Travelers Earnings Call NUGGETS: Homeowners Initiative, Non-fixed Income Portfolio
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Michael Zaremski – Credit Suisse: I’ve been hearing that you and others talk about terms and conditions changes within the homeowners. Can you update us on that initiative, specifically how far along the process are we, and can you detail what the main initiatives are? I believe they are on the deductible side.
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Brian W. MacLean – President and COO: This is Brian, let me start. Clearly the main initiative is the deductibles. We have been pushing this – I would say we started about 12 months ago. We have been pushing more dramatically in the last six months. We’ve got just about 40 states now where we are pushing higher deductibles than we have historically had and that is the main initiative. In some places – in most places it is heavily on the new business side of the equation. So it’s not as much broadly across the renewal book although in the more troubled areas it’s even there. We are pretty encouraged by fairly recent activities and it started with actually an article in the Wall Street Journal Online the other day about insurance deductibles soaring and talked about kind of a widespread movement to get deductibles up. So that is clearly the biggest area. Also from the underwriting and terms perspective I think we and some other companies are looking hard about how we cover roof hail losses and so there’s an underwriting dynamic about being more specific – doing a better job of selection on the age of roof, the quality, the type of roof, et cetera, and also looking at how we could potentially be changing the coverage around covering roof losses. Those are probably the biggest areas.
Jay S. Fishman – Chairman and CEO: The only thing I’d add which Brian made brief reference to, but over time no matter there is a change in our underwriting process to actually exclude homes that have roofs that are of a particular age compared to – and it varies based upon the type of roof it is and its structure. But setting up a hard line standard to the extent that an age of the roof exceeds X number of years or X percentage of its useful life, we don’t underwrite the home at all and I don’t know how many states that’s in Brandon, I don’t know if you know either.
Brian W. MacLean – President and COO: Yes. I don’t know.
Michael Zaremski – Credit Suisse: So, I mean do you think – is this the – (46) seems like a lot, so should we expect, I mean in your accretion rates in homeowners in excess of I think 8%, 9%, 10%, plus you’re making deductible changes. Should we expect – is the expectation meaningful improvement down the road?
Brian W. MacLean – President and COO: I’m trying to think what exactly by meaningful…
Michael Zaremski – Credit Suisse: In terms of the margins it’s just seems like there is a lot going on there more than just rate.
Jay S. Fishman – Chairman and CEO: It’s Jay Fishman. I think two things. First, the rate side is not only new, but also renewal and so the impact of the rate is taking effect in the book right now. What is completely unpredictable is the weather, and the weather losses are such a meaningful part of homeowners’ losses that for us to speak about anticipating improvement implicitly implies an assumption about weather. I would tell you that you importantly here the actions that we’d taken on rate were doing fine, pleased with the retention in the homeowners book. To the extent the change in deductibles are predominantly in new business, we anticipated and are seeing a drop off in our new business as other competitors have not yet become – have not changed as much as we have, that’s why the article that Brian referenced a moment ago about showing deductibles was interesting to us. So, I’d say that, yes, we feel very good about the rate actions in the renewal book and that’s looking pretty solid to us and we will ultimately see what happens with our new business driven by the change in deductibles in those states.
Brian W. MacLean – President and COO: But you’re right Mike, together they should have a meaningful impact on margins. The big variable is what the weather is going to be.
Michael Zaremski – Credit Suisse: Then lastly as I look at Slide 10, on Business Insurance. The renewal rates change, 1Q 7.5%, 2Q 7.4%. I believe you guys have a pretty decent line of 30, 60 days out on pricing. Do you think you’ve reached an absolute level of rate increase that we should maybe think about rates moving downward?
Brian W. MacLean – President and COO: This is Brian again, Mike. Let me take a shot. Again I’d start by reemphasizing that 7.5% rate, 9 points of price and 4 points of trend we’re getting some pretty good margin expansion at these levels, but I get your question, which is where is it going and I’ll start with the caveats we always give. We don’t have a magic crystal ball, so we’re not going to make any long-term prediction. With that said a couple comments. We’ve talked for a long time that the two main things that are driving pricing improvement at this time are the lowering interest rates and the increased whether volatility. Certainly, nothing happened this past quarter that mitigated those two factors. So, I think there’s a lot of reason why there should be something sustaining it, but the thing that I’d reinforce is, to us it isn’t about a magic number. Believe it or not, we do not have an aggregate target for a pure rate number that we are shooting for. We’ve got about 1 million accounts every year, so one-twelfth of those coming through every quarter and it really is a very granular how we approach it, no broad brush answer. So, what we really focus on is the execution underneath and are we getting the right rate increases on the right accounts. Our goal is not to get higher rate. Our goal is to improve profitability. Now we understand that in the aggregate more rate is better than less in that venture, so it’s hard for us to pinpoint exactly where. I mentioned in the distribution slide, the fact that we had 1 point higher rate in our worst performing business and 7 points higher retention suggests that there’s more opportunity there. If that is in fact the case, we’ll be encouraged, but we’re going to execute on a very granular level.
Jay S. Fishman – Chairman and CEO: I’ll only add just a couple of comments because I think it is so important it really speaks to the fundamental strategy. We’ve got underwriters out there who were looking at all these individual accounts every day. Brian’s right, almost 1 million business accounts over the course of the year. We’ve got one underwriter doing an evaluation of an individual account or an individual class of business and suggesting pricing. We have accounts that produce very attractive returns. We have accounts that produce much less attractive returns. How the mix actually shows up this month, which accounts are coming due, are they weather exposed, are they less weather exposed, and they’ve been consistent with our loss expectation, have they not been, is really going to determine what the individual underwriter decides as it relates to that account. So, our look at 7.5 versus 7.4 is that you can’t conclude much of anything from that, and I’m not even sure in the aggregate, it’s all that relevant. The breadth, and we’ve shown this before, the breadth of account pricing changes in our account base is really quite remarkable. It goes from accounts that are getting 10% or more of rate reductions all the way up to accounts that are getting 10% or more of rate gains. So, it’s really left to the underwriters. What we will say is that we’re not hearing anything anecdotally from our field organization that would cause us to believe that continuing to improve profitability is becoming meaningfully more challenging. We ask that all the time and we’re just not hearing a message that says we are beginning to find this competitively difficult. The feedback from the field organization is actually pretty encouraging and it’s one of the important reasons that we have confidence that we will continue to move forward.
Non-fixed Income Portfolio
Keith Walsh – Citigroup: First question for Jay or Jay, just on the non-fixed income portfolio. I read in the 10-Q you expect income in the second half of this year to be more consistent with the second half of last year, which would have a lower after-tax yield than what you guys put up in the first half this year. Is that driven more by how returns are reported on that asset class or more statement where those returns should be relative to current interest rates? I have got a follow-up. Thanks.
Jay S. Benet – Vice Chairman and CFO: Yes. This is Jay Benet. We don’t have a crystal ball to see how the alternative investment portfolio is going to perform. But in looking at what’s its place during the quarter we did have a very strong quarter with regard to private equities and real estate in particular. I’d say in the case of private equities, it was geared more towards the first half of the quarter than the second half of the quarter. I mean you are seeing as well as we are what’s taking place in the economy and in the markets. So in looking out at the second half of the year, we were just more or less looking at the performance of the portfolio in the second half of the second quarter and saying things seem to be moderating a little bit from where they were in the first half of the quarter and where they were in the first quarter. So it’s hard to predict as we said and we will see what happens. But we are not forecasting a precipitous drop, we are just saying, take a look at the first – at the second half of last year as some indicator as to where the second half of this year might be.
Keith Walsh – Citigroup: Then second question for Brian, and I know you’ve already alluded to this on Slide 14. It appears you may have some runway here on the above 90% combined ratio business to really drive rate. Maybe another way of asking this question, is there a more optimal spread in retention between your worst performing business and your middle or best performing accounts, because it seems like it’s a pretty tight spread and you could really drive a lot more rate on that worst performing and see if you could talk to that a little?
Brian W. MacLean – President and COO: So, the thing I would emphasize like I said in the comments is, so the picture we’re showing there is a real summarized version of how we do this. So, as we look at it, I would say directionally, what we’ve seen in the last 90 days is to exactly that point, more opportunity on the worst performing business, whether that’s combined ratio over 90% or however we measure it in different businesses. It gets back to what Jay said is driving that. Potentially, there is a more optimal balance in the retentions there. We’ve got to see how account by account how that all plays out, but we’re very focused on improving the profitability specifically on those accounts and retaining our best business at the best possible terms, conditions (invoiced).
Jay S. Fishman – Chairman and CEO: This is Jay Fishman. In some of our business, we’re looking at these numbers on a decile basis that granular and some we’re looking at it on a quintile basis, that granular. But when you look at the page that you’re looking at, and this is only one quarter to one quarter sequentially, and I’d hesitate to overreact or over predict, because you just don’t know what happened in the field on so many individual accounts. But to see a lift in retention in that 90% and above, on the summarized basis, with only 1 point of listing rate suggest that it would be a useful bucket for us to focus on over the next quarter and see if we can make better, effect more better profit improvement actions in that bucket, but it is only one sequential quarter to another and I wouldn’t overreact to it or overstate its significance. It’s an indicator, an important indicator, but only one.
Keith Walsh – Citigroup: Just a quick follow-up. That 90% or higher combined ratio, what percent of your business is that currently?
Brian W. MacLean – President and COO: I don’t have that exact numbers.
Jay S. Fishman – Chairman and CEO: I don’t know that we’ve ever disclosed it either and it varies by the way by month. What comes due, that was the other part of this that is so important that for competitive perspective, it isn’t something that we want to share, but the mix isn’t the same quarter-to-quarter, which obviously affects not only the retention, but also the rate gains. It keeps moving, but from a competitive standpoint, we just don’t think that’s something that we’d like to share.
Brian W. MacLean – President and COO: I would just say, because I think you said combined ratio. First of all, the loss ratio, and you can look at our aggregate loss ratio, obviously it’s a relatively small percentage, so our aggregate loss ratio wouldn’t be where it is.