The Travelers Companies, Inc. (TRV)

Q2 2010 Earnings Conference Call

July 22, 2010 9:00 AM ET

Executives

Gabriella Nawi – SVP, Investor Relations

Jay Fishman – Chairman & CEO

Jay Benet – CFO

Brian MacLean – President & COO

Bill Heyman – Vice Chairman & Chief Investment Officer

Greg Toczydlowski – President of Personal Insurance

Analysts

Jay Gelb – Barclays Capital

Matthew Heimermann – JP Morgan

Keith Walsh – Citi

Michael Nannizzi – Oppenheimer

Jay Cohen – Bank of America Merrill Lynch

Cliff Gallant – KBW

Brian Meredith – UBS

Paul Newsome – Sandler O'Neill

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the second quarter 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 Thursday, July 22, 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 now begin.

Gabriella Nawi

Thank you, Frank. Good morning and welcome to the Travelers discussion of our second quarter 2010 results. Hopefully all of you have seen our press release, financial supplements and webcast presentation released earlier this morning. All of these materials can be found on our website at www.travelers.com under the investor section.

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

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

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

With that, here is Jay Fishman.

Jay Fishman

Thank you, Gabby. Good morning, everyone and thank you for joining us today. Given the very substantial second quarter weather losses for the entire property casualty industry of course for us, we were pleased with our performance this quarter reporting net income of a $1.35 per diluted share, an increase of 6% from last year's quarter and a return on equity of 10.1%. Recognizing that our operating income of $1.39 per diluted share is about $0.11 below consensus estimates, I would like to make the following observations. First, the $0.11 differential equates to approximately $50 million after tax. I point out that for the first six months of the year we have an excess of $1.3 billion.

Secondly, the shortfall was attributable to second quarter weather losses which aggregated $285 million after tax or $0.58 per diluted share. To put that cost in context, we estimate for catastrophes for the second quarter included in our previously provided guidance was $92 million after taxes or $0.19 per diluted share. As best as we can tell consensus estimates included $0.22 per diluted share for second quarter catastrophe losses. To put the first half weather losses in context, we have already recorded $597 million of after tax catastrophe losses or $1.19 per diluted share. The methods used to estimate our expected annual catastrophe losses indicate an expected annual loss of $390 million after tax or $0.80 per diluted share for the entire 2010 year. So we have been after just six months we are now well in excess of our expected annual loss estimate for the full year.

Recognizing that we do not control the timing of weather, we just take these events in stride. There have been periods where catastrophe losses have been exceptionally low such as in 2006 and 7 and there were times when they ran abnormally high. We praise our product for the long term and weather will occur when it does. We do not believe this high level of catastrophe loss is in any way a result of changed underwriting standards or reinsurance practices and Brian is going to have more to say about our cap losses later.

Third, the quarter also benefited from $251 million or $0.51 per diluted share of favorable reserve development. Again as best as we can tell consensus estimate s for the quarter included $0.23 per diluted share of favorable reserve development. And just a reminder because development is so unpredictable we do not include it in any of our guidance. In terms of the operating environment for the second quarter, we remain quite pleased with our performance in our personal insurance segment both auto and home owners.

Given the amount of discussion at this time last year on our agency auto business, we are particularly pleased with the improving rate of change of policies enforced in personal insurance. Profitability in the first half improved versus last year and we are pleased that the actions taken to improve profitability which we spoke to you about this time last year are coming through in the results.

In our commercial businesses the operating environment really remained very similar to last quarter. Retention rates remained quite strong and rate on renewal business remained positive but it was at a lower level than in the first quarter. The negative impact of the economy on net written premiums has moderated somewhat from recent quarters and we are hopeful that this bodes well for future economic growth. We repurchased $1.4 billion of our common stock in the quarter and since the second quarter of 2006 we have now repurchased over $12 billion of our common stock. As these actions demonstrate, we continue to execute successfully in the marketplace, generate solid earnings and return excess capital to our shareholders.

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