse me, coming out of last year, that you expected personal lines premium -- personal lines margin to be improving this year.

And adjusted for the non-cat weather, I'm just curious as to whether you still feel that way.

Good morning, Larry.

This is Greg Toczydlowski again.

Up to this quarter, we certainly did see relatively low loss cost trend, both frequency and severity, and we saw rate outpacing that.

Clearly this quarter, we could see, was in the weather lines.

And when we really segment the data and look at a geography level in the coverage line, we could see it was predominantly in the physical damages coverages.

So when we look that we're expecting normal weather patterns for the rest of the year, we still believe in that statement that our loss cost trend will be offset with slightly more rate.

And I'd just observe that God has his our own plan for the weather.

And obviously, statement is always going to be measured relative to -- particularly in the non-cat area, where obviously, we're out of pattern here for the first three months, anyway.

Sure.

I appreciate that.

And then second question, Brian, your comments on surety competition.

Can you just elaborate a little bit.

Is that just coming from the traditional players?

Are you seeing any new capacity moving into that area?

Why don't I -- It's Alan Schnitzer.

I'll take that.

I would say that we are continuing to see a lot of capacity and just a lot more bold activity on the part of previously existing capacity.

I wouldn't say that it's necessarily new entrants into the marketplace, although there's always puts and takes on that as well.

Fair enough.

Thanks.

And our next question is from Jay Cohen with Bank of America.

Please go ahead.

Thank you.

I have two questions.

The first is, in looking at the Select Account business, and you've had consistent renewal rate improvements there.

I guess I'm assuming a fair amount of this business gets renewed fairly automatically with some modest increases, and it's not too much of a push to get those increases.

Is that oversimplifying it?

Slightly.

But directionally, it's right.

And we are obviously looking at that, you know, class-by-class.

So it's not -- we talk about the individually underwritten stuff, and deal-by-deal.

I don't want to imply that this is just one big bucket.

But we are looking at industry classes and kind of bucketing it that way.

But directionally, Jay, you're right.

A lot of it is automatically handled.

On the express side, about 80% of that business goes through without being touched by a person.

And there's obviously ability to drive a little bit of price through there.

That we've been successful with.

And like you said, you can see the numbers on whatever that is, page 11, that would reinforce that.

In the statistics I last looked at in Select, was that 80% of the accounts have not had a loss in the last three years, and as a consequence, the loss experience for an individual account is not terribly relevant, but the size of the book and the ability to determine the right price for the class is what the secret sauce is all about.

And so that's what we're responding to there is the loss dynamics from a class perspective.

Got it.

And then the other question -- I forget exactly who used the word, but maybe it was Brian.

When you were talking about rate increases, you suggested the environment was becoming more receptive.

And most of your discussion on the pure rate environment has been about your efforts to target selectively rates, and getting the right price for the right risk.

But are you seeing a reaction by your competitors to act in a more disciplined fashion?

Obviously, it will vary a lot by line of business and by size of account, but is there any underlying trend where that might be the case?

Brian and I, we're going to tag team this a little bit.

We often get asked who's stepping on the gas, you know, it's lots of different ways to ask that question.

And the anecdotal observation that we have to that is, nobody.

We just haven't seen competition.

We just haven't seen competition where we turn back and we scratch our head, broadly speaking.

You can always find an individual account or an individual transaction that doesn't make sense to one carrier versus another.

But it's not as if we look broadly at the marketplace and we say, gee, we can't figure that strategy out.

And it's been interesting, because again I think the observers to the industry have perceived that there is someone like that.

And I know there's actually been some commentary to that effect.

We haven't seen it.

We don't come to that conclusion.

And I think it's evidenced in the retention rate that are universally strong amongst the best competitors.

Now ours, I think, if you look at the real data, ours is probably the highest.

But when you look at what we think of as the great middle market accounts, they're all historically at pretty solid levels relative to their own circumstances.

And if there were someone who were really acting that way, carrier or carriers, we think you'd see more churn.

This gets back to our view of kind of the mythical cycle dynamics.

I find it interesting that people talk about it being a soft -- you know, a soft environment and it may be, at the top line.

If you look at our earnings per share last year before cat's, look at all the earnings that we generated, earnings per share pre-cats.

Last year was actually our best earnings per share year ever.

Now you can say, yes, it was favorable development or it was this or it was that.

The negative is, investment returns have been challenged.

But it's been interesting to us that the observation of the challenging market place, and we acknowledge that with respect to the top line, really hasn't translated to the bottom line.

[MUSIC].

That's obviously an audience reaction to my commentary, as I waxed on eloquently about it.

I think your acceptance speech is over.

[LAUGHTER]

I don't even remember the question.

Real quickly, Jay, at the beginning, as you teed it up, we tend to first and foremost look at our own information.

So we look at the fact that, as I said, throughout this quarter and really through just about two straight quarters now, month-by-month we've seen a little bit of improvement every month in pricing.

And this month, we saw retention improve by two points.

And we look at the combination of those and it says, we're not pushing too hard.

You know, we hear the rhetoric and the anecdotes just like you do.

One of the reasons why we say we won't see the big amplitude in the cycles is that five years ago, certainly 10 years ago, in our offices there would be all those anecdotes.

Everyone would rattle off these are the two or three markets that are behaving crazy in the world today, and we don't get that same level of noise out of our folks.

But you're right, we look at our own information first and we feel good about our data.

Thanks for the answers.

And our last question is from the line of Vinay Misquith with Credit Suisse.

Please go ahead, Mr.

Misquith.

Hello.

Thank you.

Just made it under the wire.

Just a follow-up on Jay's question before.

Has an the improving economy helped you in your ability to take rates up?

You know, I try hard to separate what we know from what we speculate.

I know the data , I know the numbers, exactly why we've been successful in that strategy would be speculative on our part.

It was interesting, and you can look at the data, when the economy was deteriorating, going back now just two or three years ago, we were actually able to move rate in the right direction.

Now I don't know that ever got positive, but it certainly, as the time went on, became less negative.

Now that was -- that would be contrary to what one would think, so I am respectful of the complexity of our industry and the data that comes at us.

I can only share with you that we've been -- it would be hard to overestimate the nature of engagement of the leadership in Business Insurance and Personal Insurance with the folks in the field about how -- how to operate in this environment.

So I can tell you that the direction has been specific with clarity.

One would even argue, intense.

That doesn't mean intense pressure, but an intense involvement.

And whether that's attributable to an improving economy or the value of the franchise, which is sort of the one that I personally endorse, but I'll leave that to others to speculate more

Fair enough.

And this is a follow-up to that.

How do you see pricing versus loss cost trends for the future, based on where you are pricing right now?

Again, I assume you are talking about written, because earned is what it is.

Yes.

And that is baked into our -- when I say baked in, it's very, very predictable.

But we haven't, just to be -- and then I'll turn it over to Brian -- we haven't actually done the arithmetic to sit here and say that if rate continues to improve at this level and loss trend doesn't turn, when written rate would exceed loss trend.

So we just haven't done it yet.

But we're -- this is encouraging.

The last couple of quarters is encouraging.

You may have --

I'd go back and repeat the numbers I said before about frequency and severity, and then we're not making a projection of what we think rates are going to be over the next however many quarters.

But we are encouraged with the trends that we've seen in the last five or six months now, and you know, you could do the arithmetic.

And we watch it loss cost closely, and so any of the variables could move.

And again, we've just been a company that has refrained from making predictions about rate.

There are so many variables.

The economy, energy prices, all sorts of things interact with this.

And so, we are real pleased with what we did in the first quarter.

We are feeling, as I said in the press release, cautiously but increasingly optimistic, and we'll keep our fingers crossed for the second quarter.

That's kind of been -- not that it's about luck but the environment continues to be supportive of the strategy that we are -- that we're employing.

Okay.

That's great.

Thank you for your answers.

Thank you.

Operator, thank you.

You're very welcome.

We have no more questions at this time.

I'll now turn the call back to you.

Yes.

Thanks for joining.

As always, Andrew Hersom and I are available in Investor Relations for any follow-up questions.

Thank you, and have a good day.

Ladies and gentlemen, that does conclude our conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

Have a great day, everyone.