The Travelers Companies Inc TRV
Q4 2009 Earnings Call Transcript

Transcript Call Date 01/26/2010

Operator: Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year Earnings Review for Travelers. We ask that you hold all questions until the completion of formal remarks, at which time you’ll be given instructions for the question-and-answer session. As a reminder, this conference is being recorded on Tuesday, January 26, 2010.

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

Gabriella Nawi - SVP, IR: Thank you, Pema. Good morning, and welcome to the Travelers discussion of our full year 2009 results. Hopefully, all of you have seen our press release, financial supplement, and webcast presentation released earlier this morning. All of these materials can be found on our website at under the investor section.

Speaking today, will be Jay Fishman, Chairman and Chief Executive Officer; Jay Benet, Chief Financial Officer; and Brian MacLean, President and Chief Operating Officer. Others 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 got through prepared remarks, and then we will open it up for questions.

Before I turn it over to Jay, I’d like to draw your attention to the following on page one of the webcast.

Our presentation today includes certain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Specifically, our earnings guidance is forward-looking, and we may make other forward-looking statements about the Company’s results of operations, financial condition and liquidity, the sufficiency of the Company's reserve and other topics. The Company cautions investors that any forward-looking statement involves risks and uncertainties, and is not a guarantee of future performance. Actual results may differ materially from our current expectations 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 in response to questions, we may mention Travelers operating income, which we use as a measure of profit and other measures that may be non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials that are available on the investors section on our website,

With that done, here is Jay Fishman.

Jay S. Fishman - Chairman and CEO: Thank you, Gabby. Good morning, everyone, and thank you for joining us today. By now you’ve seen our fourth quarter results and clearly they stand on their own merits.

For the quarter, we reported record net income as well as record net and operating income per diluted share. For the year, we reported net income in excess of $3.6 billion and return on equity of 13.5%. In the quarter, we repurchased 30.1 million common shares for just over $1.5 billion, and for the year, we repurchased 69.4 million common shares for approximately $3.3 billion.

Throughout the past year, we have continued to capitalize on our competitive advantages to generate top tier profits and return excess capital to shareholders thereby producing attractive returns. Jay and Brian will have more to say about our results in a few minutes.

What I would like to do is to take the next few minutes and give you a broader perspective on our recent history, and what it means to you. In the five full fiscal years since the combination of Travelers and the St. Paul, we have clearly distinguished ourselves amongst financial service companies in terms of overall financial performance.

Our cumulative earnings from continuing operations have totaled over $17 billion. We have achieved a cumulative average annual return on equity from continuing operations of 14.1%; we’ve returned $13 billion of capital to our shareholders through share repurchases and common dividends; and our average annual growth in book value per share and dividend per share has been 10.9% and 8.4% respectively. This performance has resulted in a total return to shareholders defined by share price appreciation and the reinvestment of dividends, which ranks us as a top performing financial service company.

On page four of the webcast, you can see our five, three, and two year total return performance compared to a significant number of leading U.S. listed financial service companies including the 20 largest Standard & Poor’s financials by market capitalization. In each time period, our total return ranks us no lower than six.

On page five of the webcast, you can see similar statistics for the Dow 30 Industrial Average companies. We’re very proud of these results, and we believe that they are the result of well executed strategies. We know that many of you focus intensely on the rate dynamics of our business. Brian is going to discuss in detail our rate levels across all three of our business segments. But in summary, the impact of renewal rate changes on renewal premiums remained positive in the quarter across all three business segments.

Nonetheless, while we agree that pricing is an important aspect in our business, it is not the only competitive lever by a long shot. Where we believe we are different from so many in our industry is in the exceptional value we provide to our customers, brokers and agents through the breadth of products and services we provide.

In the last five years, we have made significant investments in our franchise to enhance this value, whether it is developing technology platforms such as Travelers Express and Quantum Auto and Home that help agents more easily do more business with us, introducing new products including our growing suite of middle market IndustryEdge products to meet the specialized and changing needs of our customers, redesigning our claim processes, or helping our customers minimize their risks through our industry leading risk control services, we are constantly looking to enhance our value proposition.

These investments have been important and we believe they have contributed meaningfully to our ability to differentiate Travelers in a crowded industry. With respect to pricing, we’ve said it before, and we’ll say it again our industry is no different than most. Product pricing is an important element of success, and we wrestle with pricing strategy every day. However we do not believe that our business is commodity business. Pricing is only one component of competition; and agents, brokers and customers have preferences regarding the company with which they chose to do business.

Our investments have been geared towards making travelers a more compelling choice and enhancing our profitability. As we look forward, the investment opportunity we will continue to provide is pretty straight forward. We will always manage shareholders’ capital with a view that on their behalf we should be appropriately compensated for risks that we assume whether it’s on the right side or the left side of the balance sheet. We will continue to build on our competitive advantages as well as continue to seek rate where needed so that the pricing of our product reflects our long-term return expectations.

We remain committed to continue returning excess capital as evidenced by the stated assumption in our 2010 guidance of between $3.5 billion and $4 billion in common share repurchases. Before I turn it over to Jay Benet, I’d like to address the subject of providing annual earnings guidance.

We’ve thought long and hard about whether the practice is one which we should continue. Our thought process considered the fact that we exclude reserve development from our guidance and catastrophes are fundamentally unpredictable. However many in the analyst community, nonetheless include their own estimates for both.

We believe that our core earnings are actually quite predictable given our straight forward approach of running our business, and that the level of transparency, clarity, and insight that we provide to investors on a regular quarterly basis is industry leading. Given the general nervousness that exists in the financial marketplace and the risk of individuals misperceiving why we would stop a practice that we’ve been following for some time, we have decided to continue providing guidance this year consistent with past practice. However, it is our intention to stop providing explicit earnings per share guidance after 2010 and over the next year, we will reach out to the investment community to make sure we have a smooth transition. With that let me turn it over to Jay.

Jay S. Benet - Vice Chairman and CFO: Thanks, Jay. Let me refer to page six, and start with my usual statement that our the balance sheet remains extremely strong and that all of our capital leverage and liquidity measures were at or better than target levels. In fact, despite supplementing normal dividends paid from our operating companies with a special $500 million fourth quarter operating to holding company dividend, our operating company capital actually increased to 23.2 billion at the end of the year from 21.5 billion at the beginning of the year.

This increase resulted from our very strong fourth quarter results and to a lesser extent from the favorable impact of certain fourth quarter regulatory changes. As many of you know, the NAIC recently adopted two rules that the life insurance industry had been pressing for. A temporary rule effective for 2009 and 2010 easing restrictions on the amount of deferred tax assets insurance companies could recognize on their stat balance sheets, and another rule that change requirements for valuing non-agency residential mortgage-backed securities from an approach based upon ratings from traditional rating agencies to one based upon a model developed by PIMCO.

While neither of these regulatory changes impacted our GAAP financial statements, the deferred tax asset change and the non-agency RMBS valuation methodology change had the positive effect of increasing operating company capital by approximately $500 million and $100 million respectively.

Full year share repurchases were $3.3 billion, and common stock dividends were $690 million, despite accelerating share repurchases in the second half of the year with the intention of lowering holding company liquidity to an amount that was closer to our target level. Our strong profitability, and the timing of operating company dividends resulted in holding company liquidity of $2.1 billion at year end, exactly where we began the year and almost twice our target level. Our plan is to reduce this amount in 2010.

We increased our leverage slightly from 19.5% at the beginning of the year to 20.3% at the end of the year, and we increased book value per share by 22% to $52.54, the fifth straight annual increase in book value per share since the Travelers-St. Paul merger.

After-tax net realized investment gains were a $130 million in the quarter driven by an after-tax gain of a $103 million on the sale of half of our Verisk holdings. Fourth quarter net realized investment gains also included impairments of only $16 million after-tax, and combining this with prior quarters we recorded a full year after-tax net realized investment gain of $22 million.

Total net unrealized investment gains were $2.8 billion on a pre-tax basis at year end, which included only a $150 million of investments for which fair value was continuously less than 80% of amortized cost.

All-in-all we ended 2009 with an extremely strong balance sheet positioning us very well for our planned increase in share repurchases to a range of $3.5 billion to $4 billion in 2010.

Page seven provides a comparative analysis of fourth quarter and year-to-date operating income and GAAP combined ratios. Net favorable prior year reserve development was $328 million after-tax in the current quarter compared to $189 million in the prior year quarter as all three of our business segments once again experienced favorable development.

While there were no cats in the quarter, we did experience a very modest increase in estimated cat losses related to several storms that occurred earlier in the year, this in contrast to the benefit we recorded in the prior year quarter from a reduction in loss estimates related to hurricanes that had occurred earlier that year. Also impacting the current quarter was a $52 million after-tax net benefit from the favorable re-estimation of current year loss ratios, primarily in BI due to better than expected frequency trends. So overall, we’re very pleased with our 2009 underwriting performance.

Net investment income of $653 million after-tax as shown on page eight, was up $215 million from the prior year quarter due to a dramatic turnaround in non-fixed income performance. The 7% yield on our non-fixed income portfolio in the current quarter, which was driven by much stronger private equity and hedge fund performance compared to a negative 14.9% in the prior year quarter, the height of the financial market turmoil.

While the 20 basis point after-tax yield on our short-term portfolio was considerably lower than the prior year quarter, due to the lower rates, the long-term fixed income portfolios after-tax yield remained constant at 3.7%.

As shown on page nine of the webcast, we achieved a 14% operating return on equity for full year 2009, up from 12.4% in the prior year. Fixed income NII less interest on our corporate debt what we refer to as the passage of time component, contributed 8.3 points for the year down slightly from 2008 due to the lower short-term interest rates.

Non-fixed income NII, a much smaller contributor to operating ROE, rebounded somewhat from its 2008 level, contributing a slightly negative 0.1 points, while the contribution from underwriting income also improved to 5.8 points due to more normal cat losses.

Consistent with information, we shared with you in recent quarters, full year operating ROE was negatively impacted by abnormally low yields on non-fixed income and short-term investments. Year-to-date, the non-fixed income portfolio yielded a negative 0.6% after-tax rather than what we consider to be a more normal level of positive 7% and short-term rates averaged 0.3% after-tax rather than a more normal level of say 2.5%.

Had these investments performed at more levels, 2009 full year operating ROE would have been approximately 150 basis points higher. All-in-all, cumulatively from 2005, we produced an average annual ROE of approximately 14.4% consistent with our stated longer term goal of mid-teens ROE.

Brian is now going to provide more in-depth information about our quarterly results.

Brian W. MacLean - President and COO: Thanks, Jay. Turning to the Business Insurance segment on slide 10, operating earnings were up significantly in the quarter due to improved underwriting results and higher net investment income. The underwriting improvement was driven by increased favorable prior year reserve development and a re-estimation of the current year loss ratio due to overall frequency and commercial auto liability severity both being better than expectations.

The combined ratio, net of these items and catastrophe losses, was up 1.8 points quarter-over-quarter, which is primarily the margin compression we’ve been speaking about throughout 2009. For the full year, the adjusted combined ratio was essentially unchanged as the margin compression was offset by lower large losses and less non-cat weather losses.

Net written premiums are down 9% for the quarter and 3% for the year, this is the result of the impact of the economy on our insured, and the next two slides are intended to illustrate how we think about that impact on our written premiums.

Slide 11 takes our full year 2008 net written premium and walks through how much of that business we retained, and how much new business we wrote, it then measures the change in premium resulting from the increase or decrease in our insured exposures; in other words, did the accounts we wrote have payrolls, business receipt, vehicles owned, et cetera, going up or down. So, working the slide from left to right, we have full year 2008 net written premium of $11.22 billion. This is essentially the business that was up for renewal in 2009, and we retained 82% of that. For those of you that might be looking for a rate on renewed accounts, it was essentially flat for the year.

We then wrote new business of $2.2 billion or 20% of the previous year’s net written premium. So, if the insured exposures for all of 2008 remained constant, we would have grown premiums by 2%. Obviously, these exposures don’t stay constant, and in fact during most years they are increasing as the economy expands. We see this in a few different ways through renewal premium increases as a result of greater insurable values or through audit premium. As many of you know, we go through an audit process in our commercial business and adjust our premiums charged to reflect changes in insured’s payrolls, vehicles, property values, et cetera. But in 2009, the economy didn’t expand and the slide shows the impacts.

First, the premium changes due to reduced exposures on renewed accounts had a 2% negative impact. In addition, a reduction in audit premium and increased cancellation and endorsement changes resulting from business failures or reduced coverage needs further reduce premiums by 3%. So, the long winded but hopefully clear way of saying that our premiums went from 2% growth to 3% contraction because our customers’ businesses shrunk and accordingly they needed less insurance.

The next slide walks through the same analysis for the fourth quarter, and you can see the negative economic impact is even greater driven significantly by audit premiums. Since, we are auditing accounts we wrote a full year ago, it makes sense that this dynamic would have worsened over the course of 2009. Similarly, as we look into 2010, it’s logical that the drag will continue through the next few quarters reflecting the economic environment of early 2009. Since we are not economists, we don’t want to start projecting this too far into the future, but if the economy did hit bottom in early 2009, we should see some marginal improvement in these metrics by mid to late 2010. So a lots of words to explain a pretty basic concept.

The results are what they are, and the economic impact on our insureds is real, but importantly given our solid retention rate and new business dynamics when the economy does begin to rebound, we’re positioned to see some very healthy organic growth.

Now before I get into the production statistics, let me take a minute to make clear what we mean when we talk about positive renewal rate change. Every quarter we show you several graphs with premium, rate, and exposure change. On Slide 13, we’ve tried to very simply portray that when we say positive rate change we mean a true rate increase not just a smaller decrease. Obviously, less negative is better, but it is not adding to premiums, and for the last three quarters, all three of our segments have been in the green.

Turing to the production statistics on slide 14, overall retention remains high with a stable trend in Select Accounts and Other Business Insurance, and a modest decline in Commercial or middle market business. The total price change is significantly better than the prior year quarter, while versus last quarter Select was up slightly, and Commercial Accounts and Other Business Insurance were down slightly. We believe that these results continue to demonstrate successful execution on our competitive advantages and capabilities in the marketplace.

The next page takes the renewal premium change data, and splits it into its two primary components; pure rate and exposure change. Across all of Business Insurance, and in each of these individual businesses rate is positive. As we just talked about overall exposure is declining as a result of the economic environment, so total price change is a slight negative.

Select Accounts is still getting positive exposure change in its renewal premium, this is primarily a result of higher insured values on commercial properties.

So in Business Insurance, we have now been talking for three consecutive quarters about the positive rate change. And we are well aware that this is somewhat inconsistent with the broader marketplace view of pricing.

On the next slide, we took the rate change in Business Insurance, and showed in total and by our five major product lines. While the degree of this change varies for each line of business due to both the initial profitability and market conditions. It is important to note that our composite positive change is not being disproportionately driven by one or two lines of business, and as a result, we believe the improvement is more sustainable.

So we continue to be encouraged that we are getting rate improvement in our commercial business and to give you some further insight into our mood as we head into 2010, slide 17 shows our preliminary look at the rate change within Commercial Accounts for the month of January.

I want to point out that I am just talking about Commercial Accounts, that other business units may not be as positive and we never want to overemphasize the importance of one month’s results, but given that January is the largest month of the year for Commercial Accounts, we felt that our ability to continue to get positive rate here was particularly noteworthy. Recognize that these statistics are not fully developed and are subject to change, but we do believe they demonstrate the sustainability of our competitive advantages in the market.

2009 new business results shown on the next page are up 2% quarter-over-quarter. In Select Accounts, we have less new business for this period. This is a direct result of our conscious decision to get some rate in those products where it is needed and increased competition within the large end of the Select business.

The Select's Express product, which is our no touch insurance solution for small business customers continues to produce strong new business results driven by a historically high flow of new business opportunities.

We continue to see significant increases in the flow of new opportunities in Commercial Accounts and Other Business Insurance, and as we have discussed in the past we are maintaining our strategic underwriting focus and accordingly our hit ratios have come down. We are extremely pleased with the new business results for the quarter.

Although we continue to see the effects of the economic downturn in a majority of our businesses, we remain very pleased with our effective execution, position in the marketplace, and results this quarter and for the full year.

We firmly believe that as the economy stabilizes and eventually improves our competitive advantages, our breadth of product, industry leading metrics, point-of-sale capabilities, and leadership position with independent agents, will continue to matter and differentiate us in the marketplace resulting in both continued growth and profitability.

Moving to the Financial, Professional, and International Insurance segments, slide 19, operating earnings in the quarter were up $40 million driven by favorable prior year development in a number of different businesses and increased net investment income. This was partially offset by losses on a non-renewed professional liability program in Ireland which resulted in the increase in the adjusted GAAP combined ratio for the quarter.

For the full year, the adjusted combined ratio was up just slightly as margins generally continue to hold steady.

Net written premiums for the segment after adjusting for the impact of the changes in foreign exchange rates were down slightly for the quarter, about 1%, and the full year about 2%. The largest driver of the year-over-year change is the impact of the economy on Surety volumes.

Turning to the production statistics on slide [seven] (sic) [20] and starting with Surety. For the fourth quarter, we did see quarter-over-quarter growth in the Construction Surety book of business, driven by activity in our large national accounts market within our Surety business. However, fewer Construction Surety opportunities continue to exist in the marketplace, and as a result, we do not see this quarter’s results representative of a larger macro trend.

Given market conditions, we continue to feel very good about the top line story in this business, the credit quality of our book of business and our market position going forward. Quarter-over-quarter retention and new business in Management Liability was down as a result of our underwriting initiatives and continued focus on getting rate where we needed.

Renewal premium change decreased to minus 1%, but the pure rate change was at plus 2. The rate improvement was offset by other renewal price change at minus 3, the other RPC was impacted by a combination of intentional underwriting actions and the impact of the economy on exposures.

In our International business, retention was down marginally versus the prior year quarter, renewal premium change was slightly positive with underlying rate improvement at 3%. New business is down modestly compared to the prior year quarter, as intentional underwriting actions in the United Kingdom and Lloyds were partially offset by continued growth in personal lines products in Ireland.

We continue to monitor the analysis on impacts of the financial marketplace disruptions on our Management Liability business, which we have shared with you over the past couple of years and our conclusions remain the same. Our current loss estimates continue to be within our planned expectations.

So overall for the segment, our consistent focus on strategic underwriting actions has resulted in some intentional rate and growth variations by products within Financial, Professional and International. We’re very pleased with these results and continue to be encouraged by both our top line performance and underlying profitability within this book of business particularly in light of the difficult economic conditions.

Turning to slide 21 in Personal Insurance, both the auto and property businesses continued to perform well given the current economic environment. Full year operating earnings were up 29% year-over-year driven by lower catastrophe weather-related losses in the quarter and in the current year.

While we did not encounter an event the size of Hurricane Ike in the current year, we did have catastrophe losses that were consistent with our 2009 expectations. Additionally non-catastrophe weather was active throughout the year and marginally exceeded our expectations.

Moving to the quarter, operating earnings are down slightly from the same period last year due to less prior year favorable development and a reduction to Hurricane Ike’s estimate in the fourth quarter of 2008 and the late development of auto claims at year end 2008.

Agency net written premiums which exclude any premiums attributable to our recently announced direct-to-consumer initiative are up 2% compared to the prior year. By line, automobile premiums are down 1% due to lower policy growth, which we attribute to our pricing discipline, and property premiums are up 6% compared to the prior year resulting from strong renewal pricing and new business growth.

Looking at slide 22, Agency Auto’s combined ratio of 100.9% was higher than fourth quarter 2008 primarily due to the timing of 2008 weather-related losses. Specifically during the last few weeks of ’08, we experienced heavy weather activity and those losses developed into early 2009. If we strip out this noise and take into consideration the expected fourth quarter seasonality, we believe our auto product is achieving margin improvement due to our local and disciplined rate actions more than offsetting current loss trends.

Agency Property’s combined ratio when adjusted for cats was 76.6%, two points higher than the fourth quarter of 2008. Like the rest of the industry, we are seeing some loss cost pressures on our property book primarily driven by the year-over-year increases in the cost of labor and materials associated with weather-related losses.

Turning to slide 23, we continue to be pleased with our Agency Auto production results especially in light of current market conditions. While policies-in-force are down, retention is flat compared to prior year quarter with continued positive renewal premium change. Overall, we feel good about our new business production as we see the decline we experienced in previous quarters flattening out.

We remain pleased with our Agency Property production results for this quarter. In spite of the difficult housing market, all of our production metrics improved compared to the same prior year period. Retention, renewal premium change, and PIF growth remain at two-year highs, and new business is up 20% compared to the same quarter last year. So, it’s also important to note that we have achieved these production results with a combined ratio that is significantly below the industry average. So overall a great quarter, record net earnings and earnings per diluted share, and given the economic environment solid top line performance, but we believe that these results are less about the near term economic or insurance marketplace conditions, and more about the long-term capabilities and competitive advantages we have built.

These capabilities are sustainable and we will continue to differentiate ourselves to our independent agents, customers, and brokers through the products and services we provide. So, we feel great about the short-term, and we are just as bullish about our long-term position in our marketplace.

Now let me turn it back to Jay Benet.

Jay S. Benet - Vice Chairman and CFO: Thanks, Brian. Pages 24 and 25 set forth our guidance for 2010 along with certain supporting information. We are projecting fully diluted operating income per share in the range of $5.20 to $5.55, which in round numbers should translate into an operating return on equity of approximately 11%.

Our guidance assumes cat losses of $390 million after-tax or $0.80 per diluted share, an increase from the guidance provided in prior years due to growth in our homeowners business. No estimates of prior year reserve development, either favorable or unfavorable. A low single digit change in average invested assets, ex unrealized gains and losses. Share repurchases in the range of $3.5 billion to $4 billion, and a weighted average diluted share count after share repurchases and employee equity awards in the range of 485 million to 490 million shares.

We thank you for listening and now welcome any questions you might have.

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