The Travelers Companies (TRV)

Q4 2012 Earnings Call

January 22, 2013 9:00 am ET

Executives

Gabriella Nawi - Senior Vice President of Investor Relations and Member of Operating Committee

Jay S. Fishman - Chairman, Chief Executive Officer, Chairman of Executive Committee and Member of Operating Committee

Jay S. Benet - Vice Chairman, Chief Financial Officer and Member of Operating Committee

Brian W. MacLean - President, Chief Operating Officer and Member of Operating Committee

Doreen Spadorcia - Vice Chairman of Claim Services, Personal Insurance, Operations & Systems and Member of Operating Committee

Analysts

Randy Binner - FBR Capital Markets & Co., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Adam Klauber - William Blair & Company L.L.C., Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Amit Kumar - Macquarie Research

Vinay Misquith - Evercore Partners Inc., Research Division

Gregory Locraft - Morgan Stanley, Research Division

Jay Gelb - Barclays Capital, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year Results Teleconference for Travelers. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, January 22, 2013. 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

Thank you, Andre. Good morning, and welcome to Travelers' discussion of our fourth quarter 2012 results. Hopefully, all of you have seen our press release, financial supplement and webcast presentation released earlier this morning. All of these materials can be found on our website at www.travelers.com under the Investors section.

Speaking today will be Jay Fishman, Chairman and CEO; Jay Benet, Vice Chairman and Chief Financial Officer; and Brian MacLean, President and Chief Operating Officer. Other members of senior management are also in the room, available for the question-and-answer period. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will open it up for your questions.

Before I turn it over to Jay, I would like to draw your attention to the explanatory note included at the end of the webcast. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in our earnings press release and in our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward-looking statements.

Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement and other materials that are available in the Investors section on our website. And now, Jay Fishman.

Jay S. Fishman

Thank you, Gabby. Good morning, everyone, and thank you for joining us today. Given Storm Sandy, we are very pleased to report fourth quarter net and operating income of $304 million and $278 million, respectively. For the full year, we reported $2.4 billion of operating income and operating return on equity of 11% and a 9.8% return on equity. Our financial and operational results for both the full year and the quarter were strong and demonstrate the success of the strategies we have implemented over the last few years.

In Business Insurance, excluding National Accounts, we continued to achieve meaningful positive rate gains of nearly 8% in the quarter, while retentions continue to remain stable and new business remained at only marginally lower levels.

Our Management Liability businesses have also produced similar pricing successes over the past year, achieving nearly 8% rate gains in the quarter. The operating environment for our businesses remains the same. Interest rates remain at historically low levels and weather patterns continue to be uncertain. Catastrophe losses this year totaled $1.2 billion after tax, making it another year with a very high level of catastrophe losses by historical standards. As such, we remain committed to our strategy of pursuing rate gains across all of our businesses in order to improve returns. We are particularly pleased with the rate gains we've achieved over the past 2 years and the compounding effect we are now recording.

In Personal Insurance, both our Home and Auto business were also significantly impacted by Storm Sandy. Notwithstanding that impact, we are especially pleased with our Agency Homeowners business, which produced a 96.4% combined ratio for the full year and a 78.7% underlying combined ratio for the year.

In our Agency Auto business, while we believe we are very much on the right path, we are not yet satisfied with our results. Our 99.2% underlying combined ratio for the year is not at a level that produces sufficient returns. As we have discussed previously since the fourth quarter of 2011, we have been experiencing an increase in auto severity, resulting in levels that continue to exceed our expectations. But with the rate increases we have already achieved, earned rate gains exceeded our updated view of loss trend in the third and fourth quarters. In this regard, we are now achieving widening margins and we intend to continue this strategy. Assuming that we continue to achieve rate gains at this level, and the loss trend does not materially increase from current levels, this will result in improved underwriting profitability in the line. Brian will discuss this in more detail later.

Turning to capital management, we remain committed to our strategy of returning excess capital to shareholders. In that regard, we repurchased $400 million of stock in the quarter, bringing total capital return to shareholders in 2012 to over $2.1 billion, including $700 million of dividends. Since embarking on our long-term strategy of returning excess capital to shareholders in 2006, we have reduced our shares outstanding by $362 million or 52%.

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