Good morning, ladies and gentlemen. Welcome to the first 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 Tuesday, April 23rd, 2013. 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, Andre. Good morning and welcome to Travelers' discussion of our first quarter 2013 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 Jay Fishman, Chairman and CEO, Jay S. 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. 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 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 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. Jay Fishman.
Thank you, Gabby. Good morning, everyone, and thank you for joining us today. Before turning to our results this morning, I want to take a moment and comment on the events of the last week. No doubt someone will ask about the cost of the events in Boston or in West Texas. Right now, we don't expect either event will be meaningfully costly to us. My real answer is that the human cost is stunning, and we are reminded of the fragile nature of the world in which we live. Our sympathies go out to everyone affected in these horrific events, and we will do all we can to help in the recoveries. As we are reminded of 9/11, we wish only the best for the folks in Texas and embrace fully the sentiment of Boston Strong.
Turning to our results, we are very pleased to report a strong start to 2013 with operating income of $2.31 per diluted share, which is the highest quarterly operating income per share since The Travelers Companies' initial public offering in 2002. Both net and operating income increased 11% from last year's first quarter results to $896 million and $887 million respectively, producing a return on equity of 14.1% and an operating return on equity of 15.8%. Our margins improved significantly with a GAAP combined ratio of 88.5%. Importantly, underlying underwriting margins increased across all our business segments, in large measure the result of the pricing and underwriting actions we have taken over the last few years. Our 90.8% underlying GAAP combined ratio was an improvement of almost four points from the prior year as earned rate increases outpaced expected loss trends in each segment.
While we are certainly pleased with these results, we will continue our strategy of taking the steps necessary to continue improving accident year profitability and returns. Our focus is evident in the production statistics for each segment this quarter. Renewal rates were at or above levels achieved in recent quarters and exceeded expected loss cost trends in each segment. In addition, retention rates remain at very high levels. We also saw modest new business growth in Business Insurance, and while new business in Personal Insurance remains meaningfully down from historical levels, it was consistent with fourth quarter 2012 levels. Brian will take you through the details by segment. I'd like to comment briefly about our total return to shareholders as measured by the net stock price change plus cumulative amount of dividends over the same time period, assuming dividend reinvestment.
We've shown this information in the past and believe it is an important measure of our long-term success. The universe you see on slides four and five contain the 20 largest S&P financial companies by market capitalization, as well as companies in our P&C insurance peer group. As slide four demonstrates, our total return to shareholders for each of these periods is impressive. Slide five shows the return on a Treynor risk-adjusted basis, and amongst these companies, we are first on a one and five-year basis and sixth on a three-year basis. These results are very gratifying. It's worth noting that over the last five years, the compound annual growth rate in our book value per share has been 9.4%. In earnings per share, it's been 8.6%, and in dividends per share, it's been 9.7%. If we include the dividend increase announced today, it's 11.5%.
Before I turn it over to Jay, I want to take a moment and extend the best wishes of 30,000 Travelers employees to our friend and colleague, Chuck Clark. Chuck is retiring after 55 years, indeed a lifetime of service with Travelers. It is not possible to overstate the impact that Chuck has had on so many of us at Travelers, and we will all benefit from his powerful legacy for many years to come. He is the best in our business, and we all wish him the best in this next chapter in his life. I will miss him more than I can express. With that, let me turn it over to Jay.
Thanks, Jay. As Jay said, we're very pleased with our first quarter results, as well as our liquidity and capital positions. Operating cash flows of approximately $530 million was strong despite higher than normal claim payments that were related to Hurricane Sandy. We repaid $500 million of debt that matured in March and maintained our strong cash position, ending the quarter with holding company liquidity of just over $1.5 billion. We returned $476 million of excess capital to our shareholders through dividends of $176 million and common share repurchases of $300 million, consistent with our ongoing capital management strategy. We announced an increase in our quarterly dividend from $0.46 per share to $0.50 per share, an increase of almost 9%.
We also recorded on a consolidated basis, pre-tax net favorable prior year reserve development of $231 million for the quarter, which was lower than the $304 million we recorded in the prior year quarter. Each of our segments once again saw its reserves develop favorably. I should point out that this quarter's reserve development included an unusual item, a $42 million pre-tax charge precipitated by legislation in N.Y. related to the N.Y. Fund for Reopened Cases for workers' compensation. Business Insurance accounted for a little less than half of this quarter's total reserve development. Favorable development in BI was driven by better than expected loss experience and general liability for accident years 2003 and prior, as well as accident years 2004 through 2010, resulting from a more favorable legal and judicial environment than we had expected, and by property loss development for accident years 2010 through 2012.
I should also note that BI reserve development was reduced by the $42 million pre-tax charge precipitated by the N.Y. legislation concerning workers' comp that I mentioned previously. Excluding the impact of this legislation, our workers' comp reserves were essentially unchanged for all accident years. The rest of this quarter's favorable reserve development primarily resulted from better than expected loss development in bond and financial products contract surety business for accident years 2006, 2007, 2008, and 2010. Better than expected loss development in several international businesses within FP&II, and better than expected CAT and non-CAT loss development in Personal Insurance homeowners business for accident year 2011. On a combined statutory basis for all of our U.S. subs, accident years 2003 and prior, as well as accident years 2004 through 2011, all developed favorably in the quarter, while accident year 2012 developed very slightly unfavorably.
Finally, to update you on Hurricane Sandy, our current estimate of total ultimate losses is now $1.011 billion, net of reinsurance and pre-tax, down $13 million from our fourth quarter 2012 estimate. Finally, all of our capital ratios remained at or better than our target levels at the end of the quarter. Net unrealized investment gains were approximately $4.4 billion pre-tax, or $2.9 billion after tax, a slight decrease from the beginning of the year due to the rise in interest rates that took place during the quarter. Book value per share was $68, or 7% higher than at the end of the prior year quarter, and 1% higher than at the beginning of the year. With that, let's have Brian talk about the operations.
Thanks, Jay. I'll go through the segment results in some detail, the overall headline from an underwriting perspective is the margin expansion that we saw in all our business segments. Beginning with Business Insurance, we continue to be extremely pleased with the fundamentals of the business. The combined ratio for the quarter of 89.4 improved slightly versus the prior year, while the underlying combined ratio, which excludes the impact of CATs and prior year development, improved by more than four points. As always, there's some non-run rate items in the quarter, three points of the improvement was driven by earned rate increases that exceeded loss cost trends. Net written premiums increased 5%, with the largest increase in workers' compensation driven by higher rate and exposure in our guaranteed cost and national account businesses.
Turning to the production statistics starting on page 11, overall retention was in line with recent periods at 80%. Pricing remained strong, with renewal premium change over 10%, new business volume was up slightly from recent quarters. Drilling into the pricing results, the renewal premium change was driven by pure rate increases of 8% and exposure of over 2%. The rate gains we achieved this quarter were up slightly from both the previous quarter and the first quarter of 2012. Rate increases ranged from 6%-10% across all lines and were once again led by workers' compensation and commercial auto. As we've explained before, when comparing the quarter's data with prior periods, keep in mind that the data develops over time and can bounce around a bit, this is especially true of exposure.
On slide 15, we show our commercial accounts rate change and retention data for the first quarter of 2013 as compared to the first quarter of 2012. This slide presents a summarized view of how we analyze the pricing and retention on our renewal book to ensure we are taking the right actions. The data is segmented by the individual account's long-term loss ratio, with the bars on the left representing our best performing business accounts with long-term loss ratio of less than 60%, the bars on the right representing our worst performing businesses, that is, accounts with long-term loss ratios exceeding 90%. The results show that retention is stronger for the better business, the rate change is dramatically higher on the poorer performing accounts. I would emphasize that this is summarized data, don't overanalyze the precision on the page.
What this data continues to tell us is that our underwriters are making the right targeted rate decisions class by class, account by account. With the continued improvement in pricing and loss trend holding across Business Insurance at about 4%, we continue to see meaningful margin expansion. In our Financial, Professional & International Insurance segment, the combined ratio for the quarter was 82.3, an improvement of 5.5 points year-over-year. The underlying combined ratio improved nearly four points, driven by underwriting actions across the segment, along with increased rate in our management liability business. This marks the ninth consecutive quarter of improving underlying loss ratios for the segment. Net written premiums increased by 7% in the quarter, driven primarily by lower reinsurance costs across the segment.
Gross written premium showed a modest increase of about 1% in the first quarter, driven by strong rate gains in our management liability book of business, partially offset by a slight decline in surety premium. All in, a great quarter for the segment. In Personal Insurance, operating income was up significantly versus the first quarter of 2012 due to higher underlying underwriting margins, lower levels of catastrophe losses, and higher net favorable prior year reserve development. The combined ratio for the quarter of 89.4 improved more than 8 points versus the first quarter of 2012, while the underlying combined ratio showed more than a 3-point improvement year-over-year. Looking specifically at auto, we continue to be very pleased with both pricing and retention, with renewal premium change of nearly 9% and retention at 81%, both in line with recent periods. While new business volume was down year-over-year.
What these results demonstrate is that we've been successful in achieving rate increases on the renewal book, but our pricing actions have meaningfully impacted our new business, and we are watching this trend carefully. Turning to auto profitability, the underlying combined ratio of 94.4 was an improvement of over a point versus the prior year quarter, reflecting the earned impact of the written rate gains we have achieved over the past several quarters. It's important to remember that there's a significant amount of seasonality in losses for this line, and the first quarter loss ratio typically runs a little below the full year average. I would also note that the unfavorable prior year development in this line is due to a slight increase in our estimate of Sandy auto claims.
Regarding loss cost trends, we've been talking to you about increasing bodily injury severity for more than a year, and we were encouraged that the bodily injury severity trend we saw this quarter remained consistent with what we have seen in the previous two quarters. In addition, earned pricing remains in excess of our current view of loss trend, and assuming loss trend remains at this level, we will see year-over-year auto margins expand for the remainder of 2013. Looking at homeowners, pricing was also very strong, with renewal premium change coming in at 12%, down slightly from the fourth quarter of 2012, but up more than two points year-over-year. Retention remained strong at 84%, while new business volume was meaningfully lower than the prior year quarter due to the execution of our pricing, underwriting, and deductible strategies.
The underlying combined ratio for the quarter of 81.1 improved more than 4 points over the prior year quarter, benefiting from a lower level of non cat weather and fire losses, along with earned rate increases that exceeded loss cost trend. A very strong underwriting result, but given the ongoing volatility of weather patterns, we will continue to implement improved underwriting pricing and terms and conditions. Overall in the segment, there was progress on the underlying fundamentals along with some benefit from the lower weather related losses. It's still a work in process, and we'll continue to execute on our strategy in order to further improve our results. With that, let me turn it back over to Gabby.
Thank you. Andre, we're ready for the question and answer segment. If I could ask you to please limit yourself to one question and one follow up. Thank you.
Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for our first question. Our first question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.
Thanks. I have one question, Brian. You talked about personal lines. You talked about the rate gains you're getting both on the homeowners and the auto side. I think in the Q, the outlook, you mentioned that you expected profitability to be roughly in line with what you saw in 2012. Just trying to square those two items and just one follow up. Thanks.
Specifically, I just want to make sure, that's a homeowners?
I think you said on the 10-Q, it said the outlook for Personal Insurance overall was that profitability should be in line with 2012, or you would expect it to be in line with 2012. Just given that you're taking mid to high single-digit, in some cases double-digit rate gains, I'm just trying to understand why that number shouldn't be better next year than this year?
Yeah. This is Jay S. Benet. What we tried to say on the 10-Q was what we had last year were various quarters that had favorable weather, favorable fire losses. As you can easily understand in the homeowners, it's very difficult to predict what a normal level of these things are.
Thinking about what the outlook for the year was in homeowners, our view was, well, they were favorable last year. Whatever normal is this year sounds like it should be a little higher. Despite having this underlying concept of rate exceeding some view of loss trend, and that's a pretty difficult concept when you get into a business that has so much of its losses tied up in weather and fire type events. We do feel that there's an improvement in profitability coming about through pricing versus this concept of loss trend, but that improvement will be offset if these other levels of losses go back to whatever quote-unquote normal is. It's a very difficult equation, if you will, to try to come up with an outlook for that business. That was our best shot as it relates to homeowners.
Then on the auto side, the view was a little marginal improvement based upon pricing where it is today versus in that business, a much better view as to what loss trend looks like. On one hand-
Better meaning more accurate, more predictable.
Yes. Yeah.
Yeah.
Yeah. Looking at the two combined, one getting better, one if things go back to normal in homeowners, who knows whether they will, getting a little less margin. The two of them should kind of offset and the profitability should be roughly the same level.
Understood. Okay, great. Thank you. Then just in Business Insurance, and we certainly saw exposures kind of pick up in some of the reporting that you provided us with. Just trying to understand. You're taking rate, you're expecting to continue to do that. Your retention is not falling and you're seeing exposures lift. Is that exposures on the business that you had or is that potentially being impacted by new business or new endorsements on old business? Thank you.
Michael, this is Brian. The exposure numbers we show are all on a renewal book for starters, driven by a whole bunch of things. In property, for example, there's been a lot of movement to improve insurance to value. We could have the exact same building, but getting a different insurance to value on it, and that would be driving exposure up. It can be more employees in workers' comp. It could be more vehicles, more receipts on a GL rating. It can be all of those different things. As I mentioned in my comments too, I would also point out that the granular nature of the exposure data, in particular on commercial accounts, moves around a bit as premium audits come in, et cetera. There is a lift there, but maybe not as dramatically as some of that data shows. It moves around.
The premium audits have been trending in which direction recently?
For the last several quarters, they've been pretty flat. They rose dramatically as we came out of the 2008, 2009 time period. Yeah, clearly it's positive. Premium audits are a return to the traditional couple points of positive on average.
Great. Thank you.
Our next question comes from the line of Josh Stirling with Sanford Bernstein. Please go ahead.
Hey, good morning. Thanks for taking the call. This is obviously a great quarter, as we work through results, we're starting to see some players get more comfortable with margins. Obviously Travelers has been the leaders thus far in raising pricing and talking about accident years being not a target. I'm curious to get a sense of how far you think we may have to go in pricing. You're guiding to continued pricing in 2013 in your outlook in the 10-Q, would love to get a sense of how much further accident year sort of margin expansion you think that the industry needs to get back to target.
Josh, it's Jay Fishman. I can't speak to the industry or any other company. I can tell you what we're doing. We're going to continue, it's driven by two factors. First, the weather remains unpredictable and just more uncertain than it has in many years. That's been the case for the last several years, that's been driving much of our action. The other part is that as our investment portfolio continues to mature, the effect of reduced interest rates will continue to push the fixed portion of net investment income down over the next several years. We've provided those projections to you previously with, well, actually, they're more than projections. They're almost the actual numbers, such as the bonds as they mature will be reinvested. I would refer you back to that schedule to get some sense of that impact.
The net investment income will continue to decline for the next several years at least, unless interest rates change. The weather remains very unpredictable and uncertain. We're going to keep going.
That's helpful, Jay. The other thing that's surprising about this, just as a follow-up. A couple of years back, it was clear that it was easier to maintain margins and maintain pricing in the soft market in the smaller areas and personal lines. It sounds like, if I'm interpreting what you guys are saying correctly, that you think that there is more pricing momentum to continue in the larger mid-market commercial accounts and national accounts businesses as opposed to the smaller businesses and personal lines. I'm wondering if you can talk about, one, I guess, if that's right, but then also just underlying that, how those two different markets have diverged and what we ought to understand about how they operate differently. Thank you.
No worries. We tend to think of those markets really in three segments, and even that's an understatement of what the real environment is. We tend to think of small, middle market, individually underwritten accounts, and then the national accounts business. Certainly over a long period of time, the competitive dynamics in the national accounts arena in particular has been more dramatic than the level of competition in the smallest accounts. In fact, if I recall correctly, I don't think that renewal price change in our select business actually ever went negative. We should check that, but that's my recollection. I don't believe it ever did. Obviously it did in middle markets. For those who engage in the real national accounts business, and I would observe that our participation in that segment is actually relatively modest. That's been the most competitive.
That's a historical framework, I think, around which to think of pricing. For what's happened over the last several years, we have been successful at passing along price increases, both in our small commercial business as well as our middle market individually underwritten businesses. I'm not sure that the differences in the ability to pass, or at least as measured by rate gains or renewal price change in the small business, I don't think that there's been a significant difference in the ability to be successful in those two segments. The dynamics are quite different on the individually underwritten business. It's account by account. It is, in many cases, loss driven. It's the experience of the individual account. In select, you're dealing with class underwriting. You're dealing with, think of it as one would personal lines, a price established for a class of business.
The nature of the underwriting decisions are different, but the results have been interesting in that we've been successful at getting rate gains in that small end as well as the individually underwritten business that are largely in the aggregate the same. Do you want to talk about national accounts at all? I'm looking at Brian.
Yeah. National accounts is a little bit more of a service model. A lot of what we do there, the majority of what we do on the casualty side is all loss responsive. The market conditions have been such that our service capabilities have been viewed very favorably, the pricing's improved there pretty dramatically. We've done really well there. We feel good about it. We're not a large casualty risk taker in that space.
That is an important distinction. Even our national accounts business will write national property on a guaranteed cost basis. We'll do that.
Our casualty business, both in terms of liability as well as in particular workers' compensation, is largely, in one fashion or another, a fee for service business where we are managing a claim on behalf of the client. We are not, as one would think of it, a guaranteed cost risk taker in the larger end of-
The risk we would take there would be excess.
Yeah. Exactly right. I hope that is helpful.
Thanks very much.
Our next question comes to the line of Charles Sebaski with BMO Capital Markets. Please proceed with your question.
Good morning. Thank you for taking my call. Just had a question about the personal lines business and the change in PIF this quarter. While the retention seems to be holding constant on both the agency auto and agency homeowners, there's been a pretty significant decline in PIF year-over-year. I wonder if you could just give some more insight on it, just a rate change or a competitive dynamic shift.
This is Brian. I'll start. We're clearly watching that closely. Obviously in our statistics, you can see the renewal book is performing well. We feel great about that. The actions that we are taking, and we believe it's very directly tied to the actions we're taking from a pricing, deductible, underwriting perspective, specifically on the last point there on homeowners, is impacting our new business volumes and our competitive position in the marketplace. Like I said, we're watching it closely, and we're going to continue to manage it. We're committed to improving the profitability there. I don't know, Jay.
I think you've expressed it right. In the homeowners business, our sense is, and this is more anecdotal than factual, our sense is that the increase in minimum deductibles, in particular in not an insignificant number of states to really try and bring the policy back to its historical intent, is having an impact on new business competitively. It had been our hope, I think more than anything else, that the weather changes that we're confronting, those are systemic. They're not unique to us. They are systemic in that any thoughtful underwriting driven company would, in the long run, evaluate how you make a reasonable return in that business.
We've taken the steps that we think make sense for us, where we're not going to allow our business to continue from a policy in force standpoint to decline in double digits for long without beginning to take other steps that we might have to take. One of those steps is not To reengage in the business and make substandard returns. We'll have to wrestle with the strategy and how we implement that in the marketplace if what we're doing now, strategically and tactically, doesn't turn out to be competitively viable. That's why Brian's comment that we will continue to watch this carefully.
I guess just sort of a follow-up to that, any thoughts on how the direct-to-consumer channel is sort of coming along or any growth plans to sort of push that line either advertising or otherwise accelerate the development of the business?
Not yet. The test that we're actually continuing to do internally, we refer to as Little America. Our Little America test is, I don't know whether it's two or three states, but we're actually doing pricing testing in those two states, picking states where our agency business was not nearly as prominent as other states, where we can determine the price elasticity of the product and what actions we take and what drives volumes. We also believe in learning about this, that the notion of what I'll call traditional advertising, media-based advertising, that may have run its course, meaning we're just not convinced that taking a substantial amount of resources and applying it in traditional media channels actually is going to result in a growth strategy for a business.
We have been deeply exploring digital and the way to drive digital business around it, which we think, at least at this point, has more viability to it and a greater impact. That's at least a learning in the process that it's possible that American eyeballs are just exhausted from auto insurance ads, and to become another name in that quest may not make a great deal of sense. Lastly, we watch with interest who responds. We're always wrestling, not wrestling, that's actually an incorrect word. We are evaluating, is perhaps better, the dynamic of who responds in that channel, the nature of the customer, and always wanting to make sure that when we are ready to launch this more substantively, that we really understand the customer that's responding, and we like that customer. Those are still learning points for us.
Until we really feel comfortable that we know what we're doing and we have a likely successful outcome, we're going to keep testing and making sure we wire the thing up properly.
I appreciate the input.
Thank you.
Our next question comes from the line of Amit Kumar with Macquarie. Please go ahead.
Thanks, good morning, and congrats on a very strong quarter. I guess two quick follow-up questions. First of all, if I look at slide 14 for other Business Insurance, it seems that exposure rebounded meaningfully over the past few quarters. Can you just sort of delve a bit deeper into the cause for that?
Yeah. This is Brian. A decent amount of that business is property. It's got our national property business there. It's got our marine businesses there. As I said, insurance to values improved pretty significantly there, so we've had some movement. Some of the other activity in oil and gas has moved there. It's a couple specific things. I wouldn't read robust economic growth into it.
Okay. No, that's helpful. I guess the only other question is going back to the charge regarding to the New York Fund for Reopened Cases. Can you sort of just expand on that? Is that the fund which will close at 1/1/2014? I guess what I'm trying to figure out is there a possibility as more new claims come in, could there be further adjustments down the line? Thanks.
Sure. You're welcome. It's Jay Fishman. Yes, this is the fund that will close 1/1/2014 as a result of legislation undertaken in New York. Your question actually is quite relevant. The $42 million pre-tax that we've provided is an actuarial estimate of the amount of reopened claims that would have been cede-able to the fund. As a consequence, we did not build into original loss estimates, loss picks, if you like, in our workers' compensation business. Now, that's the best estimate we have, given all the data that we have, of the amount that will no longer go back to that fund, so we have to provide for the reserve levels. If, in fact, the claim activity is different from that actuarial estimate, yes, we will have a variance to that $42 million prospectively. It can go up or down, obviously.
The answer to your question is yes, that's correct.
Okay, thanks.
There isn't anything structural.
Sorry.
There isn't anything structural that will require us to take further action. If our estimate's right, we think we've appropriately assessed the liability.
Got it. Okay, thanks for the answers.
Our next question comes to the line of Michael Zaremski with Credit Suisse. Please go ahead.
Hi, thanks. I was hoping we could flesh out the audit premiums impact during the quarter. I believe it was a component of healthy growth in at least one line. I was curious if it benefits the combined ratio in a way that we should be cognizant of as well.
This is Brian. I'm thinking through the question for a second, I don't think it has any impact on the combined. As we say on the pages of, what I'm looking at the page numbers 11, 12, 13, those are illustrative production statistics that we use in managing the business. Particularly in commercial accounts, how the true-ups of audit premiums flow through that data develops over time. From a loss ratio perspective, I don't think it has any impact.
Without getting into the details of accounting, we have this thing called earned but unbilled amounts on the balance sheet that's trying to take into account everything we know about the particular policy holders that we have. There's nothing really about the audit premiums per se, that are going to drive a major change in a combined ratio in any given quarter. It's just all part of the entirety of the estimation process. Then as far as the overall level of audit premiums this year in the first quarter versus last year, there really wasn't a significant change in the dollar amount. As it relates to premium differentials from one quarter to the next, it's not driving that either.
We actually make an estimate and accrue on a regular basis the amount of estimated audit premiums that we project. Then obviously as each policy ends and each policy audit occurs, we will make an adjustment to that accrual either up or down, depending on it. In the financial crisis, what happened, the reason that it became a more substantive issue, was that we had never actually seen audit premiums go negative. We were not accruing on the premise that they would be negative, we had significant adjustments then relative to that. Now it's more consistent with historical patterns and is so no. I need to correct one thing I said earlier. I'm reminded by Bill Cunningham, who is here. I said that I didn't recall that select RPC had ever been negative and in fact, it was in the RPC-
Fourth quarter
in the fourth quarter of 2008. The others were third quarter of 2008 and first quarter of 2009, it was flat, but fourth quarter of 2008, it was modestly negative. Apologies for my memory not being perfect on that.
That's very helpful. Lastly, I see The Travelers stock valuation has increased fairly meaningfully. I noticed that share repurchases plus the dividend lagged net income by a fair amount this quarter. Is that due to the debt repayment? Is there a change in philosophy prospectively?
Yeah. There's no change in philosophy. As we've said before, there's a lot of timing differentials that take place as to when you earn the money, what monies are up at the holding company versus in the operating company. There's absolutely no change in philosophy.
Thank you.
Our next question comes to the line of Gregory Peters with Morgan Stanley. Please proceed with your question.
Hi. Thanks. You guys are actually sitting at your target ROEs, at least for one quarter. I'm wondering, how does that shift your thinking in terms of managing the business? Even in a low interest rate world, you're getting where you want to be. How do things change?
Yeah, Greg, we reflect again sort of the same comment I made earlier. The fact is that on an accident year basis, excluding the favorable reserve development, we are not at that level, and going to be compounded by the fact that investment income in the fixed portfolio will continue to decline. That's a certainty unless rates change. Then the third piece is that weather remains very unpredictable, and the fact that we had favorable non-CAT weather in one quarter is certainly not enough for us to conclude that anything is different. Our analysis is largely the same, we're going to continue to keep pushing.
Okay. In a way, you're basically normalizing all that stuff when you talk about that mid-teens over time.
I'm glad you said it. The slide is clear. It says mid-teens ROE over time. I said several quarters ago that that was not achievable in this environment. On an accident year basis, I still don't believe that it really is. As a consequence, we were going to leave it in place as an aspirational goal, I think are the exact words that we used. That's where we sit today. As a consequence, we'll continue to push.
Okay, great. Perhaps the only negative thing in a very strong quarter was just some clarification around the workers' comp reserve side. I understand the one-time charge. There were no releases anywhere across the book in workers' comp. I'm wondering, is that the first time that you haven't released from workers' comp reserves? Should we be concerned that the last couple of years have developed unfavorably there?
This is Jay Benet. What I did say was that there was no
No change really in workers' comp. This is the first quarter of the year, and workers' comp is a long-tail line, as you know. While we look at everything on a quarterly basis, we don't necessarily have adjustments to all of our reserves on a quarterly basis. I wouldn't read into that other than, we put up reserves in the fourth quarter, and we still feel very good about where those reserves are, and we'll see how they develop going forward.
I'd make an observation, even though it's not the question that you're necessarily asking. We were sure that somebody was going to ask us about frequency in workers' compensation and the loss trend and kind of where things are in that regard. Just reflecting back on our comment a couple of, I think it was actually two years ago, a year and a half, two years ago, which is that the frequency dynamic has indeed returned back to its long-term trend line, which is really good. It was the blip that we saw, I think it was in 2010. We attributed it to late filed claims as a result of the financial crisis, that frequency line has now returned back to its long-term trend line. That's absolutely no guarantee that it will stay there.
It may change next quarter, we were just prepared for that question we thought someone would ask. We feel actually quite good about the workers' compensation business. We obviously do have a view on what the accident year returns are in the workers' comp line across all the businesses, and we are very much on track there.
Okay, great. Thanks. Congrats on the quarter.
Our next question comes to the line of Larry Greenberg with Ladenburg Thalmann. Please proceed with your question.
Thank you. Good morning. Brian, I know you said not to microscope slide 15 of the deck on the pricing changes by band, I'm just curious. For the middle band, retention is down a decent bit, versus a year ago, where the outside bands, it's improved a little bit. I'm not sure it matters, but I'm just curious if you have any theory what's going on there.
Yeah, I think so. Part of it, the honest answer to that is probably the middle bar there in blue was a little too high a year ago.
Yeah. Okay.
As we looked at marketplace opportunity and the profitability on that business, that is 60%-90% loss ratio business. There is a wide band within that. As we try to emphasize, this is a real simplification of how we look at it. In every one of our businesses, it is at least quintiles, in many it is deciles, and we are looking at all the stuff in between. I wouldn't read too much into that dip. A piece of it was, I think, as we looked at the data a year ago, we began to execute more granularly there and push on the right accounts. We actually feel good about the progress there.
Bill Cunningham actually a year ago said that there was real opportunity, or so he thought, particularly in the right side of this graph, the over 90 segment. If you take a look at what has happened since, the results are just, you could not have scripted them much better. Retention remains at relatively, let us call them low levels, but rate is even higher. Again, just an analytical validation of the strategic and operational approach that he described a year ago.
Right. Very helpful. Thanks. Just a quick follow-up on the direct business. Your statutory underwriting loss there actually declined pretty significantly this quarter. Clearly, part of it was driven by less expense spend. I am just wondering, relative to your comments earlier, might we be looking for kind of a new baseline underwriting result there, thinking about it holistically?
The result very specifically is a function of reduced national media spending, advertising, as we have pursued this Little America strategy. Greg shared with me, it is two states that our media and digital spending has been very targeted because we are trying to generate activity and results in those states so we can learn about price elasticity. As a consequence, the aggregate amount of spending is down. I would not overreact on a permanent strategic analysis as to what we have been doing these last few quarters. This is a very targeted moment for us to determine pricing sensitivity, and as a result, less advertising spending is needed to generate the results.
It's no top-down decision at this point that we want to cut our losses, not eliminate them, but we want to bring down our underwriting loss from this initiative.
No. Quite the contrary. The best way to answer is we remain committed to the strategy. As I've said before, we want to make sure that we know that we have a financial success. It is far easier, I'm not saying easy, but it is easier to have a marketing success and a financial disappointment. We are guarding carefully against that. As a result, we want to make sure that not only do we have a pricing profile that is competitive for our brand, but that the pricing strategy there can produce a reasonable return. That it just takes time for sales to occur, losses to emerge, and to evaluate the performance of the business. We're just not. There'll always be another 25-year-old generation that's coming of age that needs insurance.
Granted, there's certainly activity today, but we feel strongly, having years and years ago now had a marketing success and a financial disappointment, that we're just not going to go down that path. Urgency, to go quickly is not the measure here, it's to go successfully.
Thank you.
Our next question comes to the line of Randy Binner with FBR. Please proceed with your question.
Thank you. Question on reserves and the commentary that the legal environment is better than expected in the 2010 to 2012 accident years. I just was wondering, we're seeing that across a bunch of companies, but it's still surprising to me that the legal environment was so good in that time, given the economy. I'd appreciate any color on your thoughts on why that's been the case, why you've had less exposure legal-wise on casualty lines in that period of time.
Good morning. This is Doreen Spadorcia. I'll try and answer your question. I'll tell you, we had exactly the same assumption when the economy started to turn. We were worried about not only that, but political environment. We watched down to the county, what's happening around jury awards, settlements, et cetera. The best I can give you is we think that the financial crisis probably encouraged people to want their dollars faster. There were opportunities for settling some cases that maybe in the past they would have waited to see what the amount would have been. We also took very targeted approaches in certain jurisdictions that we thought we had the ability to set some good precedent. We've just found that the willingness for people settling has been, they want to do that sooner rather than later. Whether that will continue, I don't know.
We've also seen cases that have gone to verdict. We thought again, that there might be some view that this is a bad economy, people need the money, where people on the jury have said, "This is a lot of money given this economy." Even the things that have gone to verdict on some of the kind of GL and other things, they've been more reasonable than we anticipated going into this kind of economic environment. Again, that's just our view.
It's not for lack of effort on the part of the trial bar, though, right? I mean, they're very well kind of financed right now and very aggressive. It's more people wanting their liquidity. I guess that's the takeaway?
I can tell you there's a lot of advertising still for the plaintiff's bar looking for different kinds of cases. There's unique financing tools that people are using around big kinds of lawsuits. You're right in that regard. I just can tell you what we're seeing. I don't know if that's across the board.
That's very helpful. Just one more on reserves, and that is on, it was 2010 to 2012 that developed most favorably from the commentary, but not kind of 2008 and 2009 and prior. Time marches on and those years are getting seasoned. Are we getting to the point now where kind of the 2008 and prior accident years kind of stop giving as much from a redundancy perspective?
This is Jay Benet. I'll answer the question by saying every time we provide information on reserves, it's our best estimate, and we don't have a crystal ball as to how these things are going to develop. I think if you think of the arithmetic associated with reserving, as years mature, more and more claims are paid, more and more claims are settled. It's logical to believe that as the accident years mature, there's going to be less development. You just have to wait and see how these things actually take place. I mean, we certainly carry IBNR for all the years you mentioned. Sometimes you have large cases that you think are going to cost you X, and they cost you less or more, whatever. We just have to see.
I think centrally, the less IBNR you have, the less uncertainty you have, all things being equal, the less development you'll have.
This is Jay Fishman. Some observers of the industry spend a lot of time commenting about reserve development from hard years, hard cycles, or soft years, or soft cycles, people who embrace that thinking can come to view that particular years will be more productive than others. We don't agree with, at least for us, I'll speak about Travelers. We just don't believe that. We don't do it. We make our best estimates all the time. Our loss estimates are not driven by the revenue strength of that business. They're just not. We don't look at any years necessarily as being more potentially productive than others. As an old year rolls off, a new year comes on, and it just keeps going. We just don't spend a lot of time obsessing about individual accident years and what they're producing.
Randy, it's Alan Schnitzer. I would also add to Doreen's response that over that period of time that you mentioned, we also had other developments like the Private Securities Litigation Reform Act that was really pro-defendant and made some cases harder to bring. Other developments like the Class Action Fairness Act. There's been some important cases in the Supreme Court that I think have been some setbacks in some cases for the trial bar. I think all those things contribute. We, for example, just had an important win at the Supreme Court on an interpretation of the Class Action Fairness Act in Standard Fire versus Knowles.
The cases go both ways, of course, I think if you look back over the last five or six years, you'd probably on balance and maybe just at the margin, on balance, see a slightly improving environment from the defense side.
Thanks for all the responses. Obviously, it's a very good claims and underwriting result. Thanks.
Our next question comes from the line of Jay Gelb with Barclays. Please proceed with your question.
My question has been answered. Thank you.
Our next question comes to the line of Vincent D'Agostino with KBW. Please proceed with your question.
Hi, good morning. Thanks for taking the question. Back to one of your earlier comments about auto loss cost trends maybe stabilizing a bit. I'm just curious if you think that this is going to drive just a newfound rate competition in the personal auto industry. To your earlier comments, maybe not with Travelers, but is that something we might be able to expect the industry to ramp up on?
It's Jay Fishman, I'm going to turn it over to Brian. My comment about loss stabilization was, at least mine, was specific to workers' compensation, and it was a frequency comment where we had seen a tick up in frequency, and it generated a lot of questions over the last several quarters. I was just commenting that frequency trend was now back in line.
Maybe you're referring Vince back to my comment where I was talking about auto severity. Just to be crystal clear, we had been seeing for, and this goes back a little over one year ago now, we started talking about a ramp-up in auto severity. The good news is that has leveled off third quarter, fourth quarter, this quarter at about the same level, but it is still higher than historical norms. The rate of increase isn't increasing anymore, but we've still got some severity trends.
That's actually an important point. When we say leveled off, we don't mean that severity has gone to zero.
Sure.
What we mean is that the rate of increase is more consistent.
Right
Our own expectations and to some extent, historical trends, it is still increasing.
Yeah. We obviously don't know what our competitors are planning to do. We do know that the line, the personal auto line of business, has gone from a 94 to 102 combined the last six years for the industry, in an environment with declining interest rates. From a return perspective, it's not the healthiest line of business for the industry. We do look at the publicly available rate filings of our competitors, and that may indicate some movement upward in pricing, but we'll see what actually happens in the marketplace.
Great. Thank you. Winter Storm Nemo was, at least from the northeastern standpoint, was a fairly large storm event, but we haven't heard anything about Nemo from really anybody yet this quarter. Is it safe to assume that from an industry standpoint or Travelers standpoint, that was basically a non-event?
I'm just looking at Cat 96.
96.
Is that Cat 96?
Cat 96, I believe.
Yeah. I'm going to look that up really quickly.
You know what, in the meantime, why don't we go to the next caller and then we'll come back on that.
Looks good.
Andre, if you can take the next and last question. Thank you.
Thank you. Our final question comes from the line of Brian Meredith with UBS. Please go ahead.
Yeah, thanks. Brian and Jay, I'm wondering if you could talk a little bit about your distribution and kind of what their mood is right now. We're going into third year of price increases. Are they just getting tired of it? Are they accepting of it? What's kind of been the reaction?
I think the numbers largely tell the story, and I'll go through it. Although the senior team here spends a lot of time with agents and with brokers. If you had to do a short summary, you'd say on the commercial line side, the agents feel terrific. They're feeling really good and really supported and solid. They believe that they can talk to their customers, explain the rationale. The best remind their customers how long pricing went down and actually do a pretty good job comparing where even in a lifted environment, how that compares to historical premiums. They're feeling pretty good. I don't know if you agree with that, Brian, but that's.
I do. We've spent in recent weeks, we've been out with agents a lot and talked to a lot of them. I think, again, not to overemphasize the data on slide 15, but how we execute in the marketplace and really doing it on a granular basis works with them. The more we're having specific conversations about accounts or classes of business, the more focused that is, the better it will be received. The more it's viewed as just a broad brush approach to the marketplace, the more challenging it will be.
On the personal line side, what we're hearing from them is what you see in the numbers, which is that our change in minimum deductibles, our change in underwriting, or to some extent, our changes in rate are causing us to be less competitive on new business. They share with us that the renewal book is fine, and I would say, I don't know that that really reflects a mood, but this is a conversation that we have with producers and agents all the time, that they're certainly confirming to us that for the moment, the strategies that we're taking in home and in auto on the new business side, I would say only, on the new business side only, at least for the moment, is causing us to be less competitive than historically we've been.
We certainly listen to that, and we see it in the numbers, and no great surprise to us at the moment.
Just to circle back on the previous question, just a couple of quick comments on the big winter storm that we had a couple of months ago. We've clearly gotten some claim volume out of that. It hasn't been outsized. It was obviously contemplated in what we booked in the quarter. A couple of comments. From an auto perspective, at least up here in Connecticut, Massachusetts, and the Northeast, they really shut down the roads a lot, so there wasn't a lot of activity. The type of claims that we get, the really damaging winter storm claims we get tend to be when there is either really extended events, when the snow sits for months on top of roofs and you get damage there, or you get collapses.
Fortunately, in this event, although we got lots and lots of snow in a short period of time, it warmed up, it got cleared, and so it just wasn't a tremendous event for at least us, and it doesn't appear to have been in the industry either.
Great. It looks this concludes our call. I don't think we have any more questions in the queue. If anybody has further questions, as always, Andrew Hersam and I are available in investor relations. Thank you, and have a good day.
Ladies and gentlemen, this does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.