旅行家集團 (TRV) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the third quarter results teleconference 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, October 18, 2012.

At this time, I would like to turn the conference over to Ms. Gabriella Nawi, Senior Vice President of Investor Relations.

Ms. Nawi, you may begin.

Thank you.

Good morning, and welcome to Travelers' discussion of our third quarter 2012 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 statement 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.

And now, Jay Fishman.

Thank you, Gabi.

Good morning, everyone, and thank you for joining us today as we report a very strong third quarter.

Net income was $864 million, or $2.21 per diluted share producing a 13.6% return on equity.

Operating income was $867 million or $2.22 per diluted share, a record for a quarter for operating income per share.

Operating return on equity for the quarter was 15.5%.

Our earnings were driven by superior underwriting results as well as solid investment income.

From an underwriting perspective, we benefited from lower weather-related losses, net favorable prior-year reserve development, as well the cumulative effect of rate gains we have achieved over nearly two years.

In Business Insurance, excluding national accounts, written rate increased to nearly 8%, with retention increasing as well to 81%.

In Personal Insurance, renewal prices increased in both Auto and Homeowners to 9% and 12% respectively, while retentions remain stable.

Also, in Personal Insurance, we continue to execute on improving terms and conditions, along with pricing, and while we are experiencing lower new business volumes, we are taking the right actions in order to improve our profitability and returns.

In FPII, rate increases continue to improve in our Management Liability businesses reaching 6% in the quarter, while maintaining stable retentions.

We continue to be pleased with the execution in each of our segments.

While we are encouraged by the success we are having executing our granular pricing strategy, I remind you that it is not just about the headline numbers.

That is what is happening underneath the numbers is the real story.

Our success is premised on really understanding which accounts or lines are in need of improvement and which ones meet or exceed our expectations.

Brian will take you through slide 13 in more detail, but the conclusions from the slide are positive.

We initially showed you this analysis several quarters ago as the illustration.

It is a very summarized look at what we do at a very granular level and it is also important that you understand that loss ratio performance is only one of the metrics we use to manage our portfolio.

Yet even on this very summarized basis, the analysis demonstrates real progress.

It is the package of analytics that we deploy that is illustrated on slide 13 that gives us the confidence that we will get the right combination of rate and retention on the right accounts that will translate into increased profitability.

As we have said before, we remain committed to taking the steps necessary to improve returns.

This means leveraging our data and analytics across all of our businesses to underwrite and price each of our products very thoughtfully.

We continue to assume that our operating environment has changed.

Notwithstanding the benign weather we saw in the third quarter, mother nature seems to be increasingly unpredictable and we believe the low interest rate environment will continue to impact our business for the foreseeable future.

Therefore, we will continue to seek improved pricing and take those underwriting steps necessary to improve profits and produce higher returns on capital.

This remains business as usual for us.

And with that, let me turn it over to Jay.

Let me begin by echoing Jay's comments.

The third quarter operating income of $867 million, operating ROE of 15.5% were very strong and, along with the timing of certain payables, drove extremely strong operating cash flows of $1.5 billion for the quarter.

As Jay indicated, third-quarter operating results benefited from a relatively low level of both CAT and non-CAT weather-related losses, when compared to both the prior-year quarter and to what we would consider normal for the third quarter, as well as a significant amount of net favorable prior-year reserve development.

Operating results also continued to benefit from earned rate increases that exceeded loss cost trends in two of our segments, Business Insurance and Financial Professional and International Insurance, as well as a relatively low level of large loss activity.

In addition, our investment portfolio had another quarter of solid performance, driven by real estate partnership and hedge fund returns and the non-fixed income portion and fixed income investment returns that were in line with our expectations.

Another item I would like to mention is that our net favorable prior-year reserve development included an addition of $114 million after tax on a net basis to our asbestos reserves, coincidentally, the same amount added to our asbestos reserves on a net basis in the prior-year quarter.

On a gross basis, the current quarter's asbestos reserve addition was actually $24 million less than in the prior-year quarter.

While the underlying asbestos environment remains essentially unchanged from recent periods, payment trends have been modestly higher than we had previously anticipated resulting in a need to modestly add to these reserves.

Turning to financial strength, all of our indicators remain in excellent shape.

Holding company liquidity of $2.04 billion and all of our capital ratios were at or better than their target levels.

Our debt to total capital ratio now stands at 21.9%, down from 23.4% at the beginning of the year and well within its target range.

Net unrealized investment gains ended the quarter at $5.08 billion before tax, increasing by over $500 million during the quarter, while book value per share rose to $67.81, 9% higher than the beginning of the year and 11% higher than a year ago.

And during the quarter, we returned $529 million to our shareholders through a combination of dividends of $179 million and common share repurchases of $350 million, bringing our total dollars returned to shareholders to $1.57 billion year-to-date.

I should also note that due to the strength of our year-to-date operating results, we have generated more excess capital than we have returned to our shareholders so far this year, which is strictly a matter of timing.

Our strategy of returning all excess capital to our shareholders through a combination of dividends and common share repurchases remains unchanged.

As such, we expect that the dollar amount of our common share repurchases during the fourth quarter will be somewhat higher than the $350 million quarterly run rate of share repurchases we have been doing in recent quarters.

With that, let's turn to Brian.

Thanks, Jay.

So very strong results and from an insurance operations perspective, I believe there are three key take-aways that apply across all three business segments.

First, we are really pleased with the progress we have made on our strategy to improve margin, both in the quarter and year-to-date.

Second, given the interest rate environment, the weather volatility, and loss trend, we need to continue to execute on this strategy.

And finally, we see opportunity for better results in those areas of our commercial business that are at the lower end of the return spectrum and in the case of personal insurance where weather losses have been most challenging.

With that, let me go to the specific segment results.

Beginning with Business Insurance, operating income was up 85% year over year, with catastrophe losses lower and favorable prior-year development higher.

Excluding these impacts, operating income was $549 million, up nearly 36% from the prior-year quarter and the combined ratio improved more than six points.

The strong results this quarter were driven primarily by earned rate increases in excess of loss cost trends and lower non-cat weather-related losses.

Looking at the production statistics starting on page 9, we saw renewal premium change, pure rate, and retention all increase in the quarter.

Renewal premium change was 9.3%, rate 7.8%, and retention was above 81%.

The rate progress that we continued to achieve was broad-based with increases between 6% and 10% across all lines, led by Workers' Compensation and Commercial Auto.

These increases in pricing, along with the growth and exposures and audit premiums, helped to drive net written premiums up 5% year over year.

New business was somewhat lower in the quarter, as it has been for the last several quarters.

Over time, pricing on the new business we have written has improved.

But given our strategy to improve margins, we remain very comfortable with the volume trade-off.

We are obviously pleased with the aggregate production results, but are even more pleased when we look at our execution on a more granular basis.

Slide 13 shows our renewal rate change and retention data for commercial accounts for both the second and third quarters, segmented by the individual accounts long-term loss ratio.

We have shown you this data before that are now adding a comparison to last quarter.

The bars on the left represent our best performing business, accounts with long-term loss ratios of less than 60%, and the bars on the right represent our worst performing business, accounts with long-term loss ratios exceeding 90%.

For context, the bulk of our business is in the less than 60% loss ratio band while about 15% falls in the greater than 90% band.

You can see on the slide that for our best performing business, rate has held steady while retention improved modestly from the second quarter.

In the middle tier, rate improved over 2.5 points while retention increased nearly 5 points.

And for our worse performing business, rate increased over 1 point to 18% while retention improved slightly.

What this data tell us is that we are doing a great job of retaining our best business, improving the profitability of the middle tier, and that we have an opportunity to potentially get higher rate increases on our poor performing accounts.

As we have said many times, it is not a one-size-fits-all strategy, and you can see that very clearly in this data.

As you evaluate the slide, I'd emphasized several points.

First, actual pricing and underwriting decisions are made on an individual account basis and include many additional dimensions beyond loss ratio.

Second, the exhibit presents highly summarized data and we actually measure and manage our performance on a much more granular level by business product line, industry, and geography.

And finally, key to this analysis is our ability to measure returns on allocated capital at the individual account level for these individually underwritten businesses.

Slide 13 focuses on commercial accounts, which is our largest individually underwritten middle market business.

But our focused pricing and underwriting approach also applies to our commercial flow business, Select Express, which is the small account end of our select business.

If we were to display the Select Express business in a similar fashion, as we did for commercial accounts, you would get a broad array.

In terms of loss ratio, the CMP product would be in the middle tier and similar to the middle tier for commercial accounts, we are improving profitability, in the case of Select Express with renewal premium change on CMP in the mid-teens.

Our mono-line commercial auto products within express, which is less than a $100 million of written premium, would be at the poorer performing end of the spectrum.

And so where our data and analytics suggests, for the Select Express book, we are focused on underwriting and pricing actions.

Again, this is another example of how we apply our powerful analytic tools to drive superior results.

In the Financial, Professional, and International Insurance segment, we once again posted strong results with operating income for the quarter of $180 million.

This is down year over year due to a lower level of favorable prior-year reserve development.

In Bond and Financial Products, net written premiums were down just slightly quarter-over-quarter, as the continued decrease in surety volumes was partially offset by higher volumes in our Management Liability business, notably, in those areas that are producing higher returns.

In Management Liability renewal rate change, which came in at 6% for the quarter, has increased sequentially in each of the last five quarters.

It also increased from month to month within the quarter.

Management Liability retention was a strong 86% in the quarter.

In International, net written premiums were up 24%, or $66 million on a constant currency basis.

A third of that is due to lower surety volumes in Canada and our exit from personal lines in Ireland.

Nearly a third is due to policies that were written last year with terms of around 18 months and so they did not come up for renewal in the quarter, and a smaller piece, or about $12 million, is due to disciplined underwriting in our businesses in Lloyds in Canada.

The risk and reward work we have done in International continues to pay off as the underlying loss ratio continues to trend favorably.

In Personal Insurance, results for the quarter benefited from the year over year decrease in the level of catastrophe losses, along with an increase in favorable prior-year reserve development.

Excluding cats and PYD, operating income of $190 million was up 23% from the third quarter of 2011.

This increase, along with the related improvement in the underlying combined ratio is largely attributable to favorable non-cat weather.

As we seek improved returns in this segment, we are particularly pleased with the significant pricing gains we continue to achieve in both auto and home.

Auto renewal premium change was 8.7% for the third quarter, up over 3 points from the second quarter, while Homeowners was up over 1 point to 12.4 %. Turning to auto margins, we've achieved a meaningful written rate increases over the past few quarters, which are just beginning to earn in.

In terms of loss trend, severity continues to run at mid-single digits while frequency, when mix adjusted, is about flat.

We are pleased with the progress we have made to this point but see the need to remain disciplined in our pricing strategy going forward.

In Homeowners, the story continues to be about weather.

Roughly 60% of our loss dollars in Homeowners are driven by weather, so obviously, frequency and severity trends for this line are also driven by the weather.

Because of the volatility in weather, in addition to the 12% renewal premium change that we achieved in the quarter, we continue to aggressively pursue terms and conditions changes that both reduce risk and improve returns.

The roll-out of these modifications is ongoing but our progress to date has been substantial.

In the last 12 months, we have made underwriting guideline changes and increased deductibles in more than 40 states.

We feel good about the progress but we see the need to continue to push these levers going forward.

With that, let me turn it back over to Gabi.

Andre, we are ready to start the Q&A session.

And if could please ask participants to please limit yourself to one question and one follow-up, thank you.

(Operator Instructions)

Randy Binner, FBR.

I was wondering if you could provide a breakout of the reserve release by business line within the commercial line.

So the $208 million outside of the A&E, just wondering where that broke out and especially with Workers' Comp?

I wanted to see if that was net redundant, especially in recent accident years.

We look at what is taking place in terms of reserve development in Business Insurance.

As we said, it is net about $41 million, and if we look at the components of that, property is a big component, if we look at favorable loss development, where did it come from, the recent accident year is 2011 was a big driver of that and we also had some better salvage in subrogation recoveries in some of the older years than we had expected.

Some other areas of CMP, same sort of thing in terms of the property-related items, Workers' Comp actually developed a little favorably, mostly due to some of the tabular claims that we had for accident years 2010 and prior.

We had some strengthening of Commercial Auto, given some of the claim severity that we have been seeing in recent accident years that we have been talking about, but net net as you saw, everything was on a -- was favorable.

I appreciate the color.

The Workers' Comp was stable, which is, I think unique to Travelers, but again, stepping back, how should we think about where the reserve trend is going overall?

For the industry overall I think the expectation is that redundancies would diminish.

Travelers has had an excellent reserve result, but as this goes forward, should we think of this redundancy as winding down?

We don't make any predictions whatsoever about where reserve development is going.

We make our best estimate every quarter and we stand by that.

And then as the data develops, more information comes in, we adjust the reserves accordingly.

Thank you.

And just one more on Comp.

In the accident year '11, was that also favorable or was that deficient?

In the quarter, it was essentially breakeven.

We had a tiny bit of strengthening in the 2011 accident year in the third quarter.

It was under $10 million so it was kind of a quarterly analysis that we do to get things right and effectively given the size of the reserves we're talking about rounding them.

That's great.

Thank you.

Mike Zaremski, Credit Suisse.

The underlying combined ratio improvement within the BI segment clearly very healthy.

Can you provide any color on which lines of business within the segment are exhibiting the most and/or least margin improvement?

I would say it is pretty broad-based.

As we have said, Comp and Auto have been getting the most rate increases but the range across the lines is 6 to 10.

So everybody's getting some significant rate.

As Jay Benet just mentioned, Auto is one of the lines we are seeing a little more heat, so we need the rate there but I think by and large, it has been really across the board with our products.

Okay.

In terms -- if you're getting -- what kind of rate increases are we getting in Commercial Auto?

It feels like you guys have been getting healthy rating increases for a while now and you are still talking about margins not being that great in that line.

I think about 9. Yeah, 9 points in Auto and comp was around 10.

So those were at the top end of the spectrum, which I think is consistent with what we have shown in the past.

We have talked about and others have talked about the bodily injury trend in the auto business, both commercial and personal.

And so that has been one of the reasons why we are getting those increases.

As a follow-up in regards to rate increases across all the segments, is there a dynamic of stronger momentum in some of the longer tail lines that are more impacted by the low interest rate environment?

And are you at all surprised at how well retention is holding up in face of the rate increases?

Thanks.

Obviously, as anybody looks at the economics of the product, the longer tail lines which would be more significantly impacted by the investment yields that factors into how we think about it.

I am not sure that factors in to how the customers think about it, so we work at it.

On the retention thing, I would go back to our comments on slide 13.

So we are obviously pleased that aggregate retention is going up, but it's really the texture underneath that we obsess about and are we keeping the right accounts?

So, honestly, I am not really surprised that we have been able to execute in a way where we are keeping the best business.

While the interest rate environment certainly plays a meaningful role in the evaluation, it is just one factor.

I would make an observation that our Workers' Comp portfolio, broadly, and of course you can get different conclusions in different businesses, but broadly speaking, has actually been doing better.

I am not sure, Brian, how you might characterize it.

Better than what we perceive the rest of the industry to be or it just has not been, it hasn't been in the situation where the rate need there has been enormous.

I'm not sure how to exactly characterize it, but we are starting -- we have started from a position in Workers' Comp that was not as problematic as, I think, conventional wisdom might have thought.

You can look at our line results for a good number of years and our performance in Workers' Comp has been significantly better than the industry.

We think that is due to a lot of things, risk selection, we think our claim model around medical management is the best in the business and all that stuff really matters.

Gabi hosted an analyst day where there was a considerable amount of time spent in the nuts and bolts of Workers' Compensation management.

And really, I think, demonstrated, clearly, or at least attempted to demonstrate clearly, the real competitive advantages that we bring to the Workers' Compensation line.

We're just not all in the same situation or the same environment, so I would resist the temptation to just leap to the conclusion that long really needs help and short doesn't.

It's unfortunately more complicated than that.

Okay, that's helpful.

I agree that you guys did demonstrate very well that you guys have a best-in-class Workers' Comp business at Travelers at the Investor Day.

Thanks.

Vinay Misquith, Evercore Partners.

You have done a great job of taking rates up pretty significantly.

Just curious what you're seeing so far in the fourth quarter.

The reason I ask is because you have taken rate starting fourth quarter of last year.

I just wanted to see if you are successful in getting significant rate-on-rate?

We say it all the time but we are not prognosticators here.

We are not going to guess at what's going to happen in the future.

I would point to two things.

Number one is what we saw in the third quarter, we were encouraged by.

The results that we were able to post, the texture underneath the results and the dynamic and the feedback that we have gotten from our agents and customers.

Anecdotally, as we look at what we are working on in the fourth quarter, because we obviously have some view of that but it's anecdotal, is similarly encouraging.

So, we continue to see little bit of progress here.

And at the end of the day, whether it will be up a little or down a little, we do not know.

But the anecdotes right now feel pretty good.

But we are also real cautious.

The world can change in 30 days and we will see where we are at the end of the next quarter.

But that is our mood right now.

Okay.

Fair enough.

The second question is, how much of a benefit did you guys get from low non-cat weather?

I think you said it was slightly below normal this quarter.

I think when you take a look at what is taking place in Business Insurance as an example, you see a very strong increase in profitability, decrease in the combined ratio.

And it is difficult to split out the components on an exact basis but I would say that it is at least a couple of points in there where favorable, non-cat weather has influenced us and I think if you go over to PI you've got the same kind of result.

I don't know if it's a couple points or not but certainly working its way through.

I am seeing some heads nodding around the table so I think a couple of points is probably right.

But it is truly a guesstimate because you're asking us to compare a level with whatever we thought normal might have been, and I don't know that we know normal as compared to anybody else.

So it is a challenging question to answer.

Again you're asking for what was your experience relative to what you thought the experience would be?

I do not know if what we thought the right number to begin with.

So that is the complexity.

Let me give you a perspective of what you might be looking for which is the margin expansion in BI we think was about 2.5 points in the combined ratio.

The earned rate over the loss trend dynamic.

So then the rest is got non-cat weather, it's got other stuff that always -- large loss movement that goes through the quarter, et cetera.

Fair enough.

That's very helpful.

Thank you.

Josh Stirling, Sanford Bernstein.

Thanks for taking the call and a great quarter.

In the Q, you seem to be guiding for continued pricing in fourth quarter in 2013 and I'm trying not to be redundant in the last question.

But we are all trying to figure out how long pricing lasts and I'm wondering, two questions and then I will ask them first and you guys can respond as one long Q. First, when your actuaries do indication analyses, what is the output of that?

How much more rate do you think you actually need to get to target accident year, sort of ROEs and target accident year returns?

And then separately Brian, I'd love to just follow-up, you made the point about sort of visibility to a pipeline.

Obviously you have a sense of what's going in actual production that you haven't yet reported.

But you also obviously have to file rate increases across probably 30% or 40% of your business, at least, or where that's primarily driving the rates you end up charging.

And I'm wondering if you can give us a sense of actually what's in the pipeline and what you think you'll be effective in written rate levels in the fourth quarter over 2013 as we look forward.

Thanks so much.

We have not set a goal.

A threshold number at which we stop.

And it is driven by the fact that the environment remains really unpredictable and somewhat volatile.

Not only do you have the weather dynamic, and obviously, the interest rates which are -- at least the interest rate portion is quantifiable, but you've also have the uncertainty of the fiscal cliff and what happens to the economy and all of the factors around it.

So for the moment, what we have decided to do is to continue on business as usual.

Continue to pursue what we are doing because we know that to produce the kinds of returns that I think investors will come to expect, we need to do more.

So that's honestly, as far as we have gone, which is we're going to continue to do this and we'll see how we do.

And I have no idea what the competitive environment will be or what will happen to us.

It is, nonetheless a very competitive environment and remains fragmented.

All we can do is tell you what we are intending to do for the next -- for the near-term outlook.

I do not even want to go beyond that.

All I want to do is to say in the near term, this is what we're going to do and we will evaluate how successful we are and do the data and analytics continue to show us that we're doing the right things and on the right track.

We don't have that goal line to say we are X months away from hitting it.

We don't have it, and that's really all we can say on it.

It is business as usual and we are going to keep going.

On the filings perspective, someone could go out and pull them.

I would say on the Personal Line side, we don't have any real big filings in the works that are going to change where we are today.

We took a pretty good bump up in Auto and that was because some things kicked in in different states, and so a little bit of steady as she goes there.

And Select, we've recently put in some filings which are just becoming effective and so we've got some momentum maybe there.

And those would be the two big places where we've got filed rates.

Where filings matter.

And commercial accounts really is not a filed environment.

We are really -- doing wrestling with that.

I will revert back to Brian's comment about the anecdotal observations.

It is still pretty early in the quarter.

So what we are getting is feedback from our folks in the field who are in agent's offices every day, renewing accounts and having conversations and getting a sense of what the market is.

And the anecdotal feedback, and I wouldn't overemphasize it, because it can change -- first of all it might not be right.

It might not be accurate of the real environment and it might change, but the anecdotal feedback that we are getting continues to be so far, so good.

It is encouraging and gives us a basis for saying we are going to continue.

That is about as good as we can do right now for you.

So, Jay, just to paraphrase to make sure that I get it.

Basically, looking at over your guys' planning horizon, you're not going to give a target, of course, but ultimately, you're going to march to your own drummer, raise pricing, sort of get to -- at continued levels and the market is going to do what the market is going to do.

But you're going to drive to -- sort of continue the pricing momentum along the lines you've been doing thus far in 2012.

What we don't want to do is to tell you with certainty that we're going to succeed.

Because I don't know.

It is an environment where every company decides its own strategy and has its own conversations with agents and brokers about individual accounts.

So all I can tell you with some degree of certainty is that in the near term, how we are going to act.

That I can tell you because we drive that.

How the market responds and how competitors perceive the marketplace and what they do is well beyond our control.

The data that we have from the third quarter is encouraging that we are not hitting some wall.

The important thing, the question that I asked the Company here is, are we achieving what we are trying to achieve in the market?

A lot of your -- not your questions in particular, but many of the questions that we get seem to be, are we asking for to 20 and getting 8 or are we asking for 8 and getting 8?

That actually is a relevant question and it really -- we are not trying to get 20.

We are not attempting, we have always said from the beginning of this that it was going to be disciplined, thoughtful, account by account, loss-driven, evaluated in the context of interest rate changes, thinking about weather, and most importantly, non-disruptive.

Non-disruptive to our agents and our brokers and our insureds.

We are trying to manage a business and relationships.

This is not a trading account.

It is real people with real businesses paying real bills and real agents that stand between us.

We are just trying to manage this thoughtfully, gently, doing what we need to do to make sure our business remains viable and has substance to it, but not doing it in a way that causes disruption.

So, again, I look back at the third quarter, the data all says we are making that happen and gives us a basis for saying let's keep going.

That's great, Jay.

Thanks for your time.

Michael Nannizzi, Goldman Sachs.

One question I have is when you look at your profitability and what you've talked about from here, what do you think is more important or how would you prioritize the rate actions you are taking versus the actions you seem to be taking on the loss management side?

And where do you think the industry is on those measures, whether it is terms and conditions, or infrastructure to help push down claims cost?

And then just one follow-up.

Thanks.

If you look at Business insurance, our strategy is predominately rate driven.

We have always been a company that has been actively engaged, helping our insureds manage and lower their losses.

We have a substantial risk management group and are involved and always have been with our insureds to try and help them manage their losses and do better business for them.

That is our dynamic in Business Insurance is really price driven, rate driven.

In Personal Insurance, underwriting terms and conditions play a much more significant role.

I will now let Brian speak to that.

Yes.

And I would say, clearly, personal and heavily on the homeowners side and to some degree more broadly property all around.

The place where terms and conditions are really important is our homeowners book.

Just to give you a perspective, industry deductibles in the 70s were typical average $250, maybe a $500 deductible.

Now the average is probably a $500 deductible.

If we loss inflate that over the 40 years, we think the average deductible should be somewhere around $2,000.

So the product has changed.

We are driving deductibles.

We have actually been pretty successful historically in getting deductibles on the coastal hurricane exposed, so that's not the issue.

The issue has been the inland tornado hail exposed and we are making real progress.

There, that is important.

The other dynamic is underwriting, and a lot of that is around roofs.

So age and quality of roof is an important underwriting decision.

On-time reporting, on claims is different in the policy in a lot of places than it was before.

So all of those pieces really matter on the property side.

Our focus on deductibles, by the way, is not unique to loss litigation.

That's an important part of it.

But we also believe that customers shouldn't be buying more insurance than they need.

Insurance should be to protect for catastrophic events.

We would encourage all insureds to not pay for more insurance than their own capacity to deal with losses would suggest.

And so part of this is not just loss mitigation; important, but it's also to make sure that we're doing the right things for our customers, even if they don't always see it exactly that way.

It's a $500 deductible today but becomes a policy that responds to a lost iPad.

There just isn't a way a homeowners policy was really designed to be.

Got it.

One question on the directives.

I know we haven't talked about it a lot recently.

It seems to be floating along in terms of premiums are growing a little bit, the drag on the combined ratio is about flat.

Looks like 5% to 7% of earnings right now.

What is the strategy there?

You've been in this state for a little while.

At some point, would you look at trying to get, purchase something to help build that platform?

Or is building it still the expectation?

Thanks for your time.

We have been and continue to be in the test and learn phase.

And I don't mean test.

What I'm talking about is testing in the very specific dynamics of building a business.

Whether it's how you get customers to respond or how you encourage a high conversion rate from response to quote and then most importantly, how do you generate sales from quotes?

That gets to not only the technology or interactive behavior out of a call center but also to the pricing structure.

We are still in the phase of doing what we need to do to gain the learnings necessary to launch, in effect, some time down the road, a successful business.

This is not yet launched.

We are still in the test and learn arena.

And we have more work to do in that regard.

We are going to resist the temptation.

We've done it.

I have certainly in the old Travelers days have been involved in one where we have launched the program way too early and had a marketing success and a financial disappointment.

That is a real problem and so we are going to resist the temptation to do this early.

There are always young customers coming along.

It is not as if there's a finite group of customers and they are there and once they have insurance, they're gone.

We all get a day older every day and there is always another group of customers that are emerging, that are getting driver's licenses, that become young adults that need to buy insurance.

And so, as we think about it that way, we are more than willing to be patient and do it right.

It is more important to do it right than to do it quick and fix as we go.

So that's where we are.

Okay.

And so, the timeline from here is as it develops.

Do you feel like you're getting the learnings from it to offset the cost that you're investing?

And I'll stop.

Thanks.

Well, we are certainly learning whether it offsets the cost are not, ultimately depends on whether we conclude that have the ability to launch a successful business.

You know, I mean if you're asking, do we think that that's still -- are we still on track to do that?

The answer is yes but nothing is ever certain.

The real question that we're down to now, and we've said this repeatedly, we are charging the same price in our direct channel that we charge in our agent channel because it is the only price that we know.

And the real question is going to be in that kind of framework, can we actually write a policy, underwrite a risk, and produce a reasonable return based on that?

Or is there some other pricing structure that is going to be necessary?

It's going to take us some time just to figure that one out.

If we end up concluding that we have everything that is necessary to build the business, yes, we will recover these costs.

If it turns out that we ultimately can't, and unfortunately we won't.

So the substance of your question is a challenge to answer, but I -- we still feel pretty good here.

The people working on it are first rate people, they -- one of the things, and I said this before, I used to think this was an insurance business.

It actually is a lot more about human dynamics and technology management than it is about insurance.

And it took a little time for us to even understand that.

I think we have got people from outside the insurance industry with real expertise in this arena and we are learning a lot, really a lot.

We are hopeful is sort of where it stands.

Great, thank you.

Jay Gelb, Barclays.

I wanted to touch base on two items.

The first is the exposure growth in Business insurance.

Based on what you see as the forward-looking indicators, to what extent might that pick up over time?

We're looking at each other here trying to figure out what do we know in the data and what do we see?

First, one of the things we have learned is that notwithstanding the fact that intuitively we keep thinking that the exposure data is going to turn out to be predictive of the overall economy.

We've spent some time trying to actually link those up and in effect build an index around it.

It's not nearly as predictive as we might hope.

If you look at the data broadly, I think what you would characterize it as is sluggish growth.

Now, those are words against some numbers, but that's kind of what we see.

Now, we should be careful not to confuse the dynamics with we measure in exposure to GDP.

We are measuring payroll, we're measuring projected sales, we're measuring trucks on the road, we're measuring real estate square feet, and as we all know, you can have recoveries that have jobless recoveries, not my words, words other people have used.

So our data suggests sluggish is what you see, but I would be careful to link that up to a conclusion about GDP.

It is not nearly as predictive as we might have hoped.

Okay.

Next issue on the return of capital.

I think in the past Travelers has talked about returning, in terms of the combined share buyback and shareholder dividend, having that equal to around 100% of operating income.

I think on track year-to-date it's around 75%, so based on the commentary that that will probably be higher in 4Q versus 3Q, I'm just trying to get a sense of whether you feel confident that can get closer too 100% as we think about next year?

As we have said, we do these things based upon expectations.

Thankfully we have the good problem that our earnings were stronger than our expectations so we created excess capital.

It really is a matter of timing as to when we repurchase shares.

The expectation, as we said, for the fourth quarter is to do something higher than what we'd been doing on a run rate basis for the first three quarters.

And as we say in our disclosures, there's lots of things that go into that decision.

There's capital that we need to support the growth of the business.

There's capital that we perhaps need or cash that we need to deal with, you know what's taking place in the funding of our pension plans.

I might add that we don't have a very large outstanding pension plan, given the history of the Company, but when you have interest rates as low as we have today, we want to make sure that the thing is properly funded against the assets.

We'll look at all that, but at this point, all we can say is that yes, we have created the excess capital beyond what we need at this stage and we haven't bought it back at the same rate so we will be increasing it.

Over time, which I think is really the critical phrase.

Over time, it will be the earnings that will drive the amount of capital that we return to shareholders, both in the form of dividends, as well as the share repurchases.

All right, thanks.

I just want to clarify a prior response.

I think there was a question about a pace of rate increases in BI and 4Q?

You were saying, roughly similar to 3Q.

I just want to clarify that, using 7.8% rate increase that was in 3Q as the basis line?

No, you misheard that, I'm afraid.

We were asked the question and we said we don't make predictions and we're certainly not prognosticating on rate gains.

What I think Brian said was that the anecdotal feedback, and that's all it is, it's not data.

It's just anecdotal feedback, just suggests so far, that the fourth quarter is so far looking sort of the same way the third quarter did.

Do not over read that.

There's no precision in that comment, other than conversation.

That's all it is.

But if we had heard from people out in the field, something substantive had changed.

If there'd been some meaningful difference in the environment, that I think is important.

We have not heard that.

We've just heard it is about the same.

Now, it's going to be a matter of what accounts actually come up for renewal, what's the mix, where on the grid do they fall, what lines of business so that no predictions whatsoever and all we were doing there was providing the anecdotal feedback that the fourth quarter is sort of so far, so good.

Bill, is that -- I'm looking at Bill and asking him to nod yes and he did.

That is where we are.

Thank you.

Matthew Heimermann, JP Morgan.

One clarifying question was just -- I think it was Brian who said about 250 basis points of core margin improvement year-on-year, and obviously last quarter had a bunch of non-cat weather and large losses in it.

But I guess what I was trying to get a sense of was how was non-cat weather large loss activity in the current quarter relative to normal?

Was that a benefit or not?

And if it was, any numbers you could put to it?

So 6% if I look the quarter-to-quarter combined ratio in Business Insurance was improved 6% ex-cat, ex-PYD, about 2.5% of that was the earned rate over the loss trend.

The next largest piece would have been the non-cat weather, which was clearly better and then we would have large losses.

I think that's the right sequence.

I don't have the exact numbers on each of those pieces but --

I know.

I'm sorry, I think I confused the issue.

I understand on a year-over-year basis why the non-cat weather and the large property is such a big contributor.

If you look at 3Q of this year, individually, would you characterize non-cat weather, large loss activity as a non-factor in the way the underlying margin played out or was there any benefit to speak of?

Because you've mentioned in the press release but I wasn't quite sure if that was just with respect to the year-over-year or there was something it was just a reversal of bad a year ago or if it actually was also good this quarter.

The bigger impact was the reversal of bad from a year ago with regard to non-cat weather activity.

But as it relates to the current quarter, the current quarter also was very light in weather, whether it was cat or non-cat.

We did have a benefit in the current quarter from what we would otherwise consider to be normal and as Jay Fishman said before, consideration of normal has lots and lots of judgment in it.

We are not going to sit here and say well it was worth point, half a point or a point.

But what we can tell you is that the weather was benign in the third quarter and our results benefited from that.

Okay, that's helpful.

One question just on the construction surety volumes are in decline.

I was curious if you could give us a sense of how much of that is coming from commercial end-markets versus residential end-markets.

Is there anything you see kind of has you look out that potentially could start to dampen that trend?

Yes.

This is Brian.

I'll flip it to Alan but we don't do a lot of residential.

It is way more driven by municipal finance and municipal construction.

So not very much of it would be coming from the residential side.

Okay.

But I would assume that -- (multiple speakers)

Our data is largely driven by the Municipal arena.

We don't know what is going on in the residential segment, we are just not a real participant in that market.

Way more of the surety market relates to municipal construction projects where there is a statutory requirement for the surety product so you don't have the same requirement or the same level of surety premium coming out of residential construction generally.

As a pass through to the municipal piece, there's always part of that is extending services in the new areas, correct?

That was kind of what I was thinking in asking the question.

It's kind of what I had in mind, completely recognize the comment.

-- infrastructure building roads and other utilities to service development broadly, but I certainly don't at my fingertips have the break out between that and say highway construction.

I would not have that breakout.

Okay.

All right, thanks.

Greg Locraft, Morgan Stanley.

Thanks and congrats on the quarter.

The one disconnect that I'm sort of wrestling with is the top line.

In other words, premiums written and earned premiums.

The percentage gains year-over-year are just not even close to where rates are at.

And retentions look good.

So it seems to be coming down to new business.

So my first question is, is it new business fall-off that is driving the lack of flow-through to the actual reported top line?

And if it is, I'm sort of wondering why do you think people are choosing not to join Travelers as much as they were before?

The short answer is yes.

It is primarily new business.

As you pointed out, retentions are down slightly in most of our businesses, but very solid and we feel great about those.

We're getting price increases.

Down slightly from historical.

(multiple speakers)

From historical norms, right.

And actually across Business insurance, for example, that the overall retention on a historical basis is a very strong number.

Premium is up because we've got price exposure and audit premiums kicking through there.

But across much of our Business insurance area and clearly in Personal Lines, as we've executed on our strategy of improving margins and raising prices, the new business marketplace has become more difficult.

I think I'd separate the discussion into commercial and personal because I'm not sure they're nearly as similar as that.

First, just an observation in business, low exposure is a part of this too.

Low exposure growth.

We're talking about the overall general economy.

In Business insurance, there is a phenomenon that has been interesting to us.

We have historically tracked the relationship between renewal pricing and new pricing.

In this quarter, but also in the second, the spread between, for us, I'm not speaking about a broad market economy here.

I'm only speaking about us.

The spread between renewal and new that we booked, actually narrowed, meaning it was better than historical standards would be.

So, in the context of the new business that we are taking on, we feel pretty good about it.

If there's an opportunity here, if there is, it's making sure that our folks, who are working so hard and focused on renewals, renewal retention and gaining rate, don't ignore the new business opportunity.

I don't believe, Greg, and I can't prove it to you, but I don't believe that it's people not choosing to be with Travelers.

If anything here, it's making sure that our folks have the energy as they go through the renewal process to make sure that they don't miss the opportunities in new that at these pricing levels anyway are increasingly attractive and we are focused on that and suspect that -- if you talk to an underwriter they'll tell you that renewing an account flat in a flat environment is pretty quick and pretty easy.

But if you're discussing a rate increase with a broker or an agent on an individual account, it just takes more time.

And a lot of accounts and a lot more time being absorbed in the renewal arena.

And we believe, can't prove it to you, but we believe this is mostly an issue of emphasis and effort and attention more than it is some substantive dynamic around new business that is in any way problematic.

Can't prove it, but that's what we believe sitting around the table.

In the personal insurance arena, we think it's different.

There, the combination of, particularly in homeowners but also in auto, the combination of rate and then in homeowners, the change in the deductible strategies that Brian has spoken about, has we're most certainly leading, again, that's our observation.

We are leading in the market, but responding to what we think are substantive issues -- the change in the weather, the other dynamics around it.

For the moment, there are alternatives.

There are other companies that are available to new customers that may, in fact, be looking like they are less expensive.

You get into the whole deductible dynamic and how much you pay for it.

On the personal insurance front, we are watching that carefully.

It is almost personal -- it's almost like where we were in commercial a year ago.

Which is we were moving ahead and we were hopeful that we would be able to be successful with the strategy.

It turned out, of course, that so far we have been.

In Business insurance, you've seen -- I'm sorry, in Personal insurance, you've seen the rate gains come on, particularly in the last two quarters, as the filings have taken hold and combined with the underwriting and deductible dynamics, we are watching it carefully and seeing if it will be successful in the new arena.

But only time will really tell.

I hope that is helpful.

It really is as full an answer as we can provide.

Yes, that is.

Just a quick follow-up, turning to the Business side, it sounds like that's a prioritization or a point of emphasis within the organization deciding new business versus retention.

My understanding is a point of retention has a far, far better payback within your P&L than new business.

Do the people within your organization get paid the same for retention versus new business?

Or, in other words, are they agnostic or are they actually pursuing where the highest payback is in the Travelers P&L, which is go get rate on the current book?

We can tell you how they are compensated.

I hope that they are reacting consistently, but of course you never know.

We don't pay for production.

We don't pay for new; we don't pay for renewal.

We pay for an overall evaluation of performance, not only at an individual office level, but actually right down to an individual underwriter level.

The data analytics package I spoke about earlier really makes it possible for us to have a very granular conversation with each of the front-line people about how they've done.

What you can't do is tell people that you really want to improve profitability and when they take the right steps, even if that means that they lose an account, that you somehow think that's a bad thing.

You have to embrace it and understand that it is a good thing.

So the numbers in and of themselves of production, if you pay base to that, you can get some not only unintended consequences, but frankly, it will make it difficult to employ the strategies that you know are right to improve profitability.

So our payment process is one of, let's evaluate what each of them has done in the past 12 months, as everybody else in this place is evaluated, and we make the payments accordingly.

I do think that, and it is hard being a field person right now.

They are juggling lots of accounts and negotiating renewals, driving for rate, having to do the analytics behind all of that to make sure that the selections they make are thoughtful and smart, and then you tell them, and by the way, don't forget to make sure that your following up on new business opportunities.

I do believe, and I can't prove it, but I do believe that it is a matter of emphasis and time management far more than it is pricing out of the marketplace.

I have no indication that that's the case or that there is some substantive dynamic customers choosing away from us.

I don't believe that either.

Okay, thanks a lot.

This concludes our Q&A session.

I would like to turn the call back over to Ms. Nawi.

Very good.

Thank you very much for joining us.

And as always, myself and Andrew Hersom are available for follow-up questions.

Thank you and have a good day.