旅行家集團 (TRV) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the fourth-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 January 21, 2016.

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, Tina.

Good morning, and welcome to Travelers' discussion of our 2015 fourth-quarter and full-year 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 Alan Schnitzer, CEO; Jay Benet, Vice Chairman and Chief Financial Officer; Brian MacLean, President and Chief Operating Officer; and Doreen Spadorcia, Vice Chairman, Chief Executive Officer of Claims, Personal Insurance and Bond & Specialty Insurance.

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 take questions.

In addition, Jay Fishman and other members of the senior management team are also in the room.

Before I turn it over to Alan, 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.

And now, Alan Schnitzer.

Thank you, Gabi.

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

We're very pleased to finish 2015 with another strong quarter.

As I'm sure you've seen, we reported operating income of $886 million, or $2.90 per share, and operating return on equity of 15.8%.

That caps off another terrific year, with operating income of just over $3.4 billion, operating income per diluted share of a record high $10.87, and operating return on equity of 15.2%.

Our underwriting results across the board remain strong, as you can see from our combined ratio of 86.6% for the quarter and 88.3% for the year.

In Domestic Business Insurance, consistent with our marketplace objectives, we achieved a record level of retention in the quarter, with positive renewal rate change.

In Bond & Specialty Insurance, we generated an all-time-best underlying combined ratio of 80.1% for the year.

Broadly speaking, the market dynamics in the commercial insurance marketplace continue to be remarkably stable.

In Personal lines, Quantum Auto 2.0 continues to meet our expectations.

In Agency Auto, we had year-over-year policy-in-force growth of 8% in the fourth quarter.

And as you can see in the webcast, that's the sixth consecutive sequential quarter of increasing PIF count.

Those of you who have been following our Agency Auto story know what a success it has been.

We're also pleased to be seeing an impact from the success of Quantum Auto 2.0 on our homeowners business, and you'll hear more about that from Doreen.

Jay Benet will have more to say about our current investment results, but I'll just note that we have delivered pretty exceptional returns on equity for quite some time, notwithstanding all the headwinds in the investment arena: historically low interest rates, the decline in energy prices, and volatility in the equity markets, just as examples from this quarter.

This speaks volumes about our ability to select and price underwriting risk, and the strength of our insurance franchises.

Just as a data point, our after-tax net investment income is about $1 billion lower in 2015 as compared to its high in 2007.

On the other hand, our after-tax underlying underwriting margin is about $1 billion higher in 2015 than it was at its low in 2011, particularly to the extent that fixed income yields remain low, and that seems like the outlook for at least some time.

And with capital finding its way into the largest end of this business, expertise in generating underwriting returns, and having strong franchises in the small and middle market places with meaningful barriers to entry, will really matter.

Turning to capital management, consistent with our ongoing capital management strategy, we returned nearly $1.2 billion in capital to our shareholders in the quarter and nearly $4 billion during the year.

The long-time consistent strength of our results sits behind our capital management strategy.

Just as we have for nearly a decade, we will continue to right size capital and invest thoughtfully in the Business.

Thanks to that strategy, we've now returned close to $35 billion of capital to shareholders since the middle of 2006, when we started our share repurchase program.

Let me take just a minute to comment on the leadership transition.

What I suspect many of you want to hear from me is where do we go from here?

As I've explained to our leadership team, our challenge is this: to take today's summit, and make it tomorrow's base camp.

I'm confident that we already have the right strategy in place to do that, and we've got the right team to execute it.

We've been executing it.

We understand it, and it has been remarkably successful.

It's this team's strategy.

Delivering superior returns over time will continue to be our North Star.

We'll do that by investing in, and leveraging, our competitive advantages, delivering industry-leading products and services, and making sure this is a great place to work for the best talent in this industry.

That's not to say that we won't challenge ourselves constantly to make sure that both the strategy and the way we're executing on it remains relevant.

It's critical that we reassess all the time, and we will continue to be a leader in evolving and innovating, particularly given the potential for change around us.

Among other things, we'll continue to refine our data and analytics to make sure that we lead in risk selection and pricing.

We'll continue to innovate on the product side, and in our claim and risk control organizations, to make sure that we're delivering at the forefront for our agents, brokers and customers.

And we'll continue to build on our leading position with our distribution partners to make sure that we're a partner of choice for them.

We've always understood the value of size and scale, and we're well positioned in that regard.

Just as in the past, we'll seek opportunities to grow thoughtfully and in ways that contribute to shareholder value.

And as always, we'll manage our expenses thoughtfully.

All of that is business as usual for us.

Our confidence in our strategy, and our track record in executing on it, give us confidence in our ability to continue to deliver for our shareholders.

And with that, I'll turn it over to Jay Benet.

Thanks, Alan.

As Alan mentioned, we're very pleased with our results this quarter: net income per diluted share of $2.83, operating income per diluted share of $2.90, and an operating ROE of 15.8%.

These results were driven by the continuation of our very strong current accident year underwriting performance, as evidenced by an underlying combined ratio of 90.7% despite relatively high non-cat weather-related losses in the quarter.

Net favorable prior-year reserve development was very strong at $292 million pretax, and cat losses were relatively modest at $46 million pretax.

That said, as shown on page 4 of the webcast, current-quarter results were lower than our very strong fourth-quarter 2014 results, mostly due to the impact of low interest rates and private equity returns on net investment income, and an even higher amount of net favorable prior-year reserve development in the prior-year quarter.

Underlying underwriting margins were pretty much the same in both quarters.

Fixed income NII of $422 million after tax was down $31 million from the prior-year quarter, principally due to what we've been saying for many years: securities that had higher book yields have run off during the past 12 months, and have been replaced with securities having lower yields due to the current low interest rate environment.

Another contributing factor to lower fixed income NII was the modest reduction in average investments that resulted, in part, from the Company's $579 million first-quarter 2015 payment to settle the asbestos direct action litigation.

Looking forward, based on the current interest rate environment, we would expect that the impact of lower reinvestment yields and a lower level of fixed maturity investments could, in 2016, result in approximately $20 million to $25 million of lower after-tax NII on a quarterly basis when compared to the corresponding periods of 2015.

Non-fixed income NII of $25 million after tax was down $42 million from the prior-year quarter, primarily due to lower private equity returns.

Private equities essentially broke even this quarter as compared to earning $30 million after tax in the prior-year quarter, due to lower valuations for energy-related investments.

Each of our business segments continue to benefit from net favorable prior-year reserve development.

In Business and International Insurance, net favorable development of $176 million pretax primarily resulted from better-than-expected loss experience in workers' comp for accident years 2006 and prior, and accident year 2014, in general liability for both primary and excess coverages for accident years 2012 and prior, and in the Company's operations in Canada.

In Bond & Specialty Insurance, net favorable development of $80 million pretax primarily resulted from better-than-expected loss experience in fidelity and surety for accident years 2012 through 2014.

And in Personal Insurance, net favorable development of $36 million pretax primarily resulted from better-than-expected loss experience in auto liability for accident years 2013 and 2014, and in homeowners and other liability for accident year 2014.

As I've done in the past, I'd also like to provide you with some insight into what our combined 2015 Schedule P is expected to show when it's filed on May 1. On a combined stat basis for all of our US subs, all accident years in the aggregate across all product lines are expected to develop favorably.

And all but one product line on Schedule P are expected to develop either favorably, or show very modest or de minimis unfavorable development.

The product line that is expected to develop unfavorably by approximately $50 million pretax is products liability occurrence.

But another product line, other liability occurrence, will have an offsetting amount of favorable development, as we've refined our allocation of IBNR between these two components of general liability, based upon how losses, such as those related to construction defect, have been developing by coverage type.

In total, our general liability reserves were not affected by this action.

Returning to GAAP, for the year we had net favorable development of $941 million pretax, with approximately $840 million coming from our US ops, and a little over $100 million coming from our Canadian and UK operations.

There are two additional topics I'd like to update you on.

As shown on page 21 of the webcast, we renewed our corporate cat aggregate XOL treaty effective January 1. The treaty provides coverage for both single cat events and an accumulation of losses from multiple cat events with similar terms as in the prior year but at a lower cost.

The treaty continues to provide $1.5 billion of coverage, part of $2 billion excess of $3 billion after a $100 million deductible per occurrence.

It keeps the same broad peril and geographic coverage in the same positioning of the coverage layer, providing a significant buffer between earnings and capital.

The treaty has a single limit with no reinstatement provisions.

Please note that the total costs of this treaty and, therefore, the reduction in costs, are quite small in relation to our operating income.

The second topic relates to the recent drop in oil prices.

Page 22 of the webcast contains updated information showing the magnitude of our investments in below-investment-grade energy bonds and energy-related equities.

As you can see, the sum of these investments is relatively small, and the exposure is quite manageable.

Operating cash flows remain strong: $760 million in the fourth quarter, after making a $100 million discretionary contribution to our qualified pension plan, bringing total operating cash flows to over $3.4 billion for the year.

We continue to generate much more capital than we need to support our businesses.

And, consistent with our ongoing capital management strategy, as you heard from Alan, we returned almost $1.2 billion of excess capital to our shareholders this quarter through dividends of $183 million and common share repurchases of a little over $1 billion.

For the full year, we returned almost $4 billion of excess capital to our shareholders through dividends of $744 million and common share repurchases of over $3.2 billion.

Holding Company liquidity ended the year at $1.6 billion, well above our target level.

And our debt-to-total-capital ratio, which was 23% at the beginning of the quarter -- slightly elevated due to our having issued $400 million of debt in the third quarter to pre-fund $400 million of debt that was maturing in the fourth quarter -- has come back down to 22.1%, well within its target range with the retirement of that debt.

Net unrealized investment gains were almost $2 billion pretax, or $1.3 billion after tax, which was down from $3 billion and $2 billion, respectively, at the beginning of the year, due to an increase in interest rates and spreads.

Book value per share of $79.75 grew 3% from the beginning of the year.

And importantly, adjusted book value per share of $75.39, which eliminates the after-tax impact of net unrealized investment gains, grew by 6% this year.

So with that, let me turn the microphone over to Brian.

Thanks, Jay.

Business and International Insurance results for both the fourth quarter and the full year were strong.

We continued to generate excellent returns, with a full-year combined ratio of 92.1%.

Our retention throughout the year was very strong, and reached a record level this quarter in our domestic business.

Pricing trends remained relatively consistent, with renewal rate change still slightly positive at the end of the year, while new business volume in our domestic business saw a modest increase.

Turning to the quarter's financial results, operating income was $566 million, with a very strong combined ratio of 89.6%.

The underlying combined ratio, which excludes the impact of cats and prior-year reserve development, was 94.4%, up 0.5 points compared to the fourth quarter of 2014, primarily due to a higher level of non-cat weather-related losses.

Looking at the top line, net written premiums for the quarter were down about 1.5 points compared to the fourth quarter of 2014, with Domestic Business Insurance premiums up about 1 point.

In Domestic Business Insurance, we remain pleased with the continued execution of our pricing strategy.

As we've been saying for some time, given the attractive returns that we are generating in this business, our focus continues to be on retention.

And accordingly, we are very pleased that retention improved to a record 85% in the quarter.

Renewal premium change came in at 2.4 points, while renewal rate change remained positive, but down slightly versus the third quarter.

New business of $476 million was up compared to both the prior year and the third quarter.

Looking at each of our individual domestic businesses beginning with Select, rate and renewal premium change were in line with recent quarters, while retention remains strong at 82%, demonstrating continued stability in this segment of the market.

In the middle market, we achieved record retention of 88%.

Overall rate change was about flat, and reflected a decline of about 1 point from the third quarter.

As we've always said, the execution below the headline numbers is what matters, and we continue to feel great about the granular results.

Retention for our best-performing business was just over 90%, with an average rate decline of less than 2% on those accounts, while for our poorer-performing business we continue to get rate in excess of loss trend.

In terms of exposure, the quarter's results includes a drag of about 1 point from our oil and gas business, resulting from reduced economic activity due to lower energy prices.

Just as a reference point, our oil and gas business makes up only about 3% of Domestic Business Insurance written premium.

Middle-market new business of $254 million was up from the third quarter, and in line with the prior year.

In other business insurance, retention was strong at 80%, renewal rate change was about flat, even after being negatively impacted by our National Property business.

As I mentioned last quarter, although National Property is seeing the largest rate declines of any business in our portfolio, we are pleased with the overall performance of this business.

Returns and retention remain strong, and pricing trends are stable.

Excluding National Property, renewal rate change for other business insurance remains positive and was relatively stable with the third quarter.

Turning to International, net written premiums were down about 16% for the quarter and 14% for the full year, primarily due to the adverse impact of foreign exchange rates.

Excluding the impact of foreign exchange, net written premiums for the fourth quarter were down about 6%, largely driven by declines in retention in Canada, and to a lesser extent, at Lloyd's.

International retention was down in the quarter to 79%; however, renewal premium change was slightly positive, and new business for the quarter was very strong at $80 million, up 18% year over year.

In Canada, a competitive renewal environment adversely impacted retention across our book; however, in June we launched OPTIMA, our new strategic insurance platform in Canada for personal insurance.

OPTIMA was modeled after our US-based Quantum Auto 2.0 product.

We are in the early days of the rollout, but are pleased with the initial response, as we are seeing a significant increase in new business volume.

In Lloyd's, we continue to see a challenging market resulting from global economic conditions, particularly in our marine business.

Offsetting this pressure are two new business products that we've recently launched, focused on renewable energy and global construction, and early returns are encouraging.

So, all in for the segment, it was a terrific 2015, with strong financial results in what we see as a remarkably stable environment, one where our competitive advantages really matter to our customers and agents.

Before I turn it over to Doreen, I want to make one comment on our outlook for operating margins, which we include in our quarterly filings.

Since our 10-K won't be filed for a few weeks, I would note that we expect our 2016 underlying underwriting margin for this segment will be broadly consistent with 2015.

This is subject to the usual caveats and forward-looking statement disclaimers.

With that, let me turn it over to Doreen.

Thank you, Brian, and good morning, everyone.

Bond & Specialty Insurance finished 2015 with another quarter of exceptional financial results.

Operating income for the quarter was $162 million, down from the fourth quarter of 2014, due to lower net favorable prior-year reserve development, but overall still a great result.

The underlying combined ratio of 80.7% was 3.4 points better than the prior-year quarter, due primarily to two factors: a modest increase in the loss ratio in the prior-year quarter that resulted from a re-estimation of the first three quarters of 2014; and secondly, the impact of certain customer-related intangible assets which became fully amortized during the second quarter of 2015.

Underlying underwriting results continue to run well within our long-term target ranges.

As Alan mentioned, the full-year underlying combined ratio of 80.1% was an all-time best.

We obviously don't think these results come by accident.

We pride ourselves on maintaining the underwriting discipline, aggressive management of risk and limits, strong account and agency relationships, analytics and claims management that drive these results.

As we look ahead to 2016 for this segment, we expect underlying underwriting margin to remain broadly consistent with 2015.

As for top line, net written premiums in the aggregate were down 4% from the fourth quarter of 2014, primarily due to a decline in surety volume, driven by lower bonding needs for our accounts, particularly as compared to the strong production in the fourth quarter of 2014.

Surety production can vary significantly quarter over quarter based on the number, size and timing of bonded construction projects awarded to our customers.

We have a strong portfolio of surety clients, and believe we remain well positioned to capitalize on increased bonding needs that might result from an improved economy.

Across our management liability businesses, retention remains strong at 85%, while new business premium was up 17% from the fourth quarter of 2014.

Renewal premium change trended down, with lower rate being partially offset by an increase in other RPC, which includes changes in the size of insureds' exposures, limits written, attachment points and policy duration.

The lower rate was as expected, and is consistent with the strong profitability of our portfolio.

So, all in all, another great quarter, closing a strong year for Bond & Specialty Insurance.

I'll turn now to Personal Insurance, where we closed out the year with another quarter of exceptional underwriting results.

For the segment, operating income for the quarter was $222 million, and the underlying combined ratio was 86.2% -- great results.

And as we move forward, the segment remains positioned to perform in line with our long-term return goals.

I'll touch on the quarterly results for Agency Auto and Agency Property in a moment, but first I'd like to share with you some thoughts on how we view the underlying health of these businesses.

First for Auto, I'll start by saying how pleased we are with the vibrancy of our auto business.

The market response from both agents and consumers to Quantum Auto 2.0 remains incredibly strong, and the portfolio is positioned to generate financial returns within our long-term target range.

In the agency channel, we added 157,000 policies during 2015, an 8% increase from the end of 2014.

As always, there remains competition in auto, and we remain committed to keeping our products priced accordingly through disciplined expense management, and superior pricing and underwriting segmentation.

As we look ahead to 2016, we expect the auto business to continue to grow in both policy count and premium volume, although at a more moderated percentage than 2015, as the portfolio grows.

As for Agency Auto profitability, we've mentioned on several occasions that we are comfortable with where our margins are, given the current market environment.

That still remains the case today.

The full-year underlying agency combined ratio of just under 97% was in line with our expectations for the year, and a result we are pleased with.

This combined ratio is somewhat higher than our long-term goal, driven particularly by the amount of new business that we've added over the past two years.

Quantum Auto 2.0 is priced to our long-term target returns.

But as you all know, the relatively higher combined ratio of new business improves over time.

As we look into 2016, the significant volume of new business we've added will drive a slightly higher calendar-year combined ratio compared to 2015.

So far, the profitability of Quantum Auto 2.0 is maturing in line with our expectations.

With this return profile, we continue to seek more new business, as it should be accretive to long-term returns.

On Homeowners, the financial returns generated in the last couple of years have been exceptional, and well within our target range.

As you recall, we made significant improvements in the risk profile of this business over the last few years, including changes in deductibles, other terms and conditions, and tightened underwriting guidelines.

Of course, this is a more volatile business that will always have a weather dynamic to it.

The weather in the last couple of years has been somewhat lower than our models suggested, but we know that won't always be the case.

As we look ahead to 2016 with respect to profitability, we do expect underlying underwriting margins in Agency Homeowners and Other to be lower than 2015, reflecting more normalized levels of loss activity.

As Alan mentioned, we're also very pleased with the improvements we've seen in homeowners production.

This is attributable, in part, to account rounding, along with making some localized pricing and process adjustments.

And certainly the turnaround benefited from the momentum and agent engagement from the rollout of Quantum Auto 2.0.

At this point, the business has leveled off from a policies-in-force perspective, and we expect modest growth in 2016.

Now I'll just highlight a couple of things specific to the quarter.

Looking at Agency Auto, new business premium was up 32% and net premium was up 12% from fourth-quarter 2014 levels.

And we've added 51,000 policies during the quarter.

The combined ratio for the quarter was 98.1%, and included over 2 points of favorable prior-year reserve development.

The underlying combined ratio was 100.2%, up from the prior year, due predominantly to adverse weather in this year's quarter, and the benefit in the prior-year quarter of a 2.5-point favorable re-estimation of losses related to the first three quarters of 2014.

As for loss trend in Auto, our view of normalized frequency and severity remains consistent with recent quarters at around 3% in aggregate.

There continues to be a lot of discussion about trends, particularly increasing frequency.

From our vantage point, while we may observe normal fluctuations in any particular period due to things like weather, we see a stable and unchanged long-term frequency trend.

As always, we continue to monitor external information and our own data closely, using our extensive analytic capabilities.

Turning to Agency Homeowners and Other for the quarter, we once again had strong financial results, despite relatively active weather in the month of December.

The underlying combined ratio of 69.5% was slightly higher than the exceptionally favorable prior-year quarter.

As for production, new business premiums were up 27% from the prior-year quarter, and continue to trend favorably, while retention remains strong at 85%.

Policies in force were up slightly, both sequentially from last quarter and from the fourth quarter of 2014.

So, to sum up Personal Insurance, we are exceptionally proud of the year we've had, and look forward to more of the same in 2016.

With that, I'll turn the call back to Gabi.

Thank you, Doreen.

Tina, we are now ready for the Q&A portion of the call.

If I can ask you all to please limit yourself to one question and one follow-up?

Thank you very much.

Tina, go ahead, please.

(Operator Instructions)

Jay Gelb, Barclays.

Thank you and good morning.

The first question I had was on the potential for share buybacks.

Alan, any change in view in terms of deploying well in excess of annual earnings in share buybacks?

Buybacks has gone down just slightly annually over the past years.

I'm thinking we might see that trend in place for 2016 and 2017 as well.

Jay, good morning, thanks for the question.

No change in strategy or approach to share buybacks or capital management overall.

There is no intent -- there's never been an effort to deploy more than earnings.

We've had excess capital in past years and we made that very clear that we were adding that to our annual income to buy back stock.

But we said a year or two ago that our level of buybacks would be tied to our level of income.

So we'll have a level of earnings, we will do what we need to do with it, whether that's making pension contributions or investments in the business, and we'll take what's left and return that to shareholders.

There won't be a perfect correlation between earnings in a year and share buybacks in a year.

There's some timing differences.

But I think as we have said pretty consistently recently, share buybacks going forward will be tied to earnings.

Okay.

And then on the investment income from the non-fixed income investments, it was clearly impacted by lower energy prices in force.

Given the collapse in energy prices so far this year, I'm just trying to get a baseline of what you might expect for 2016.

Is that $25 million result probably going to head lower on a quarterly basis from what we saw in 4Q?

Let me just clarify one thing about the $25 million.

That relates to the fixed income portfolio not the non-fixed income portfolio

Jay, it's Bill Heyman.

Obviously this week is a hard week from which to extrapolate for the rest of the year.

The marks as of year-end reflected a price which was an oil price higher than the price which it obtains today but not by as much as one might think.

During the year most funds wrote down their holdings.

And in some cases after the write-downs, the price of petroleum rose but nothing was written up again.

So we think a lot of these portfolios have been marked pretty hard.

That said, if we had to predict either way, there's probably a little downside left in the portfolio.

But the portfolio isn't that big that the amount ought to be material in the aggregate.

Okay.

That's helpful for a starting point.

And Jay, just to clarify, so I was talking about the $25 million of income in 4Q from the non-fixed income investment portfolio in terms of the aggregate relative to the [420] of fixed income.

I understand what you were saying in terms of lower yields results (multiple speakers) that much of a the quarterly impact.

I apologize for the confusion there.

That's okay, no problem.

But Bill, you're saying that $25 million after-tax we saw in 4Q shouldn't be that impacted by lower energy prices even so far?

No, I couldn't put a number on it, especially after the first part of this month.

But I'm simply saying that everyone assumes that there's a lot of downside based on prices as they are today.

And there might be less downside than it appears simply because of the way in which funds mark their holdings in 2015.

Thank you.

Great, thank you.

Tina, next question please.

Randy Binner, FBR & Co.

Thanks.

I think you touched on this in the opening commentary, but from my perspective the pricing, the headline pricing number you provide in the slide deck, the plus 0.6%, was better than expected.

I'm interested in your perspective on if you think Travelers is unique here.

A lot of the headline surveys that we look at in the industry for commercial lines are moving significantly negative across the board.

So I want to get your perspective on if you think Travelers is unique here and how much discipline, I guess, you think your competitors are holding against the softer market?

Randy, good morning, it's Alan.

You said it was a surprise.

It wasn't necessarily a surprise to us; it may have been a surprise to you or others.

But relative to the surveys, what we can tell you is we're showing real data.

I think what we've always seen is surveys tend to be anecdotally based and tend to maybe overemphasize some volatility either up or down because maybe the people responding to the surveys are thinking about the last transaction or the transactions in their mind.

So there's really nothing about this that surprises us.

We've been saying for a while that we expect the amplitude of the market to moderate.

This appears to have moderated.

I think the fact that we can achieve what we did is, I think, a function of two things: one, our data and analytics, our expertise, our ability to execute at a very, very granular level; and a marketplace that we would describe as remarkably stable and, at the moment, rational.

Just a quick follow up.

Are there any lines that are really helping that figure?

Meaning is workers' comp still the best form of pricing perspective where some other casualty lines might be moving negative?

No.

This is Brian.

It's still a pretty tight band, to be honest with you, across all the lines.

So nothing is dramatically out of pattern up or down.

As we commented, and Alan touched on in his comments and I in mine, it's more larger accounts feeling more pressure than medium and smaller accounts.

As we said, National Property is the space where we are seeing more significant rate declines than others.

I think it's more an account size than a line of business volatility or variability.

That's great, thank you.

Michael Nannizzi, Goldman Sachs.

Thanks so much.

Doreen, maybe a little bit more on the auto side.

Have you seen any impact from the rise in miles driven in your auto book, given the fact that your growth has come alongside that rise in miles driven?

Let me talk a little bit about miles driven.

The data shows that probably year to date the miles driven are up about 2.5% per capita.

There is still a lot of debate about whether that makes a difference if it's a long trip, a short trip, whether there is unemployment, whether you have safety features in your vehicles and so we watch that closely.

But our long-term trend of 3% anticipates that and we really haven't seen anything that particular item is causing us to view frequency differently today.

And just to be crystal-clear, the 3% is total trends with frequency being a small fraction of that.

Right.

Got it, thanks.

In middle market with retention up in the high 80%s, is that something that you could see that may be coming down?

Or would you be comfortable with that at a lower level if you saw an opportunity to find some more rate increase opportunities?

It seems high 80%s, if pricing is flat and the results are pretty good, is that an area where you could look to push for some more rate at some point?

This is Brian again.

That is a constant balancing act in our organization every day.

I will tell you that overall our core middle-market business, from a return perspective, is in a very healthy spot.

As I said in the comments, when we look at our better-performing business which is not a tiny part of the portfolio, our very well-performing business, we are at retentions north of 90% with pretty modest price increases.

We'd obviously love to renew it in the 90%s with different price increases.

But retaining that business is a real priority because it is returning very, very well.

With that said, we're always looking for opportunities to see where we can balance the rate and retention trade-off.

I would add to that, even though that's not the headline number that continues to be a headline number.

And the execution below that number is very, very granular.

So we are not managing that headline number, we're managing every single account.

Great.

And real quick, Bill, do you guys disclose -- I definitely appreciate the disclosure on the energy portfolio -- do you guys disclose anywhere the BBB minus category of energy exposure as well?

That next rating level up?

I can tell you that the investment-grade portfolio has an average rating of A. And the high-yield portfolio, which is 23 credits with book value of $162 million, has an average rating of BB minus, which given the size, ought to give you what you need.

Got it, thank you.

Josh Stirling, Sanford Bernstein.

Hi, good morning, Alan.

I was just thinking, you live in interesting times.

You've had good fortune here to become CEO at the time the industry structure is changing very rapidly.

Obviously over the past six months we've seen ACE and Chubb merge.

It creates a very large and powerful competitor.

And on the other hand, over at AIG there's presumably going to be lots of opportunities for everyone in the industry.

As you've thought from Travelers perspective, how the environment is evolving, how are you guys going to tackle these new challenges and opportunities?

And what should we do to see Travelers take advantage of all this change in the market?

Good morning, Josh.

I guess what I would share with you is that we are very aware and deeply engaged in all of those things.

Whether that's what's going on with any of our competitors or what's going on with technology or big data or driverless cars, consolidation among distribution, you could go on and on.

I think what I would share with you is we are very aware and deeply engaged.

As we see all of those things and others, those, by the way, weren't meant to be necessarily in order of what's top of my mind, just what came to my mind, but as we think of everything that's got the potential to change in this marketplace, nothing's going to change overnight.

These are things that are all going to evolve and develop over time.

And what we've got great confidence in is our positioning to manage all of them.

We think we can understand and manage.

We've got the talent.

We've got the resources.

We've got a deep understanding of risk and reward.

And the quality of our underlying business, the results you see this quarter and this year, we've got no distractions.

We are starting from a really good point as we think about and engage on all of those issues.

Without taking them one by one, for the most part and maybe all-in, we see more opportunity than we do risk.

We are certainly examining them from both sides and making sure that where there is opportunity, we are positioning ourselves to be able to leverage it.

And where there is risk, that we are making sure we do everything we need to do to mitigate it.

That's helpful.

I wonder if we could switch gears a little bit.

You mentioned risk.

Could you give us a little bit of a -- either Alan or Brian or whoever is appropriate -- a little bit of help of understanding what the liability side exposure is?

Maybe not Travelers per se, but generally for the industry from a meltdown in the commodities and energy patch would be.

Presumably we might see a bunch of bankruptcies.

There's a lot of different product lines that you sell that everybody in the industry sells and to companies -- and I remember a decade or so ago, Chubb really surprised people when they got hurt in an energy [surety] deal with Enron.

Obviously you got D&O and E&O exposures and maybe work comp severity.

I'm sure you guys are playing defense here.

I'm wondering if you can help us think through how you and your underwriters are thinking about potential exposures if that part of the world keeps getting hurt.

I'll start and then I'll look at either Brian or Doreen and invite them to jump in.

I'll say you hit it.

We think about the loss side of that equation all the time.

And whether it's going through our management liability book or our surety book, making sure that we understand what our exposures are.

I'll say that we look at these things -- we don't wait for there to be something significant in the marketplace to look at it.

We're looking at it all the time and as far as we can.

So we are managing our nets.

We're looking on the surety side what kind of collateral we have, for instance, on some of these accounts.

We exit accounts when we need to exit accounts.

We've got a really good track record, I think, in all those businesses.

Just on the management liability side, for example, we're much more heavily weighted be on the private nonprofit side as opposed to the large public D&O.

This is what we do every day, is manage risk and think about risk and reward.

Doreen and Brian?

Thank you, Alan.

The only thing I would add to that is that when we see any potential issue, we run that through our entire book of business, not just what that class of business is.

So we look at all the consequential effects that may have in related industries.

For example, in writing banks we look at the level of their portfolios that are exposed, not just to oil and gas but to any one thing in particular.

So obviously, surety, watching credit and looking at collateral, other management liability areas, looking at concentrations.

But this isn't unique to us.

We always take an issue and run it through the entire book and look at any consequences that might come from that.

Okay, thank you, appreciate it.

Good luck.

Thank you.

Next question please

Ryan Tunis, Credit Suisse.

Thanks, good morning.

I think my first question is for Brian.

And I think he mentioned in his prepared remarks that in middle-market the better accounts you were renewing, I think, with a modest rate decline.

But it sounded like it was only modest.

I'm curious, how is the conversation changing with those better accounts now versus maybe a year ago?

Right now, like I said, it sounds like it's maybe a modest decline.

Is that what everyone is looking for still, just modest?

How is that conversation evolving?

It's pretty much as you were saying and as you would expect based on the data.

A couple of years ago almost every conversation was starting with some form of price increase even for the best accounts, because everybody saw where the trends were.

And that has gradually mitigated over time.

But even with those better accounts, the conversation starts somewhere with trying to renew it at a modest decline or flat.

Obviously if the average is less than 2% there are still some that are positive.

The thing that we're doing probably a little different than we were a year or two ago, is we are really trying to get out as early as possible.

Frequently at least three if not six months ahead of time, have conversations with the broker and the account.

I think we do have a strong franchise with a valued product and valued services.

Fortunately most of those companies start by wanting to stay with us.

And then I think the other key point is really being able to have the data and analytics where our front-line people can see and really segment their portfolio, and in the middle market account by account, look at how they are performing.

And when there are issues either in that account, in that line or in that class of business, being able to have an informed conversation with the broker about what those are and why we're trying to do what we're doing on the account, really, really makes a difference.

I'd say the big change is getting out early and having a granular conversation on the performance of that line and that business.

Got it, okay.

And then my follow-up was actually a follow-up to Jay's question on capital return in excess of operating income.

Since the start of 2014 we see your premium surplus ratio has drifted from about 1% to 1.2%.

Leverage has been relatively flat.

You said over the past couple of years you've had excess you've been able to deploy.

How do we think about that level of excess?

Because on those metrics it does seem like whatever excess you did have you have used to a certain extent.

Are those metrics even relevant?

This is Jay Benet.

The premium-to-surplus ratio I would view was not being relevant at all.

That was a ratio that was used at a time when rating agencies and regulators didn't have the sophisticated models they have today.

As I've said on previous calls, we deal with each one of the models, whether it's our internal models, the regulatory models or the rating agency models, to come to a place where, given the profile of our business as it relates to each quarter, what is the capital that we think we need in the operating entities that we manage to support a AA rating?

And support a solid AA rating, not one where if the wind blows we're worried about our ratings going down.

That's always the starting point.

Given the size of our book, it doesn't change very much from quarter to quarter.

But what does change is the profitability, whether it's for a favorable development or some other things that take place, is higher than our expectations.

Keeping in mind that we have a flow of moneys out of the Operating Companies up to the Holding Company each quarter based on expectations.

So to the extent we earn more, we bring some more up probably a little later than that.

I think if you go back over time and you go past two years ago to an earlier period and start adding up the earnings versus the share repurchases, you see that there's a very, very strong correlation to that.

I wouldn't read into anything that says one year we've done a little more than earnings, another year we did less.

It's really just as Alan said earlier, the timing.

If the premium-to-surplus ratio goes up a little bit, I'd ignore that.

What I'd look at is in our supplement we talk about, specifically on a quarterly basis, what does the stat surplus is.

I think you can see that moves around probably in a pretty narrow band.

Okay, understood, thanks.

Next question please.

Vinay Misquith, Stern Agee.

Hi, good morning.

Just a question on loss cost trend.

With pricing roughly flat, curious how we're managing to leave margins flat in 2016 versus 2015?

This is Brian.

Speaking for the BII segment, you start with the simple arithmetic of the earned premium.

Again, it's not just rate, it's price which includes exposure change and does offset some of trend.

When we look at the arithmetic of earned rate versus loss trend we come up with a very modest, about 0.5 point of loss ratio compression into 2016.

That of course is based on our assumption of loss trend which is, as we've said, running right now at about 4% and looking at a relatively stable orderly marketplace.

And then that's offset by a variety of other factors.

You can think of weather, large losses, mix change, underwriting actions, et cetera.

But the real starting point is that compression from the rate loss trend dynamic, price loss trend dynamic, is a pretty modest number in how we are looking at it.

I think that distinction between price and rate is important.

Because as we've said in the past, there's a meaningful component of exposure that, from a profitability perspective, behaves like rate.

So what we really see in that true margin deterioration is we see going forward.

As Brian said, it's very small and probably within the margin of error of all the other things that impact margin.

Fair enough.

The second question is on the pace of future rate increases.

You mentioned that on best-performing accounts you have rate decreases of less than 2%.

Curious what proportion of the accounts now are well-performing.

Should we see for the pressure on pricing this year because more of the accounts are better-performing?

I think there is a level of granularity and precision here that for competitive reasons, I'm not going to overly segment the portfolio.

I think the backdrop to this is really the view of do we think the industry is going to continue to fundamentally be focused on the returns and the product?

And we think that's the right way to be thinking about the business and we're optimistic that the majority of the marketplace is actually looking at that.

The healthier the business, the more pressure there should be on pricing.

But in the aggregate, we're pretty comfortable that we should be able to generate appropriate with pricing to maintain reasonable returns.

And then you can come up with any variation on the theme you want off of that and be is bullish or as bearish as you want.

Fair enough, thank you.

Thank you.

Charles Sebaski, BMO Capital Markets

Good morning, thank you.

I have a couple questions on the personal lines business.

The first on the personal auto growth and success you've had from Quantum.

Is that coming from standalone auto policies?

I'm trying to understand that your sweet spot seems to be on package, multi-policy programs.

You have auto growth while homeowners is flat.

Wondering how you're working in the auto growth relative to your package program?

Good morning, this is Doreen.

We have actually seen success in both.

I think this was some of what Alan and I referred to in our earlier comments.

Clearly our auto product was competitive in agent's office and also in the direct channel.

And in many cases what that did, because we are an account-focused Company, that allowed us then to bring the home with it.

So we have seen standalone auto come in.

We've seen more opportunities for cross-selling.

I don't think it's anything small, given Quantum Auto 2.0, that we've been able to actually increase and stop the shrinkage in homeowners.

We've also put some processes in place that have been very helpful where it pre-filled certain information.

So that if someone is looking at an auto quote it will pre-fill for home.

We like the account business; we continue to look for that.

Given where the returns are and where we're going with auto, we are pleased with that as well.

Okay.

Finally a follow-up to a comment that you guys made in the business insurance regarding the exposure drag and the oil and gas exposure.

I think you said that oil and gas accounted for a 1 point exposure drag, but that oil and gas only accounted for 3% of the book.

Or is that 3% of the exposure?

I guess I was trying to understand how 3% could account for a 1 point drag?

The 3% is a premium number but the exposure, as you can imagine, was down pretty significantly.

So when you combine the 3% against a pretty big exposure delta in oil and gas, that drove the 1%

And the 3% is to total domestic business insurance and not to middle-market.

And that's a good point and maybe we shouldn't have mixed those two numbers.

The 1% drag was on the middle-market exposure change.

The 3% was on total domestic BI.

We did that arithmetic quickly.

The 3% is the premium.

The 1% is on the chart in the exposure

And it's both middle-market?

The 1% exposure drag is middle-market exposure.

The 3% is quantifying the percentage of the premiums of our oil and gas business on the total business insurance.

So the premium on just middle-market would be a higher number.

Okay, that makes sense how you could -- the math just didn't seem to work.

I appreciate the clarity.

Great, and this will be our last and final question please.

Kai Pan, Morgan Stanley.

Thank you for fitting me in.

First question is on reserve releases.

Looks like workers' comp you have releases in 2014 accident year.

Curious why the early release rather than for this normally a long-tail line of business.

Can you talk also in general, what is the loss cost trends by major lines and how that compares with your 4% assumption in overall loss cost trends?

This is Jay Benet.

In terms of the reserve release, when you're dealing with a long-tail line, you have two components to how you're going to look at the reserves.

One is what has developed in terms of the loss activity.

And you're absolutely right, in a short period of time you're not going to really see a great deal of activity.

On the other hand, what you've done is you've established a starting point for what you think the loss activity is going to be.

And we refer to that as the loss pick.

So just imagine on January 1 trying to predict what the losses are going to be for the entire period of time that those workers' comp policies will be out there.

We come up with a loss pick.

In the example I'm going use, I'm just making up a number, let's say it's 60% based on what you've seen historically.

You are looking at the historical data then for earlier accident years and evaluating that against that initial lost pick that you had for a current year.

And there are times when you see loss activity in prior years that you say it really has no bearing whatsoever on how I thought about the starting point for the current year.

And then there are times when you look at it and say, no, actually this really does change the bar for the starting point.

Usually on a long-tail line of business when you see us do what we have done here, it's based on what we refer to as base year movement.

Looking at the history and saying the initial loss pick was a little on the high side.

I was going to say -- this is Brian -- to respond to you -- trend by line in business is actually a pretty tight band with ranging from the high 3%s to the high 4%s.

But an average trend of right around 4%.

So nothing really out of pattern by line.

Great, thanks so much.

My follow-up question is for Alan.

Now you are seven weeks in the new role, so I wonder what is your top priority these days?

And what do you most -- you think you have the right strategy in place now but what are you focusing on?

Sure, thanks for the question Kai.

I've had experience managing essentially all of our commercial businesses and our business outside the US.

What I haven't had experience with is the personal lines business -- on a relative basis not as much -- personal lines business and some of our functions like claim and IT and ops and things like that, risk control.

So I'm trying to spend a lot of time in those businesses and areas that I haven't had the experience with.

Trying to spend a lot of time on the road out in the field with distribution, and our employees in the field which always has been a priority of mine.

And I guess beyond that, in my comments I said one of the things that we're going to do is continue to evolve and innovate.

Reassessing is something that we've always done and Jay Fishman has always led that initiative.

And so I have taken over from Jay.

And just like Jay didn't do it alone, Jay did it with the group, I will continue to lead the group in making sure that we're assessing what's going on in the marketplace and we are of evolving and innovating.

I would say that makes up the way I'm allocating my time.

Great, thank you so much for all the answers.

Thank you.

Great, thank you very much for joining us today.

As always, the investor relations team is available for any follow-up questions you might have.

Thank you and have a good day.

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

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

Thank you and have a good day.