Gabriella Nawi - SVP of IR Alan Schnitzer - CEO Jay Benet - Vice Chairman and CFO Brian MacLean - President and COO Michael Klein - EVP and President, Personal Insurance Tom Kunkel - EVP and President, Bond & Specialty Insurance Greg Toczydlowski - EVP and President of Business Insurance

Michael Nannizzi - Goldman Sachs Kai Pan - Morgan Stanley Paul Newsome - Sandler O'Neill Larry Greenberg - Janney Montgomery Scott Meyer Shields - Keefe, Bruyette & Woods Brian Meredith - UBS Jay Cohen - Bank of America, Merrill Lynch Amit Kumar - Macquarie Group Limited Ryan Tunis - Credit Suisse Elyse Greenspan - Wells Fargo Jay Gelb - Barclays

Good morning, ladies and gentlemen. Welcome to the Fourth 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 January 24, 2017. 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. Good morning and welcome to Travelers' discussion of our 2016 fourth quarter and full year 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 Web site at www.travelers.com, under the Investor section. Speaking today will be Alan Schnitzer, Chief Executive Officer; Jay Benet, Vice Chairman and Chief Financial Officer; and Brian MacLean, President and Chief Operating Officer. 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 take questions. In addition, other members of senior management are in the room, including Michael Klein, Executive Vice President and President, Personal Insurance; Tom Kunkel, Executive Vice President and President, Bond & Specialty Insurance; and Greg Toczydlowski, Executive Vice President and President of Business Insurance. Before I turn it over to Alan, 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 Investor section on our Web site, travelers.com. And now Alan Schnitzer.

Thank you, Gabby. Good morning, everyone, and thank you for joining us today. This morning we’ve released solid underwriting and investment results with record net and operating earnings per share for the quarter. Operating income was $919 million, generating an operating return on equity of 16.4%. This brings our full year operating income to nearly $3 billion and operating return on equity to 13.3%. That’s in line with the 13.5% average annual operating ROE we’ve delivered over the last ten years. During the year, we grew adjusted book value per share by 7% after returning more than $3.2 billion of excess capital to our share holders. Overall, our underwriting results for the year were strong as evidenced by our consolidating combined ratio of 92%. Underwriting results in business and international insurance were solid, and once again, we posted impressive underwriting results in bond and specialty insurance. Despite the disappointing impact of higher than expected personal auto bodily injury losses. Our personal insurance combined ratio for the year was 95.1%, demonstrating the value of having a balanced homeowners and auto personalized business. In our commercial business, we continue to be successful in the execution of our marketplace strategies. That resulted in continued historically high levels of retention and positive renewal premium change in the quarter, all of which reflects stable environment. In our core middle market business peer renewal rates change improved by 4 points from the third quarter as we continue to execute at a very granular level to achieve our written return objectives. I shall hear from Brain in terms of new business, we continue to be quite active in terms of submission and quote activity, but also fall in terms of underwriting discipline. Turning to personal insurance, as you've seen, the results by line were mixed. Our homeowners business once again produced excellent results and grew net written premium for the first time since 2011. In our Auto business, we're clearly disappointed by the underwriting results. During the fourth quarter, bodily injury losses were higher than expected and they developed unfavorably for the first three accident quarters of 2016 and the back half of 2015. Our claim data, the public chatter we hear from others in the marketplace and other third party data, all calls us to continue to believe that our experience is principally environmental as opposed to specific to us or a Quantum Auto product. Whilst trends change in our business, and as I've said before, our objective is to recognize it and react to the data we have as quickly as possible. We're taking actions to improve the personal auto profitability, and Brain will address this in more detail. Before I pass the mic to Jay Benet, let me conclude with this. 2016 was another strong year adding to our long-term record of delivering superior results. We entered 2017 with a great deal of momentum, and we're well positioned for continued success. And with that, I'll turn it over to Jay Benet.

Thanks, Alan. As Alan mentioned, we were very pleased with our results this quarter; a record net and operating income per diluted share of $3.28 and $3.20 respectively; operating income of $919 million, up 4% from the prior year quarter; and operating ROE at 16.4%. These results were driven by the continued solid underwriting performance as evidenced by our consolidated combined ratio of 90%, which included the favorable impact of prior year reserve developments which I'll discuss shortly, as well as the unfavorable impacts and cat losses of the $137 million pretax related to Hurricane Matthew and the fires and Tennessee, and higher than expected auto BI losses in personal insurance. The quarter also benefitted from the settlement of a reinsurance dispute and higher after-tax net investment income, which, after increasing sequentially quarter-by-quarter this year, increased 12% this quarter over the prior year quarter, all due to higher non-fixed income returns. Fixed income NII of $405 million after-tax was down $17 million from the prior year quarter due to the continuing impact of the low interest rate environment. Looking forward, into 2017 and based on the current interest rate environment and the specific securities that are scheduled to mature in 2017, we expect approximately $15 million to $20 million of lower after tax NII on a quarterly basis in 2017 when compared to the corresponding periods of 2016. This is a $5 million per quarter improvement for what we communicated last quarter due to the recent rise in interest rates. And of course, if interest rates were to continue to rise from the current levels, this expected decrease in fixed income NII would be reduced even further. In contrast of the decrease in fixed income NII, non-fixed income NII of $96 million after-tax was up $71 million from the prior year quarter, driven by significantly higher private equity returns. We continue to experience net favorable prior year reserve development on a consolidated basis, which totaled $264 million pretax this quarter, down a bit from the $292 million pretax in the prior year quarter. In business and international, net favorable development of $234 million pretax was driven by better than expected loss experienced in workers' comp and general liability. While in bond in special take, net favorable development of $75 million pretty tax resulted from better than expected loss experienced and fidelity and surety and general liability. Reserve development was unfavorable this quarter, and personal insurance $45 million pretax, driven by higher than expected auto BI injury losses related to the later part of the 2015 accident year. This corresponds with the increase in auto BI loss estimates that we made for the current accident year, which Brian will be discussing. In total, for the full year, we have consolidated net favorable reserve development of $771 million pretax with approximately $665 million coming from our U.S. operations and $106 million coming from international. As I’ve done in the past, I’m also providing you with some inside into what our combined 2016 Schedule P is expected to show when we file it on May 01. On a combined stat basis for all of our U.S. subs, all accident years across all product lines, in the aggregate, would have developed favorably. On a Schedule P product line basis, all of our commercial products will show favorable developments or very modest amounts of unfavorable development. For personal insurance, homeowners will show a modest amount of unfavorable development, primarily resulting from the higher than expected loss experience, that I discussed in the third quarter webcast related to a small number of liability claims from accident years 2013 and 2014, and private passenger auto liability will show the unfavorable development that I just referred to. There are two topics I would like to cover relating to reinsurance. First, we’re very pleased this quarter to have settled with one of our reinsurers in the USF&G versus AMRI at Elcase [ph], a reinsurance dispute that’s been pending for many years. As result of the settlement, we recognize a $126 million pretax, or $82 million after-tax gain, in our fourth quarter earnings. I refer you to the Form 10-K that we filed on November 8th for more information related to this settlement. Second, as shown on page 21 of the webcast, effective January 01, we renewed our corporate cat aggregate XOL treaty that provides coverage for both single cat events and an accumulation of losses from multiple cat events with similar terms as in the prior year and at a slightly lower cost. The treaty continues to provide $1.5 billion of coverage part of $2 billion in excess of $3 billion after $100 million deductible per occurrence. It keeps the same broad peril and geographic coverage and the same positioning of the coverage layer, providing a significant buffer between earnings and capital, the treaty has a single limit with no reinstatement provisions. And please note that the total costs of this treaty and therefore the reduction in costs are quite small in relation to our operating income. Operating cash flows were very strong this quarter, $1.14 billion, including the proceeds from the settlement of the reinsurance dispute I just mentioned, and after making $200 million discretionary contribution to our now fully funded U.S. qualified pension plan, bringing total operating cash flows for the year to over $4.2 billion. We continue to generate much more capital than is needed to support our businesses, and consistent with our on-going capital management strategy, we returned $942 million of excess capital to our shareholders this quarter with dividends of $191 million and common share repurchases of $151 million. For the full year, we returned over $3.2 billion of excess capital to shareholders through dividends of $762 million and common share repurchases of over $2.4 billion. Holding company liquidity ended the year at $1.68 billion, well above our target level. And our debt to total capital ratio, excluding the impact of net unrealized investment gains, ended the year at 22.3%, well within its target range. Net unrealized investment gains were $1.1 billion pretax, or $0.7 billion after-tax, down from almost $2 billion and $1.3 billion, respectively, at the beginning of the due to the recent run-up in interest rates and spreads. As you may recall, we generally as a buy and hold approach with fixed income investing, so any change in unrealized that relates to a change in the general level of interest rates is something we do not pay much attention to. Cash flows from the portfolio are what matter to us. Book value per share of $83.05 grew 4% from the beginning of the year. And importantly, adjusted book value per share of $80.44, which eliminates the after-tax impact of net unrealized investment gains, grew by 7% this year. With that, let me give the microphone over to Brain.

Thanks, Jay. I’ll start with business and international insurance, where we are pleased with our full year financial and production results. We continue to generate excellent returns, achieving a combined ratio of 94.3%. Retention for our domestic businesses remained at historically high levels. And we successfully achieved positive rate change with renewal premium increases of over 2%. As Alan mentioned, retention for the industry remains very strong, reflecting a stable marketplace. And in that light, we were quite pleased that we were able to generate nearly $2 billion of new business premiums, up slightly from 2015. Looking at the quarters financial results, operating income of $722 million was higher than the prior year quarter by $156 million with a very strong combined ratio of 89%. Operating income included the $82 million after-tax gain related to the settlement of a reinsurance dispute that Jay mentioned earlier. This gain was in other income, and accordingly, do not benefit the combined ratio. The underlying combined ratio, which excludes the impact of cats and prior year reserve development, was 93.1. The underlying loss ratio was 1.4 points lower than the prior year due to lower large losses and non-catastrophe weather related losses, partially offset by a modest amount of margin compression. Turning to production, given the returns that we are generating in the segment, our focus continues to be on retention. And we are very pleased that retention for our domestic business remained at 85% for the quarter. Renewal premium change of two and half points included renewal rate change of seven tenths of point, which was higher than recent quarters, while new business came in at $439 million for the quarter. Turning to the individual businesses, in select, retention continued its improving trend and came in at a strong 83%. Renewal premium change was nearly 6 points, and we generated new business premiums of $92 million, up 7% versus the prior year. In middle market, retention of 87% remained at a historically high level, while renewal premium change was over 2 points, including 1.4 points of renewal change, or 4 point higher than the third quarter. New business activity, as measured in submissions and quotes, has been up for the year and in the quarter remained consistent with the prior year. However, as 2016 progressed, fewer of these opportunities met our underwriting standards and/or return objectives, and accordingly, new business premiums of $226 million in the quarter, were down 9% year-over-year. In other business insurance, renewal premium change was down slightly with a relatively flat rate environment compared to the third quarter of 2016. While retention remained strong at 80% and new business premiums up $121 million. New business volumes for other business insurance were impacted by the same market dynamics, I discussed the middle market. In international, production results were very strong in the quarter. Retention remained at 82%, while renewal premium change of over 2 points was higher than recent quarters with the biggest single driver of the increase being Lloyds, which due to the transactional nature of that market, is subject to variability. New business volume of $91 million was up 14% year-over-year driven by Lloyds, including the results of our new global construction and renewable energy groups. So all-in for the segment, it was a very good quarter, capping off the year with strong production and profitability. Before turning to bond and specialty, I want to comment on our outlook for operating margins, which we include in our quarterly filings. Since our 10-K won’t be filed for a few weeks, I would note that we expect underlying underwriting margins and the underlying combined ratio during 2017 will be broadly consistent with those in 2016. This is subject to the usual caveats and forward looking statement disclaimers. I’ll turn to bond and specialty insurance, which continues to perform exceptionally well. Operating income for the quarter of $161 million remained strong and was in line with the prior year’s quarter; as in improved underlying underwriting margin was offset by slightly lower level of net favorable prior year reserve development; the underlying combined ratio of 79.7 for both the quarter and year with the full year result being an all-time best for the segment. On top line, net written premiums for the quarter were consistent with the prior year for both surety and management liability. In our management liability business, we continue to execute our strategy of retaining our best performing accounts while writing new business in return adequate product segments. And so, we couldn’t be more pleased that retention for the quarter was a record 88%, while we added $41 million of new business. Renewal premium change of 2.3 points down about a point from recent quarters, reflecting the mix change impacting average policy duration. The other components of renewal premium change that drive profitability were essentially unchanged. So bond and specialty results remained terrific and we continue to feel great about the segment’s performance and execution in the market. In terms of outlook as with business insurance, for 2017, we expect both the underlying underwriting margin and underlying combined ratio will be broadly consistent with 2016. Turing to personal insurance, net return premiums for the segment grew 12% in the quarter with a combined ratio of 98.2 and an underlying combined ratio of 93.2. For the full year, net written premiums grew 10% with a combined ratio of 95.1 and an underlying combined ratio of 90.1. So, overall, strong results for the segment, but results by line were mixed. In auto, as Alan mentioned, we booked further upward revisions in our loss estimates for 2016 and for the second half of 2015. The auto combined ratio for the quarter was 116.7 and include both the full year impact of the bodily injury related adjustments that I just mentioned, and seasonably higher fourth quarter loss levels. So instead of taking you to a detailed reconciliation of the quarter, it would be more productive to focus on the full year ratios. For the full year combined ratio, we had a 104.0 and the underlying combined ratio was 101.8. These were both higher than we expected and at a level that does not meet our target returns. For full year 2016 underwriting combined ratio included about 2 points from the 10-year effect that we discussed last quarter. As we said then, when you are growing your book of business, the higher levels of new business will temporarily increase the combined ratio and the impact of 10 year in the year was as we expected. In addition to the impact of 10-year, the full year of 2016 underlying combined ratio was elevated by 3.5 points due to the recognition of the increased bodily injury liability losses. This result represents a gap that we are working to close. You will recall that we reacted to signs of adverse bodily injury loss development with a reserve adjustment in the third quarter. Unfortunately, since then, we saw a further development in excess of even those increased expectations, which drove our actions this quarter. The deterioration is primarily driven by an increase in the trend towards more severe accidents. Some of the factors that lead us to this observation are a higher percentage of claims involving distracted driving, more accidents involving higher speeds and more accidents on highways and at intersections. This is also consistent with recent industry data. For example, the National Safety Council report of significantly higher traffic cyclicalities in 2015 and 2016, a two year trend that we haven’t seen in decades. In response to these developments, we are taking action in the marketplace. Our primary response is to file for increased base rate. And in November and December of 2016, rate increases were implemented in 16 states, which cover about 60% of our quote volume. More rate changes at higher aggregate levels are planned for 2017 along with other ongoing actions to refine and optimize our underwriting process. The combined impact of these actions should be to both reduce the rate of growth and improve profitability. While it will take 18 to 24 months for the actions we’re implementing to fully earn into the portfolio, we do expect that the auto combined ratio will improve in 2017. Turning to homeowners and other, our results for the quarter and the full year remains strong, and reinforce the value of a portfolio underwriter. The underlying combined ratio of 70.4 for the quarter and 75.7 for the year, demonstrate consistent performance relative to 2015. In terms of top line 2016 saw growth in net written premiums of 2%, and we look to continue the momentum in 2017. So, as I said, mixed results by line in the segment with challenges in auto mitigated by strong results in home, resulting in a segment combined ratio of 95:1 for the full year. We are fully aware that our recent auto results need to improve. Pricing and underwriting actions we’re implementing should put us on track to deliver a more profitable portfolio in the years ahead. Finally, as it relates to our outlook for personal insurance, we expect underlying underwriting margins during 2017 will be slightly higher than in 2016, and the underlying combined ratio during 2017 will be broadly consistent with 2016. In agency automobile, we expect underlying underwriting margins and the underlying combined ratio will improve in 2017 compared to 2016. In agency homeowners and other, we expect that underlying underwriting margins will be slightly lower, and the underlying combined ratio will be slightly higher in 2017 than in 2016, reflecting higher and more normalized levels of loss activity. With that, let me turn it back to Gabby.

Thank you. We're now ready to start the Q&A portion. Before we start, if I could just ask you to limit yourself to one question and one follow up. Thank you.

Thank you [Operator Instructions]. And our first question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed with your question.

Brian may be a little bit on auto. If you could just give us some indication of how we should be thinking about the starting points for ’17, and given the adjustments you made through the year. When should we start to see the rate increases flow through? And should we expect the starting point to be closer to the develop loss ratio picks you have said now for ‘16?

Michael, this is Michael Klein from Personal Insurance. I’ll take a crack at that. So, I think you will see the rate increases start to flow through in the first quarter. As Brian said, we began making rate filings in the fourth quarter, really in response to what we saw in the third quarter. Rate filings that we’re now making as we looked ahead to the first half of the year reflects the increased loss of content that we saw in the fourth quarter. Importantly, you don’t see a lot of the fourth quarter rate filing activity in the production statistics, just because of the timing of those rate increases. They went in November and December, largely impacted renewals not until December. And so, it’s really a timing issue in terms of not seeing and show-up in the fourth quarter of this year. But we would expect that you will see the rate momentum start to build in the first quarter of 2017, and continue from there. In terms of the starting point for 2017, I would say two things; first of all, as Brian mentioned that 3.5 points that you see on the webcast slide. He mentioned that represents a gap that we’re looking to close. And so in other words that 3.5 points is built into our base-line expectations as we start 2017. And then we’re taking trend and forecasting in actual word from that point. So, the starting point does include that 3.5 points of additional losses and the gap that we’re looking to close.

Michael, just let one -- this is Brian. I would also just emphasize, obviously, thinking through the written versus earned dynamic with the rate. And as we obviously get it on a written basis, it has to earn-in overtime; hence, my comment of 18 to 24 months to work-through the 3.5 points.

And then when you think about the -- and most of your policies are 50-50 annual versus six month policies. Is that right, or somewhere in that range?

It’s a little bit more tilted towards the annual. So, it's about 60-40 annual versus six months.

And then Brian when you mentioned the margin outlook for ’17 versus ’16.does that contemplate that whatever trend you’re seeing is sort of the need-year, and that we’re not going to see more deterioration? Or does that contemplate that you’re going to see that, the loss trend continue to increase, at may be some pace not at same levels we’ve seen, or if you give some context there, thanks.

I think, as Michael just said, the 3.5 elevation is built into our expectation. Above that, we're expecting normal 3.5% loss trend, which includes more normal inflation of severity. But we don’t expect another spike. Michael?

I would say that just to clarify, so Brain mentioned the 3.5 loss trend. That is an elevated loss trend relative to where we've been. So the forecast, importantly, I think, it's important to take away that and includes both the increased base-line and a higher trend estimate going forward than we had in the past. It's modestly higher but it is a bit of an increase at front.

Our next question comes from the line of Kai Pan with Morgan Stanley. Please proceed with your question.

First question is just on the deterioration of fourth quarter. What exactly, sort of like if you are looking back in third quarter, what exactly sort of like accelerate in terms of loss cost trend from the third quarter? And just want to get the confidence that over that what you book in the fourth quarter. Do you think that's -- and it probably not be much matured like a deterioration from that levels?

Yes. So the first thing I would say, Kai, it's all the normal stuff. Now, we're talking about very recent accident periods for a very long tail-line of business, so just as a perspective. At the end of 2016, we have paid less than 15% of what we believe the ultimate losses will be for auto bodily injuries. So, it's by nature a long tail-line of business, so it takes a while to play-out. We’re looking at all of the activity that we see, both in frequency and severity of loss, cut every which way you can think of, and looking at frequency activity, incurred losses, the paid losses. And importantly, we're also, as we went into 2016, we're looking at that coming loss of 2013, ’14 and early ‘2015 where we actually had slightly favorable development in the ’13 and ‘14 years, and consistent experience in the early part of the ’15 year. So we're looking at the history that we have coming into the year. As we went into ’16, we started to see a little bit of movement in the fourth quarter ’15 and early ’16, but still within our range of expectations. We got to the third quarter, and those periods, again fourth quarter ‘15, first two quarters of ’16, started to elevate above the expectations. Hence, we took the activity and the actions that we did last quarter. And this quarter, as we look at all of those periods. Again, now we’re looking at the end of ’15, early first three quarters of ’16, and obviously, now another quarter of data. We saw a continuation in that trend that was accelerating. And we took what we think was the appropriate management’s best estimate, given all of those factors. And we feel good about it but there’re certainly no guarantees that we can see what's going to happen next quarter. I mean, Michael, if you want to?

Yes, I think, that's exactly right. I think it's a combination of additional development on the periods that we saw before, and an additional quarter’s worth of data that again reflects the fact that that adverse development continues through the end of the year. And we've made our best estimate based on the information Brain just described.

My full-up on auto side again is that, if you look at this growth 13% year-over-year is actually accelerated from the last few quarters. As you increase price, do you think that one coming down? And do you think that 2 points of these are new business penalty impact will be smaller in 2017?

Thanks Kai, this is Michael. I would say a couple of things, and let me give you a little bit of the moving part underneath this growth in the fourth quarter. We do expect, as we put rate into the marketplace and put additional rate into the marketplace, that our win rates will decline. So on the business that we quote, do we convert it? We’ve actually seen, in 16 states that Brian mentioned, our win rates have come down as we put that rate into the marketplace. So, think of that as our batting average, our batting average is dropping as we put rate into the marketplace. The reason this growth is up in the fourth quarter is actually largely driven by the fact that we ended up with more as fast than we expected in the quarter, so quote growth is actually elevated. So we’ve got more played appearances, if you will, but the batting average, the win rate, has actually come down in response to the rate. Again, we think some of that is timing, some of that, as we mentioned in the last quarter, the ultimate impact of the actions we take depend somewhat on the fact that we’re in a competitive environment, and the impact on growth and a little bit on what happens in the marketplace. So our perception of what happened in the fourth quarter is we took rates so did the market. The rate impacted our batting average, but the rate also drove business into the market, which drove that quote growth. So the PIF growth is really a quote growth story, not a conversation rate story. In terms of your question about expectations, as we looked ahead, our actions are focused on two things; improving profitability and managing growth. And we expect, that’s why I give you a little bit of analog for 2017 rate looking ahead into the first quarter, we would expect rate will rise and growth will drop as we look into first quarter. What ultimately happens will depend on how those actions play out in the marketplace.

Our next question comes from the line of Paul Newsome with Sandler O'Neill. Please proceed with your question.

I wanted to switch the question onto the commercial business a little bit. And I was wondering if you could give just a little bit more color on the pricing environment in the domestic insurance business. And it's a little bit tough to read the tealeaves. But is it better or is it worse? Is there really any change from a competitive perspective in that business?

Paul, this is Brian. I will start, I’m sure there will be follow ups to this. But broadly speaking, we feel good about the trends that we see. When you look across the data on the renewal book, we continue to see some, albeit modest, but pretty consistent improvement in what we’re seeing. And we’re encouraged by that. We think that might be somewhat reflection of the market. But fundamentally, I think it’s a reflection of our execution. Our strategy on our portfolio remains incredibly consistent, and that is to look at in on a very granular or account-by-account or class-by-class basis. And simplistically, for the really well performing business, keep it at the best price that we can keep it at and the appropriate price, and then work hard at improving the rest of the portfolio. And when we look at that granular level, we feel really good about the momentum and also feel good about the aggregate statistics. So directionally we feel positive.

Paul, it's Alan. I would add to that that it's not just a market dynamic, it's in our execution dynamic. It's a very granular, as Brain said, account-by-account class-by-class. And I think in some respects and importantly it's the franchisee value we bring to the marketplace. So we look at an account and we figure out what we need to do to achieve the written objectives that we have. And I would say probably speaking we've been speaking.

How closely does the commercial auto business, or has the commercial auto business, track the results of the private passenger auto?

Paul, I'd say that we see a lot of the same trends in the businesses. There are different businesses. They have different starting points. The coverages aren’t exactly the same; for example, on the personal line side, you've got uninsured and under insured motors, that's not such a factor on the commercial side. So I would say, broadly speaking, the trends are consistent. We see consistency across them. But the results don’t actually come out the same for a whole host of reasons.

So we haven’t seen the severity issue even at a level in the…

No, I wouldn’t think we haven’t seen it. We have seen. It has impacted recent years. We see a lot of the same trends. But on the auto side, it's largely private passenger. On the commercial side, you've got a lot of trucking. So you've got different dynamics there. Also it just manifests itself differently. And on the commercial side, I mean on the personal line side, auto was obviously a bigger contributor to the segment more in terms of volume, so it just manifests itself more prominently. On the BI side, obviously, commercial auto is a smaller piece of whole, so it manifests itself differently. So we do see very consistent trends across books.

Our next question comes from the line of Larry Greenberg with Janney Montgomery Scott. Please proceed with your question.

So, I want to go back to the auto. And I appreciate that you think it's mostly environmental on top of the 10 year issue. But I guess I just want to challenge you a bit on it. And just question, whether you think it's fair to say that maybe you picked up on some of these environmental factors later than some of the others did. And if you agree with that, why do you think that's the case? And I kind of say this in the context of, when you were growing rapidly in auto and before you picked on the BI trends, I know you talked about being keenly focused on what was driving that growth. So I'm just curious on your thoughts on all that.

Larry, this is Brain. And I'll start with, there’s a lot in your question. And we do believe it's a fundamentally environmental issue. We would never say it is definitively exclusively an environmental issue. As I think I said last quarter as I'm sure I said last quarter, Quantum 2 is a relatively new product that we’re working now. And accordingly we are very atoned to looking at how it is performing and always looking to improve it. I would not agree with your statement that we are late to seeing the fundamental trend of what's going on in bodily injury severity. And without doing a long history, you can go back 2011, 2012, 2013, we were talking about this a lot, distractive driving and speeds are not brand new things, and we were talking about it then. We got to ’13 and talked about a elevated level of bodily injury, and we were hoping that that would remain pretty constant. And we went through about two year period, 2013, 2014 into 2015, where we saw very constant, again elevated levels but constant with our expectations, of what we were getting in bodily injury. In fact, 2014 has developed favorably and we continue to see that. And what we are talking about now is another increase in that trend. And we’re talking about very, very recent accident periods, and looking at the data and responding, I think pretty quickly. And so I think there is a bunch of things. Further on the comment of, you’re sure it’s not Quantum 2. We’re sure it’s not exclusively Quantum 2, because when we look across our business the same fundamental trends are in the legacy book of business, are in the Quantum 1 book of business, are in the Quantum 2 book of business, are in the business insurance business. It’s in industry data. It’s without the carriers. So it’s not exclusively a Quantum issue. With that said, we are very granularly looking at how that product is performing, state-by-state sell-by-sell and reacting. So, I know that, and that’s this probably sounding way more defensive than I should, but it…

The one thing I would add to that, Larry its Alan. The profile of the business that we’re attracting, we actually like it. We look at the profile of all the business coming in, and if we didn’t like that profile, we would have the defending answers for you. But fundamentally, we like it. We just like it at a higher base rate.

Our next question comes from the line of Meyer Shields with Keefe, Bruyette & Woods. Please proceed with your question.

One, I guess, question on the actual quarter. There was a slowdown in exposure unit growth within the middle market. I was hoping you could talk to that a little bit?

There is nothing fundamental in terms of trends changing there. There is always going to be some normal volatility from quarter-to-quarter and things that drive the exposure. But there is really nothing fundamental that we would identify as a trend.

So not related to the improving renewal rate changes?

No.

And then more broadly speaking, when you look at the targeted after tax returns, would a change in tax rate change what you’re targeting?

It’s an interesting question. And I guess instead of answering that specific question, let me just back-up because my guess is there is a lot of questions on the call in terms of change administration, macro environment, how it’s going to change, a lot of different things. And so maybe I’ll just back-up. We are very return focused in the way we think about this business. It is the lens which we evaluate just about every decision that we make. And so, we calibrate our return expectation to our cost of capital. And so there are couples of things going on that could impact cost and capital. For example, if the risk free rate goes up, cost of equity goes up. If the tax rate goes down then our after-tax cost of borrowing theoretically goes up. There could be other things in a change in tax policy. But if you just started with those two simple assumptions, you would look at that and say, gee, if the risk free rate goes up and if the tax rate goes down, you would speculate that our overall cost of capital would go up. If our overall cost of capital went up then our return objectives would go up with it.

Our next question comes from the line of Brian Meredith with UBS. Please proceed with your question.

Couple of questions here, just first on the personal lines, do you think that the rate actions you are taking on auto insurance will have an impact on homeowners growth here going forward?

I think that's possible. We've certainly talked about the fact that our auto growth has -- one of the benefits of our auto growth has been growth in home. That said, we’re doing what we can to mitigate that impact. And we've got specific actions we're taken from an agency management and a distribution standpoint and in another areas to try to make sure that any impacts from the rate actions in auto don’t have any impact on our ability to grow home. We’re trying to continue the momentum that we have in the home line into 2017.

In other words, they definitely co-relate. But we think -- we’re hopeful there are things we can do to offset that and try to lever up the home growth.

And then the second question here. On the domestic business insurance, we've seen your rate activity modestly increase the last several quarters. Is that a trend we should continue? And are you getting to a point now where you’re saying all right, can't let the underlying loss ratio deteriorate anymore on an underwriting year basis?

I know this won't be totally satisfying, but I think we need to go back to the answer we gave, which is we look at the accounts that are up for renewal every quarter and we try to figure out what we need to do to achieve our written objectives. And it's every single one of those transactions, or every portfolio on the flow stuff, really evaluated one at the time that rises up to that number. So, we don’t think with a broad brush. We don’t go out to the market and say get 1.4 points of rate in middle market. We say this is our overall return objective, and go out and execute one account or class at a time to get there. And we will when we get to the 10-K give you an outlook on RPC. So we haven’t showed that yet, it will be in the 10-K when it comes out. But we never forecast on uniquely on peer rates.

But you are forecasting for a flat underlying combined ratio for the next year. And then if I remember correctly that was part of it. But yes, there is going to be better non-cap with at least normalization and then deterioration from rate below trend, right?

So the margin compression that we've had this quarter and the last few quarters has been relatively modest. And this quarter and in past quarters, it's been within other things that cause volatility in the period-over-period comparison. Most notably, this quarter and probably recent quarters weather and large losses. So, when we give you that outlook and yes we did say broadly consistent, we're certainly not measuring to the basis points, but probably consistent within a relatively narrow range. That takes into account lots of things rate, loss trend, mix, claims handling initiatives, other strategic objectives. So it really is an all-in assessment and we try not to focus too narrowly on that narrow rate loss trend. You’ve got exposure in there too, contributing to margin. So, it really is a [technical difficulty] when it comes to our outlook on margin.

Our next question comes from the line of Jay Cohen with Bank of America, Merrill Lynch. Please proceed with your question.

One more question, I guess, about the new administration. Obviously, something that’s being talked about relative to taxes is a board or adjustment tax. I’m wondering if you could share your thoughts on how that may affect your purchase of reinsurance from non-U.S. companies.

Jay, good mornings, it’s Alan let me start. It’s really hard to answer that question without knowing what the board or adjustments going to look like. And we’ve all read it depends on whether it’s characterized as an export or an import and whether the dialogs or defaults to the new bill, and we’ll see where that comes out. I think broadly speaking, as it relates to us in reinsurance, I think, our answer would be, we’re by enlarge a gross line underwriter. We like our underwriting. We like to keep it. And we buy reinsurance in pretty modest amounts. And so, if there were tax adjustments that change the cost of reinsurance, obviously, we could look for alternative providers of reinsurance. We could buy a little bit less, buy a little bit more. But it would come down to evaluating the individual transaction. But I think the broader point for us is reinsurance is just isn’t that big deal for us.

Our next question comes from the line of Amit Kumar with Macquarie. Please proceed with your question.

Two quick follow up on personal auto, the first question I have is. If I go back and look at the rates that were put in place for 2016, I guess, average rate filling for in the range of, let's say 3% or so. So, when you talk about the rate filings in November, December and going forward, how should we think about that number compared to the historical 3% average number?

I would say it’s a pretty broad range. It depends on the state, and even there, it depends on two things; one, our experience in that state; and the rate need, but also recent rate fillings in that state right, because there is a cumulative nature to it. But certainly, it’s getting bigger than what you’d seen earlier in 2016. And we expect more the same during 2017 to try to close that gap of 3.5 points.

Okay, so probably more than that. Is that a fair way to look at it?

Yes, definitely.

The second question and the final question I have is, you talked about 60% of your book, 16 states. You said more filings for in the pipeline. Is that immediate? Is that like a Jan-Feb thing, or is that more spread out versus the actions taken in the past?

Amit, this is Michael. I would just to clarify the comment. So the comment was 60% of our quote volume. So, again think of that as that’s a new business statistics, right. So, the 16 states that we filed-in so far, those represent roughly 60% of our new business quote volumes; not exactly the same as 60% of the book, just a point of clarification. I would say the majority of the rest of the states have rate filings plan for the first quarter. And so broadly speaking, we will have made rate filings in the majority of the states where we have the auto product by the end of the first quarter. We also have additional rate actions planned for later in the year. And that obviously is all subject to regulatory approval and regulatory constraints to the timing and the amount. But I would say the first round ought to be in market by late in the first quarter, and then we've got follow-up actions on the drawing board as we look into the remainder of 2017.

I think that's very helpful. Thanks for the answers and good luck for the future.

Our next question comes from the line of Ryan Tunis with Credit Suisse. Please proceed with your question.

My first question, I guess, just for Brain, and it's on the new business penalty. It doesn’t sound like the thinking has really changed on the impact to the new business penalty. I guess, even though the environments revealed it-self to be a bit more of an issue maybe than we thought a couple of quarters ago. Just what gives you confidence, I guess, to continue to compartmentalize the BI severity versus the new business drag, especially when you think about the fact that a pretty good size of the book is new business? And I guess along those lines, if there so is a big 10 year impact, why wouldn’t we assume that a lot of that strain alleviate itself in 2017 with the growth pull-back?

Yes, so a couple of things. So I think of the 10 year impact as being discreet from the bodily injury trend. And so the 10 year impact is just the math of the maturing of the book of business. And in fact where it goes in 2017 is a function somewhat of what growth rates do. It will likely increase in 2017 slightly, as the growth that we've seen in the back half of 2016 earns through the business. But I think of the 10 year impact is more of just the arithmetic of. I don’t think of it is a new business penalty as in a BI where you’re pricing differently.

Yes, I think, and again I think it's, this is Michael. I would say just to reinforce what Brain said. When we talk about the 10 year effect, what we’re really trying to do is just isolate the impact on the loss ratio from the relative age of the business, if you will, right. How tenured it is? What renewal it is at? And as Brain said, it's essentially a mathematical exercise that estimate what that component is or was. And then the rest of it, the environmental turn that we talked about the 3.5 points that's in the full year loss ratio, is absolutely the gap that we’re actively working to close. What we do in the meantime is we monitor the performance of the tenuring and try to isolate that, and make sure that that is developing as we expected. And that analysis has remained relatively consistent, and is why we continue to have that same 2% estimate a quarter later.

And then a couple of quick ones for Jay Benet, first on the workers comps and general liability, just curious the accident years and those reserve releases. And also just getting color on how new money yields have changed, I guess, today versus the end of the third quarter? Thanks.

As it relates to the accident year question, it's really spread amongst a number of accident years. We, in the past in our disclosures have said, at times, it's related to accident years X and Y. And when we’re preparing disclosures this time, the laundry list of accident years was exceptionally long and we just said why don’t we just say what it relates to. So, there isn’t any particular accident year for either one of them, it's just spread amongst various ones. As it relates to the new money yields, just looking up some stats as it relate, let’s say -- we generally tend to focus on the ten year treasury. So, if you look at where the 10 year treasury was at the end of September, it was 1.6 and ended December 2.45. And spreads moved in that time frame as well. So I think you could look at the public data as so what to place, but a considerable rise in interest rates from one period to the next. Bill, do you want to add something?

I thought I might add a little. Obviously, the question goes to at what point will new money yields exceed maturing yields. And obviously, the actions before this quarter gets us close to that point. But we’re not yet where we need to be. We’ve done a fair amount of work on it in the last few weeks, and using a whole bunch of assumptions, which would take long times really. We think that where taxable is being replaced by taxables, we reached that point sometime in the first half of 2017; for municipals replacing municipals closer to the first half of 2019. Obviously, a lot is going to be determined by the shape of any tax legislation as a very extreme, if you needed, a revenue neutral bill and the municipal exemption itself were affected, that would be non-trivial. If corporate rates were simple, and individual rates were simply lowered and the relative value of municipal were affected then they’ve already achieved it. That would be less important to us. But in the bottom line is where is, what I think you’re getting at, we’re not quite there yet.

Okay, that’s really helpful. Thanks guys.

And this is Jay Benet, again. If I could just add one thing, not relating to your questions but during my remarks one of my collogues tap me on the shoulder, indicating that instead of referring back to November’s filling of Form 8-K, I inadvertently said 10-K. So, we don’t file a 10-K in November. We did file an 8-K about the settlement. So, I just wanted to correct the record.

Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your question.

One question first on the personal auto book, as you pointed to your margin outlook for 2017. Can you talk about, I guess, the components of the expense ratio and the underlying loss ratio? The expense ratio do tick down in the Q4, so it’s part of helping to get to your margin goal for next year on some kind of improvement in the expense ratio to offset potentially your continued deterioration on the loss side. Can you just take us through the components a little bit?

Elyse, good morning it’s Alan. I would say that we go about as far as we want to go and getting outlook. And we’re pretty hesitant to start breaking it down to the component pieces. Part of our strategy, at least on the auto side, was obviously reducing expenses. And you’ve seen that come through to some extent already. But going forward, we prefer not to break out the pieces.

And then one other question, the business insurance reserve releases picked up materially year-over-year, as well as sequentially. I know you reference it spanned numerous accident years and workers comp with GL lines. As we think about potentially an environment where we’ll see higher inflation levels going forward, just wondering if you could provide some commentary surrounding the pics that you’re using on some of your longer tail lines? And what give you confidence for such a high level reserve releases given the uncertainties surrounding forward inflation levels? Thank you.

Yes, as it relates to reserving, as well as pricing and loss mix, so particularly year. We’re not assuming in any of the work we do this year or in any previous years that whatever the inflation environment that currently exists. And I have to say, it's an inflation environment related to the specific drivers of losses in our product as opposed to the general level of inflation. But we never assume that things are going to stay stagnant. There is an underlying assumption that things will overtime reverts back to the mean. And as you can well imagine, there is a great deal of actuarial judgment, management judgment, as to what that means. So - and looking at the reserves as they exist today, looking at how the development patterns have manifested themselves in the lost triangles, we come up with what our best estimate is of the future payments that we will be making. And if those best estimates are lower than what the carried reserves are, we’ll make adjustments for it. But it is factoring in a long-term view as to what the levels of inflation might be.

And that's from the line of Jay Gelb with Barclays. Please proceed with your question.

I had a question on your asbestos exposure. Earlier this month, the Hartford announced an economically favorable transaction, Berkshire Hathaway, to buy retroactive reinsurance contract. The size of Hartford's exposure is very similar to Travelers’, at $1.8 billion for asbestos environmental. And there's been $300 million annual pretax drag on Travelers’ earnings for the past two years. I'm wondering what your thoughts are now that other companies are taking steps to address these legacy exposures?

Yes, thanks for asking, Jay. There's nothing fundamentally novel about those transactions. And as you can imagine, we look at them from time-to-time. So far, we haven't seen terms on one of those deals that we found attractive enough to do. And I'm not sure what else to say about it.

Great. Thank you very much for joining us today. Have a great day.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your lines.