Alan Schnitzer - Chairman and CEO Jay Benet - CFO Greg Toczydlowski - President of Business Insurance Tom Kunkel - President of Bond & Specialty Insurance Michael Klein - President of Personal Insurance David Rowland - EVP and Deputy CIO Abbe Goldstein - SVP of IR

Jay Gelb - Barclays Randy Binner - B. Riley FBR Elyse Greenspan - Wells Fargo Kai Pan - Morgan Stanley Amit Kumar - Buckingham Research Greg Peters - Raymond James Yaron Kinar - Goldman Sachs Sarah DeWitt - JPMorgan Josh Shanker - Deutsche Bank Brian Meredith - UBS Jay Cohen - Bank of America Merrill Lynch

Good morning, ladies and gentlemen. Welcome to the Second Quarter Results Teleconference for Travelers. We ask that you hold all questions until the completion of the formal remarks at which time you’ll be given instructions for the question-and-answer session. As a reminder, this conference is being recorded today, July 19, 2018. At this time, I would now like to turn the conference over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin.

Thank you. Good morning, and welcome to Travelers’ discussion of our second quarter 2018 results. Hopefully, all of you have seen our press release, financial supplements and webcast presentation released earlier this morning. All of these materials can be found on our Web site at travelers.com under the Investors section. Speaking today will be Alan Schnitzer, Chairman and CEO; Jay Benet, Chief Financial Officer; and our three segment Presidents, Greg Toczydlowski of Business Insurance; Tom Kunkel of Bond & Specialty Insurance; and Michael Klein of Personal Insurance. 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. Before I turn the call over to Alan, I’d 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 expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements 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 available in the Investors section on our Web site. And now I’d like to turn the call over to Alan.

Thank you, Abbe. Good morning everyone and thank you for joining us today. This morning, we reported second quarter net income of $524 million and return on equity of 9.2%. Core income was $494 million generating a core ROE of 8.7%. These results were significantly impacted by an active tornado/hail season. Catastrophe losses of $488 million this quarter arose out of nine storms. To give you some context, that’s around $50 million more than we would have expected. To put a finer point on it, losses from PCS defined catastrophes that don’t hit our threshold to qualify as cat losses as we report them were about $25 million favorable to our expectation. So all-in, losses from PCS events were only about $25 million pre-tax more than we would have expected. That’s well within the normal variability that we anticipate and price for. Having said that, this makes the recent series of quarters of catastrophe losses that have exceeded our historical experience and our expectation; tornado/hail, nor'easter, hurricanes, wildfires and mudslides. We haven’t seen a string like that in the last decade. It also includes some unusual circumstances. For example, the California wildfires were historic and last year was the first time more than one category for hurricane has made landfall on the U.S. mainland in one season. In terms of creating shareholder value over time, we don’t want to overreact anymore than we want to under-react. And when it comes to something as inherently unpredictable as weather, we take a balanced approach to developing conclusions from what takes place over a relatively short period of time. As always, the impact of weather on our business has our full attention and we’ll continue to use our leading actuarial expertise in the latest in weather modeling to inform our underwriting and pricing decisions. In addition to the weather, the underlying results in Business Insurance include a small number of large commercial losses, primarily fire related, that exceeded our expectations by nearly a point on a consolidated combined ratio. We believe this is normal variability and large loss activity and Greg will share more detail on that with you shortly. Whether its weather or other large losses, there’s no doubt that actual results are going to vary from our expectations sometime significantly. What’s important in this business is that we have the data analytics and expertise to see and evaluate the trend so we can manage for success over time. We’re confident that we do. On an underlying basis, the underwriting results benefitted from record earned premium. The underlying combined ratio of 93.6% was strong and consistent with the prior year. Underneath that, our businesses continue to perform well. In Business Insurance, the underlying combined ratio of 96.5% was solid particularly in light of the large loss activity I just mentioned. Bond & Specialty Insurance produced another impressive quarter with an underlying combined ratio of 80.5%, a 1.5 improvement from a strong result in the prior year. In Personal Insurance, the underlying combined ratio improved about 2 points as a result of the successful execution of the pricing and underwriting actions we’ve taken in our auto business. Our consolidated expense ratio improved by 40 basis points in the quarter and 30 basis points on a year-to-date basis, as we continue to benefit from expense discipline and strategic investments in technology and workflow to improve productivity. In terms of our investment results for the quarter, we were pleased that income from our fixed income portfolio was up, driven by higher short-term rates and a higher level of invested assets. Turning to production, we were very pleased with our continued successful execution in the marketplace. Net written premiums increased by 7% to a record $7.1 billion with each of our business segments contributing. As we saw this quarter and in recent quarters, we would expect underwriting results going forward to benefit from higher levels of earned premium. Once again, premium growth reflects to a large degree high levels of retention and positive renewal premium change. As I pointed out in the past that speaks to the quality of the business we’re writing. In addition to that, we explained at our Investor Day last fall that the strategic investments we’re making are designed in large part to create top line opportunities for us. The early success of some of those initiatives contributed to a healthy level of new business in the quarter. In Business Insurance, renewal premium change reached 5.3 points, its highest level since 2014 while retention remained at historically high levels. Excluding workers’ comp, renewal rate change for domestic business insurance was 3.6 points compared to little less than a point in the same quarter last year. In Bond & Specialty Insurance, record retention, higher renewal premium change and higher new business led to a 6% increase management liability net written premium. Surety premium was up double digits. In Personal Insurance, as you know, we grew our PI Auto business considerably from late 2015 to the first part of 2017, including during a period of time in which the rate we were charging was not sufficient to cover an unexpected increase in bodily injury severity. We made the point at the time that the volume of business we wrote during that period would nonetheless be a positive contributor to economic value if we were able to keep that business and achieve rate adequacy. We have in fact been able to do that. Greg, Tom and Michael will provide more detail on production at the segment level. To sum it up, weather in large losses unfortunately color the quarter. As I said, it has our full attention. But looking at the quarter and looking forward, that doesn’t define the strength of our business. We see that clearly in our underlying underwriting results and in our success in the marketplace. That is in part a reflection of the competitive advantages that we’ve developed over decades and continue to serve us well and new capabilities we’re developing to enable us to continue to lead in a rapidly changing world. We have and will continue to invest in our franchise by extending our lead and risk expertise, improving the experience for our customers, agents and brokers and enhancing productivity and efficiency. Combining that with our strong balance sheet, superior talent and capital management strategy, we remain well positioned to continue to deliver industry leading results over time. And with that, I’ll turn it over to Jay.

Thanks, Alan. Core income was $494 million, down from $543 million in the prior year quarter and core ROE was 8.7%, down from 9.5%. As Alan indicated, these changes were not driven by fundamentals and our operating performance; rather they resulted from a pre-tax increase of $85 million in catastrophe losses, $488 million compared to $403 million in the prior year quarter and an incremental pre-tax charge of $45 million related to a few large commercial losses that were primarily fire related. PYD was also modestly lower, $186 million pre-tax compared to $203 million. Higher cats and lower PYD accounted for 1.3 of the 1.4 point increase in our consolidated combined ratio, 98.1% versus 96.7% in the prior year quarter. Our consolidated underlying combined ratio of 93.6% which excludes the impacts of cats and PYD remains steady changing by only one-tenth of a point as 1.7 point increase in BI’s underlying combined ratio that primarily resulted from the fire related losses was almost entirely offset by improvements in both PI and Bonds & Specialty, 1.9 and 1.5 points, respectively, demonstrating the value of our diversified set of businesses. Our pre-tax underlying underwriting gain of $392 million increased by $19 million driven by increases in both PI and Bonds & Specialty. Greg, Tom and Michael will provide more details of our segment results shortly. Pre-tax net investment income remains strong, $595 million in the current quarter versus $598 million in the prior year quarter while after-tax NII increased from $468 million to $507 million due to the lower U.S. corporate income tax rate for all the tax exempt investment income. As with the first quarter, pre-tax fixed income NII of $510 million increased by $26 million compared to the prior year quarter driven by the more favorable interest rate environment particularly for short-term rates as well as an increase in average invested assets that resulted from recent growth in net written premiums. After-tax fixed income NII increased by $48 million and looking forward we expect after-tax fixed income NII for the remainder of 2018 will increase by approximately $55 million to $60 million in each of the third and fourth quarters compared to their corresponding quarters in 2017. Non-fixed income continues to perform well although not as well as in the prior year delivering $94 million of pre-tax NII. And overall, core income benefitted this quarter by $54 million due to the lower U.S. corporate income tax rate. Turning to reserve development and on a pre-tax basis, BI’s current quarter net favorable development of 84 million was primarily driven by better than expected loss experience in domestic workers’ comp partially offset by higher than expected experience in general liability for accident years 2008 and prior, including a $55 million increase in environmental reserves. Importantly, the current GL loss trend remained consistent with recent periods. Bonds & Specialty’s net favorable development increased to $89 million driven by domestic management liability and PI had $13 million of net favorable reserve development driven by personal auto. Year-to-date, on a combined statutory Schedule P basis for all of our U.S. subs, all accident years across all of our product lines in the aggregate and all of our product lines across all accident years in the aggregate developed favorably or had relatively small unfavorable development. Operating cash flows of over $1.1 billion were very, very strong. We ended the quarter with holding company liquidity of $1.4 billion and all of our capital ratios were at or better than target levels. The recent run up in interest rate that’s benefitted fixed income NII has for the first time in many years resulted in a small net unrealized investment loss that impacted shareholders’ equity. After-tax net unrealized investment gains which were $1.1 billion at the beginning of the year and $133 million at the end of the first quarter moved to a net unrealized loss position of $112 million after-tax at the end of the quarter. This was the driver behind a 3% decrease in book value per share from $87.46 at the beginning of the year to $84.51 at the end of the current quarter. I’d remind you the changes in unrealized investment gains and losses do not impact the manner in which we manage our investment portfolio or our business. We generally help fixed income investments to maturity, the quality remains very high and changes in unrealized gains and losses have little or no impact on regulatory capital. Adjusted book value per share, which excludes unrealized investment gains and losses is now $84.93 or 2% higher than the beginning of the year and 3% higher than the end of the second quarter of last year. We continue to generate excess capital and consistent with our ongoing capital management strategy we returned almost $560 million of capital to our shareholders this quarter comprising dividends of $209 million and share repurchases of $350 million. Year-to-date, we returned over $1.15 billion of excess capital to our shareholders through dividends and share repurchases. Before turning the microphone over to Greg, I’d point you to Page 19 of the webcast and provide a brief update on our catastrophe reinsurance program, the significant component of our overall reinsurance protection program. While the structure of our cat reinsurance is generally consistent with the prior year, we did take advantage of the current pricing environment to increase our cat bond limit by 200 million while reducing our Northeast Property Cat Excess-of-Loss Treaty limit by the same amount. A new $500 million reinsurance agreement with Long Point Re III has replaced the $300 million agreement that expired in May. The new agreement provides nor’easter, hurricane, earthquake, severe thunderstorm and/or winter storm coverage for certain property losses on specified lines of business through May 24 of 2022. The attachment point and maximum limit will be reset annually. So through May 24 of 2019, the full $500 million limit is available after covered losses from a single occurrence reach $1.9 billion and until such covered losses reach a maximum of $2.4 billion. And effective July 1, we renewed our Northeast Property Cat Excess-of-Loss Treaty which now provides coverage of $600 million part of $850 million in excess of $2.25 billion. A more complete description of our cat reinsurance coverage which also includes a description of our Gen Cat Aggregate Excess-of-Loss Treaty that covers an accumulation of certain property losses arising from multiple occurrences is included in our second quarter 10-Q which we filed earlier today and in our 10-K. So with that, let me now turn the microphone over to Greg.

Thanks, Jay. Business Insurance produced segment income of $385 million and a combined ratio of 98.8% for the quarter. The underlying combined ratio of 96.5% was 1.7 points higher than the prior year quarter driven in particular by non-cat property losses, mostly a small number of large fire acclaims that Alan and Jay mentioned. We reviewed every one of these claims looking for underlying trends and not seeing any correlation we view this activity as normal period-to-period variability. The underlying loss ratio was also impacted by the net impact of small amounts and movements with a number of usual things including non-cat weather, base year adjustments, earned pricing compared to loss trends as well as business mix. A couple of other points I’ll make on the underlying results. First, we’ve been discussing the impacts of earned pricing versus loss trends for some time now. We’re now at a point where the higher levels of earned pricing about covered loss trends of the quarter. Secondly, we remain focused on managing expenses thoughtfully while making ongoing strategic investments and prudently growing the business. Our expense ratio improved by about 0.5 point for the quarter when adjusted for the industry-wide assessment from a Texas Windstorm Pool related to Hurricane Harvey. Turning to the top line, net written premiums were strong for the quarter at $3.8 billion, up 7% over the prior year quarter with domestic net written premiums up 6% driven by strong production results across virtually all of our businesses. Notably, Middle Market was up 9% due to the production results that I’ll touch on in a moment. International net written premiums were up 6% excluding the impact of changes in foreign currency rates. Turning to domestic production, we achieved renewal rate change of 2.1 points and renewal premium change was 5.3 points, while retention remains strong at 85%. New business of $532 million was up 8% from a year ago. We’re pleased with these production results particularly considering the pricing pressure in workers’ comp associated with strong industry profitability. Outside of comp, we continue to achieve renewal rate gains broadly across the remaining portfolio. Auto continues to be the line with the highest level of rate while property increases continued to accelerate in the quarter. We continue to execute our pricing strategy on the account-by-account and class-by-class basis with thoughtful balance towards retaining our best business, improving pricing where it’s needed and pursuing attractive new business opportunities. Our results for the quarter reflect our continued deliberate and successful execution in the marketplace. Turning to the individual businesses. In Select, renewal premium change was 4.8% while retention remained strong at 82%. New business was up 15% over the prior year quarter as we continue to leverage our investments in technology and workflow initiatives. We’re pleased with the returns in this business and our strategic direction. In Middle Market, renewal premium change was 5.2 points with renewal rate change of 1.9, up from 1.6 in the first quarter and up by more than 1 point from a year ago while retention remains historically high at 88%. New business premium of $315 million were strong, up 6% from the prior year quarter. As Alan mentioned, we couldn’t be more pleased with the impact our strategic initiatives are having on the business. So all-in for the segment, we continue to build momentum in the marketplace from our strategic initiatives and feel great about how we’re positioned for the future. With that, I’ll turn it over to Tom to talk about Bonds & Specialty Insurance.

Thanks, Greg. Bond & Specialty’s operating results were very strong with segment income of $204 million, up 41 million from the prior year quarter due to a higher level of favorable prior year development and higher earned premiums. The underlying combined ratio was also very strong at 80.5%, 1.5 points lower than the prior year quarter primarily reflecting improvements in the expense ratio also due to the higher level of earned premiums. As to the top line, net written premiums for the quarter were up 9%, driven by broad growth across our businesses. These results reflect the impacts of strategic product, marketing and distribution initiatives to grow these profitable lines and in the case of surety also reflect higher average bonded contract sizes and modestly increasing spending, in particular public sectors. Our growth in international was primarily driven by our UK management liability business. Turning to production in our domestic management liability business, given the level of returns we are achieving we continue to execute our strategy to retain a substantial percentage of our high quality portfolio while pursuing attractive new business. So we are pleased that retention again came in at a record of 89% for the quarter and that new business was strong, up 10% from the second quarter of last year. Renewal premium change of 3.4 points increased from the prior year quarter. So Bonds & Specialty results were excellent and we continue to feel great about our execution in the marketplace, our growth in returns and the opportunities that are strong market position and competitive advantages present for the future. And now I’ll turn it over to Michael to discuss Personal Insurance.

Thanks, Tom, and good morning, everyone. The second quarter results in Personal Insurance reflect an elevated level of catastrophe losses already mentioned by Alan and Jay. While we’re disappointed with the resulting net loss for the quarter, we’re very pleased with the underlying performance of both our agency auto and agency homeowners business. The second quarter results continue to confirm that we are delivering what we intended, a stable volume of auto business with improved profitability and a steadily growing volume of homeowners business with attractive long-term returns. Personal Insurance reported a quarterly loss for the segment of $17 million compared to income of $12 million in the prior year quarter. The overall combined ratio was up slightly to 104.9 from last year’s 104.1 but the underlying combined ratio improved nearly 2 points as catastrophe losses accounted for more of the total combined ratio. The quarter also included a modest amount of favorable prior year reserve development which Jay described earlier. In agency auto, the combined ratio for the quarter was 95.4%, down 11 points from the prior year quarter due in part to nearly 3 points of favorable prior year development and 1 point less of cat losses. The underlying combined ratio was also much improved, down nearly 7 points to 95.5% as a result of earned rate exceeding loss trend and more of a 9 [ph] loss environment. Stepping back to look at agency auto overall, we’re very pleased to see premium growth for the year-to-date of 9% with the combined ratio on both the total and an underlying basis below 96. Normal seasonality will most likely result in combined ratios higher than this for the full year but we’re pleased with the trajectory of this business and remain on track to deliver target returns over time. In agency homeowners, the second quarter combined ratio of 113.6% includes 26.2 points of catastrophe losses related to the wind and hail activity Alan mentioned. And the underlying combined ratio of 85.2 included about 1 point of impact from the Texas Windstorm assessment that Greg described. Catastrophe losses for the quarter were above both last year’s elevated levels and above our expectations with the late May event in the Northeast and the late June Colorado storm being the most significant for us. Given the magnitude of these losses and what is now a series of quarters in which catastrophe losses have exceeded expectations, a few comments are warranted here regarding our analysis of these results. In the quarter, the primary driver of the elevated cat losses is the nature of the events, their frequency, severity and location including the localized impact that is characteristic of tornados and hailstorms. As Alan mentioned, as we look at this quarter and our experience over recent quarters, we’re factoring it into our pricing and underwriting decisions. As you will note in our outlook, we expect renewal premium changes for homeowners to be slightly higher over the next four quarters than the comparable periods in 2017 and '18. Turning to the top line, agency auto premiums once again grew by 9% driven primarily by price increases as the volume of policies in force stayed broadly flat. We’re pleased to see retention holding steady as we continue to achieve renewal premium change in excess of loss trends. Although by design the pace of price increases is trending down from the peaks we reached in the third and fourth quarters of 2017. In agency homeowners and other, premium growth for the quarter accelerated slightly to 6% with continued increases in both the numbers of policies in force and renewal premium change. Retention held steady at a very strong 86%. The rollout of Quantum Home 2.0 continued with another four states during the second quarter. Another six states will launch next month. As we’ve stated in the past, the introduction of this new product will contribute to sustainable momentum and we continue to be encouraged that its flexibility, sophistication and ease of use are being well received by our agents and customers. And with that, I’ll turn the call back over to Abbe.

Thanks, Michael. And we’re ready to take your questions.

[Operator Instructions]. Your first question comes from the line of Jay Gelb from Barclays. Please go ahead.

Thank you. My first question is on the investment portfolio. Given the effect of the lower tax rate for corporations, I was hoping you can just update us on your views in terms of whether Travelers might consider reducing its major allocation to municipal fixed income investments in the fixed income portfolio?

Good morning, Jay. It’s Alan. I’m going to ask Dave Rowland to answer that question.

Sure. Thanks, Alan. We have not really seen a reason to change our strategy overall. We continue to find relative value at points on the curve where municipals are more attractive to us on a risk adjusted after-tax return basis. And so we continue to buy municipals and plan to do so in the future.

Okay, thank you. And then my next question is on the recent news with Johnson & Johnson and their emerging asbestos exposure around talc. Just last week they had a $4.7 billion legal judgment against them tied to asbestos. So I was wondering if you can give your broad thoughts on that issue as it relates to talc and J&J and whether Travelers might have exposure there. Thanks.

Sure, Jay. Thanks for the question. As you can imagine we’re always following all of the emerging issues and talc has been on our list of issues to follow for a long time. We don’t comment on any individual insurers. That wouldn’t be appropriate. But we will say as it relates to that issue and virtually any other issue – maybe not even virtually just every other issue, all the news is in the public domain and all the news that we’re aware of in the public domain or not is reflected in our thought process that goes into reserve. So I think I’ll leave that there.

I appreciate it. Thanks.

Thank you.

Your next question comes from the line of Randy Binner from B. Riley FBR. Please go ahead.

Hi. I had a question just on top line, which was good in the quarter. I think there were some comments on it in your opening remarks and script. But I just like to understand better if this better net premium written growth is a reflection of a better economic activity or if you feel that you’re capturing share from competitors? And if it’s the latter, just kind of elaborate on what the market dynamic is there?

Yes, Randy, it’s a broad question because I think you got to sort of almost look at it business-by-business across the place. You can definitely see in the exposure numbers that it’s at a healthier clip than recent periods this quarter and we do look at that and there’s nothing really unusual going on underneath. So we do attribute that to economic activity. But there are others strategic things going on in the business that we think are driving premium growth. So we’ve spent some time at Investor Day talking to you about the things that Greg and his team are doing in Business Insurance. All designs create top line opportunities for us with no change in appetite, no change in approach to risk but just the value proposition that we offer to our agents, brokers and customers. And it’s still reasonably early days but the traction has been good and that’s reflected in the new business numbers you see Middle Market there. And I’d say the same thing for Tom’s business, a lot of strategic things underway. I think he also talked about most of them at the Investor Day last fall and we think that’s making a difference. Are these seismic changes in market share, I doubt it, but I think it is contributing to really healthy production and really healthy earned premium results.

And I guess the follow up there is – and we’ll see how this develops over the earnings season. But these are – you’re a very large market and these are large gains. And I’m thinking more in Business Insurance in Slide 9 in particular in the slide deck. Is it – it seems like it’s a combination of things. I appreciate that answer. But is there a market out there? Is there another competitor who is backing away from key lines where you’re focused on, or is it really just an even mix of all the things you talked about?

Randy, I think it’s an even mix. And let me just reiterate something that I said in my prepared remarks which is when we look at the change in written premium quarter-to-quarter, for example, there’s a large part of that that’s coming from retained dollars. So that’s an equivalent retention rate on a higher base of expiring premium and rate. And so we view that as a very positive thing and a reflection of a lot of hustle by a terrific field organization and great data and analytics at the point of sale. But we think that really speaks to the quality of the business that we’re putting on. And again the fact that we’ve got no change in appetite, no change in our approach to risk just really solid execution again account-by-account basis whether that’s on a retained basis or a new basis. There is some exposure in that 5.3 points of price and again we do think that’s a function of economic activity and there’s some rate in there. So I think in terms of what we’re doing in the marketplace production top line, Randy, we free great about it and firing all on cylinders.

All right, great. Thank you.

Thank you.

Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

Hi. Good morning. My first question, in the 10-Q in your outlook you guys pointed at the potential for the imposition of tariffs and other barriers to international trade could potentially lead to higher than expected levels of inflation. Alan, if you could expand upon that comment? What lines you potentially see being impacted over what timeframe and how that translates into your margin outlook for your businesses?

Good morning, Elyse. Thanks for the question. Obviously, tariffs in conversation about trade generally is in the news and it’s completely appropriate to point it out. Tariffs presumably would impact the inputs that go into loss cost as are a lot of things, by the way, that impact the way we think about loss cost. I think generally we would look at that as affecting short-term lines and things that we could react to. So we don’t look at it. There’s no sort of outsized expectations here but we’re watching it. There’s a lot of rhetoric out there, so we’re just anticipating what could happen. I think the important takeaways are largely affect short term lines and we can react to it. And you and anybody can have a view on what those tariffs are likely to do to economic activity which we think has as much leverage for us positively or negatively as on the inflation side of things. So that’s the way I think about tariffs at least.

Okay. Thank you. And then my second question, the renewal rate change if we back out comp was about 3.6% in the quarter, up about 30 basis points sequentially, so obviously a little bit of a slowdown quarter-over-quarter than we saw last quarter. Can you just comment on how you expect the rating environment to continue from here maybe by line, getting a lot of rate and commercial, auto and property but how do you see all that coming together and do you expect next quarter will the number be higher than 3.6%? And then also as we think about getting into 2019 just how do you see those numbers progressing from here?

Elyse, as always, we give you some texture on outlook in the 10-Q for renewal price change and so we’re probably not going to get more granular than that. There’s not much more competitively sensitive than our pricing strategies. I’ll make some observations though. We do see a steady trend over the course of the year actually probably going back to beginning of 2017, we feel pretty good about that. The breadth of where we’re getting the rate gains continues to widen. We think that’s a good thing. Retention hasn’t shown any stress at all at where we are in the mid to high-80s, we got a long way to go before we’d feel like we were sacrificing retention. But we haven’t. Retention has held up. And so we feel pretty good about it. We are not – as I always remind you, we’re not executing for a headline number. We’re executing one account at a time to achieve a targeted return on that account and on our portfolio. So all-in-all, we feel pretty good about that. So maybe I’ll leave it there and happy to respond to a follow up if you have.

No, that’s helpful but just one point of clarification. In Business Insurance, did I hear the comment correctly that you guys are insinuating that earned prices is covering trend or it’s just at those lines getting the highest level of rate?

I think what Greg’s comment was is that and this is for all of BI that earned pricing is about covering loss trend. And so we’ve had a bunch of quarters in a row where we’ve told you that loss trend outpacing pricing has been a contributor to the underlying combined ratio. This is the first quarter probably in a while we haven’t mentioned that because the impact really is quite small. And that’s on an earned basis not a written basis. Obviously written basis would be more favorable.

Okay, that’s great. Thank you very much.

Thank you.

Your next question comes from the line of Kai Pan from Morgan Stanley. Please go ahead.

Thank you and good morning. My first question is on the BI underlying combined ratio deterioration under 70 basis points year-over-year. If you take out sort of like a $45 million of large commercial fire losses as well as the $9 million of assessment from the Texas Wind pool, that’s about 1.5 points. So effectively you’re flat year-over-year. I remember last year second quarter you had a higher basically elevated level of non-cat weather losses. I just wondered can you quantify this quarter’s non-cat weather losses relatively to both last year second quarter as well as your historical average.

Hi, Kai. This is Greg. Yes, we tried to give you all the pieces there so you could do the math on that. On the combined ratios we said the large losses were running just over the 100 basis points [indiscernible] that got to the 30 basis points. And so the gap that’s in the remainder is the normal margin of variability that we would expect from quarter-to-quarter. So we tried to give you all the pieces on that so you could project that going forward.

So, Kai, Greg mentioned a bunch of the sort of smaller items that – those things move around every quarter. They’re not predictable. And we try to do our best to give you a sense in the outlook section as good as we can but there’s obviously a lot of estimation in that. And obviously whether it’s base year or small weather or whatever, those things are going to move a little bit in positives and negatives and you tally them up and there’s a net impact. But it’s that kind of thing.

So your outlook suggest that second quarter non-cat weather loss is larger or higher than the normalized levels?

Say that again, Kai?

So your outlook said the second half assuming a more normalized non-cat weather losses which means the second quarter this year actually have higher non-cat losses?

If I understand the question right, Kai, in Business Insurance if that’s what you’re asking, non-cat weather was – are you talking quarter-over-quarter relative to our expectations?

Relative to your expectations.

It was slightly favorable in Business Insurance this quarter.

Kai, this is Jay. What we’re referring to is not just the non-cat losses. We’re just talking about non-variability – I’m sorry, return to whatever view is of normal for these things that will vary from quarter-to-quarter, non-cat losses being one of them, but we said all other loss activity. So we weren’t trying to just spike out the non-cats.

Okay. I just want to sort of figure out is randomness or is the loss cost trend above your earned pricing.

It’s a variety of things for which there’s always going to be normal variability. There’s no fundamental change in our view of loss trend in the quarter.

Okay, thank you. My follow-up question is on the inflation. Aside from tariff impacts we’ve also seen higher litigations as well as settlement events cost. And how do you think about loss cost trend going forward? And have you discount that in your reserve as well as pricing going forward?

I’ll invite Tom to comment on that as it relates to the management liability, but Kai because I imagine that might be your focus. But I will tell you that we certainly see in our own book and read about all the trends that you see and read about that’s reflected in of course our pricing and our reserves and there’s nothing the quarter that surprises us. But Tom why don’t you comment on --?

In our management liability book and again we read what you read but actually we have nothing that is out of the ordinary compared to recent periods when it comes to our own legal expenses. So normal inflation in there, we’re definitely seeing that but we have not experienced anything that is outside of what we’ve experienced in recent periods.

And Kai that’s not to say that our view of trend is zero, right. We’re aware of everything going on out there – at least we think we’re aware of everything going on out there that has the potential to impact those sorts of things and it’s reflected in our view of profitability and in our pricing.

Great. Thank you so much.

Thank you.

Your next question comes from the line of Amit Kumar from Buckingham Research. Please go ahead.

Thanks and good morning. One or two questions. First of all, maybe I’m just a bit confused here going back to the answer to Kai’s question. So if we ex out the noise in BI including fire adjustment and the [indiscernible] adjustment, are you suggesting that the underlying margin improvement – that there was underlying margin improvement and it was in line with what you said in Q1 10-Q or not?

No, that’s not what we’re saying. If you take the underlying combined ratio and you eliminate, for example, the fire losses, the observation was there are a number of factors and Greg mentioned the significant ones in his prepared remarks that impacted unfavorably the period-over-period underlying combined ratios. So the net of all those things; some were good guys, some were bad guys but the net of those things was a quarter-over-quarter negative.

Okay. I guess maybe I’ll tie that into the second question to that. If you look at sort of the underlined pricing discussion and you talked about some of the broader segments, can you also talk a bit more about comp trends and what’s going on, on that front and how does that impact the underlying loss ratio going forward?

Let me just follow-up quickly on your – my answer to your prior question. I just want to make sure I’m clear about this. There are always going to be things in a quarter that are variations from our expectations because our view of base year is going to change or the underlying weather is going to change or all the things that Greg mentioned, there are always puts and takes in that process. But what we’re telling you is there’s no fundamental change in the underlying trend. Those are just things that are always going to move one way or the other. So that’s the color I was trying to give you.

Can I just follow up to that and we’ll drop that second question? So what you were saying is this was in the volatility [indiscernible] so in the guidance and the discussion and all the questions, we should expect an acceleration in the gap between pricing and loss cost which will be at a faster pace in Q3 and Q4 and hence result in 2018 margin improvement versus 2017. Is that fair or did I muddle up the thought process?

So if you look in our outlook in the 10-Q, we give you a view on what the underlying underwriting margin and underlying combined ratio is going to do compared to the same period in 2017. So you can take a look at that. A significant part of that is we are assuming that putting this quarter aside, what we saw in the corresponding periods in 2017 where we had adverse small weather and we had adverse large loss activity, our view going forward for the second half of '18 is that those things will return to more normalized levels.

Fair enough.

Happy to talk to you about that offline and make sure that --

Yes, that’s fine. I think I follow for you’re saying. I think maybe there is an extreme focus on parsing [ph] for the language of the Q and then comparing it to the reported results. But what I understand from your answer is there’s always this additional volatility which one should factor in when looking into underlying trends. Is that fair?

Yes. We’re giving you our best view of outlook in the 10-Q but there are things that are going to change in small ways and there’s a number of those things this quarter and they net – you can do the math, take out the large losses but they net to what they net to.

Okay. I’ve taken up my question time so I will stop here. Thanks for the answers.

Thanks, Amit.

Your next question comes from the line of Greg Peters from Raymond James. Please go ahead.

Good morning. I appreciate some of the answers you have provided before, Jay, and I don’t want to get too hung up on one quarter’s results but the trend in PYD has been down for a couple of years and now that earned pricing is essentially covering trend and BI, is it fair to extrapolate that going forward maybe PYD stabilizes at these levels or perhaps you can use this opportunity to update us on your views of PYD?

I think my response is going to be something you’re going to feel all that great about in the sense that we don’t have a view and have never had a view of future PYD. Every quarter we do a very, very thorough and diligent review of all of our reserves to make sure that whatever trends we’re seeing, whatever changes in those trends we’re seeing, whatever data we’re seeing is not only factored into the reserve estimates but factored into our pricing on a very current basis. So we make no predictions whatsoever as to the future of PYD. Now looking back at history you can see that we have had considerable amounts of PYD in some periods and less PYD in other periods. So it has fluctuated. There’s no change in the way we think about the business. There’s no change in the way we think about reserving. So I think you can draw your own conclusions as to what might happen in the future but we make no predictions. Our view is we need to get the reserves right. They represent management’s best estimate. And what new information comes up in the future, we adjust it.

Okay. I wanted to give it a shot. My second question, in the past you’ve talked about organic innovation and also I realize there is this tremendous loyalty to the independent agent channel, but – and I’ve asked you guys about this before but insurance tech seems – there’s a lot of insured tech noise in the marketplace. A lot of it seems focused around disintermediation of the agents. And I was just wondering if you can update us on your perspectives around direct operations not only in personal lines but business?

Sure, Greg. You’re exactly right. We have a very active innovation agenda going on. We view that as a very important part of the strategic work that we’re doing and we think it’s important for us and for this industry. So we’re hard at work. Yes, we have for a long time been an independent agent broker company and I think we will for the foreseeable future. I don’t think that distribution channel is going anywhere. And I would say that as we think about insured tech, it goes way beyond distribution. There are opportunities to invest and think about opportunities whether it’s in collection and leveraging new data sources or whether it’s in leveraging artificial intelligence, whether it’s in using drone technology to reduce claim cost. We think very aggressively about innovation across the entire value chain, and so from marketing to claim settlement and everything in between. We do think that distribution is obviously an important part of that and we’re highly focused on it. And we bought Simply Business last year because we knew that advancing our capabilities as it related to engaging with commercial accounts was going to be important and we needed to advance our capabilities. At the moment where you see distribution on a direct basis in commercial insurance, it’s micro. And that’s not just us; that’s the industry. It’s really, really small stuff, think hundreds of dollars of premium but we do see something of a trend there and we’re not going to miss that. We’ll see where it goes and we’ll see how fast it goes but we’re on top of it.

Thank you for your answers.

Thank you.

Your next question comes from the line of Yaron Kinar from Goldman Sachs. Please go ahead.

Good morning, everybody. First, maybe a clarification to your answer to Elyse’s question on the inflation commentary in the Q and I apologize if I missed it in your answer. But as I look at the commentary around inflation maybe being a negative for next year and then I look at the commentary around business unit margins being stable or consistent with this year, possibly even better in Business Insurance. Does the commentary around the business unit margins incorporate the risk of inflation going up?

The answer is yes. Clearly our view of margins does incorporate a view of loss trends that has a view of severity which in turn has a view of inflation in it. I’ll just remind you that our results are most heavily leveraged to medical wage and toward inflation. So we’re not as highly leveraged to the typical sort of CPI kind of inflation that impacts short-term lines and that we think we can react to. But whether it’s CPI type stuff and the potential impact of tariffs or whether it’s wages or whether it’s medical or social inflation, whatever it is, our view of it is reflected in our outlook in margins. We could be surprised. It could be worse than we think, of course, but we do have a view of it and we look at it on a very, very granular basis aligning to the individual components of our lost cost. So we have a pretty sophisticated process of looking at it and it’s incorporated in our view.

Got it. That’s helpful. And if I can turn to net investment income again going back to the Q for a second, I think you’re guiding to $20 million to $25 million increases in 2019 per quarter. Maybe you can help me understand what was the duration of over four years and with premium growth accelerating, why wouldn’t that number be higher a year out relative to where it was in – I’m sorry, go ahead.

It’s a good question but you have to realize that it’s really being driven by the actual securities that are maturing in a particular period of time and assumptions associated with the reinvestment rate that’s going to be available at that time. And it will be determined by the actual investment opportunities then and what the yield curve looks like and where interest rates are in general. But at this stage that’s our best view as to what’s maturing and what the interest rates might be.

Okay, I appreciate the color. Thank you.

Your next question comes from the line of Sarah DeWitt from JPMorgan. Please go ahead.

Hi. Good morning. On the weather-related losses and that includes the cats and non-cat weather, you’ve seen elevated weather losses for the last several quarters as you’ve pointed out. So at what point do you call this the new normal and start pricing for it?

Yes, so the question is over what cycle do you look at, at changes in weather patterns? And so just to take you back on a slightly longer-term view, if you go back to 2009 weather was better than we expected; 2010 to 2012, a few year period, that was worst than we expected. Then 2013 to 2015 I think it was better than we expected. 2016 was about on plan. So my point is you look back over time and you have some good periods and you have some bad periods. And so we look at now what’s been a four to six quarter period and we’re not going to overreact to it, but we will react to it. So the first thing we’ll do is we will update our actuarial and weather models for the actuarial activity. So just that alone rolling through our models will change our view of the world if we did nothing else. As we are always looking at recent weather activity and trying to decide how to weigh more recent periods as compared to longer periods, that’s an ongoing process here and part of our thought process around weather. Again, we wouldn’t look at four to six quarters and overreact to that. And then we always look at lessons learned from weather activities and there are always lessons learned any time you have catastrophes like this. So we look at it. We take it in stride. We take it into account. We put it into our models. But we would not look at a year or so and say that we’ve seen a fundamental change because we’ve seen this before.

Okay, great. Thank you. And then just following up on the Business Insurance pricing, now that earned prices are in line with loss trend, will you still push for higher rates versus the 2% you achieved in the quarter or is that now sufficient to achieve your targeted returns, all else being equal?

We will push for rate in those lines and on those accounts where we need it and that’s the way we always execute. We got lots of accounts in our book of business that are rate adequate and we’re going to try really hard to keep those accounts. As always, there’s some portion of our book where we look at an account and say that needs rate and we will continue to try to get rate there. And the aggregate of those individual account decisions will aggregate up to a number. I would say there is sort of a lot of things out there that are working together. So pricing is better. Interest rates are picking up, that’s on a lag basis. It will work its way into net investment income. You’ve got the benefit of tax reform. You’ve got all the other levers that impact profitability; things like selection, mix, claims handling and expense initiatives. So all of that goes into the hopper and we’re always managing all of those levers to make sure that we’re executing towards our return objectives.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Josh Shanker from Deutsche Bank. Please go ahead.

Hi, there. I’ll give you both my questions upfront so you don’t think there’s a long one coming in the back. So I just want to understand and I get more granular I don’t think than you guidance in the 10-Q, but when you say improving margins I’m wondering now that we have the pricing versus loss cost trend out of the way, how much of that is the decision of the non-cat weather and the fire losses and whatnot and how much of the innovations you were talking about in expense save – you’ve been talking about for a year. I’m wondering if we break between those two things. And the second question, I just want to say one thing about that loss cost trend versus rate. If net renewal premium trend in BI is 2.1%, net premium earned trend is probably somewhere less than that I would guess. Maybe I’m wrong about that. Is that conservative to say that’s covering loss cost trend? I’m just trying to understand that better.

Yes, let me take the second one first. So we don’t think – we think it’s appropriate that it’s covering loss cost trend. It’s just the map we have and maybe what you’re leaving out, Josh, is the economic impact of the earned exposure, a significant portion of which behaves like rate. And then again – we all and by that I mean you all get very, very focused on this very narrow rate versus loss trend. And again that ignores the economic component of exposure that behaves like rate and it ignores all the other things that go into improving margin. And again I just mentioned the list but things like selection and mix and claims handling and expense initiatives, that’s all in there. So you can’t look at that 2.1 in isolation without thinking about all the other factors that impact margin. In terms of the outlook, a significant part of the improvement is what was adverse small weather and large losses last year returning to more normal levels. But everything is in the number, right. It reflects everything we know in terms of the outlook. But as we identify in the 10-Q, that is very significantly a return to normal level of small weather and large losses.

Okay. Thank you very much.

Thanks, Josh.

Your next question comes from the line of Brian Meredith from UBS. Please go ahead.

Thanks. Two quick ones here. Michael, I’m just curious, could you give us some thoughts on a competitive environment right now in personal auto insurance? I think we’ve seen some major companies reduce rate. Are you seeing that in the agency system?

Thanks, Brian. Yes, I would say certainly the environment in all of our markets is consistently competitive. We have certainly seen the announcements that you’re probably referring to of one carrier in particular taking rate reductions. At least at this point that’s one carrier taking rate reductions. Industry rate remains positive. When we pull filings and do our analysis that we’ve talked to you about in the past around what we’re seeing, we do see most carriers continuing to file for increases. Those increases so far this year are not quite as high as they were in 2017. I think that’s all very consistent with the industry data around loss trend and more of a 9 loss environment that I described earlier. I think that all lines up from our perspective.

Great. And then just one quick follow up. Alan, you did mentioned a little bit about interest rates moving up and that definitely could have some impact I think on pricing. Is that flowing through your models at this point when you think about the higher interest rate environment right now and your kind of thoughts on pricing and profitability by account or is it still too early for that to kind of have an effect?

We update our models on a pretty regular basis and they reflect everything that we know or are aware of or think about on an outlook basis. It’s hard to look at any one element in our pricing model and isolate it, but we do have a view of inflation and we put it in there. If you’re talking about interest rates --

Interest rates.

You think about net investment income in particular. I would say you need to think about the fact that that will flow through our fixed income portfolio on a lag basis because as Jay Benet just explained the portfolio has to turn over. So the impact of – the favorable impact of interest rates will be muted by that fact.

Right, but I’m talking more in pricing decisions than commercial lines and is the factor that you typically look particularly at some of your longer --

Say that again?

I’m thinking more in pricing kind of decisions with respect to commercial lines and what your rate activity looks like as far as the model and putting in interest rate assumptions. Are we at a point where that may be having an impact on pricing?

Hi, Brian. This is Jay. Within our pricing models as we’ve said in the past, we take into account not an embedded rate in the portfolio when it comes to looking at the product cash flows. We look at the product cash flows associated with a current interest rate environment and a view towards the future with regard to how things are being invested along the yield curve. So the pricing models themselves would be updated based on current views of interest rates. However, having said that, it’s not done in isolation, as Alan is talking about. And one of the things that you have to look at is what are your return expectations? The return expectations for products change when the 10-year treasury is at 2% versus when the 10-year treasury is at 3%. So it’s not just that it goes in and immediately has a point-for-point, dollar-for-dollar impact on the pricing. It’s a very thoughtful approach to it.

Great. Thanks for your answers.

Thanks. And we have time for just one more question.

The last question comes from the line of Jay Cohen from Bank of America Merrill Lynch. Please go ahead.

Thank you. Just one final question. The non-fixed income yield, do you view that as better than you normally expect, a little worse or in line for the quarter?

When we think about how that portfolio is doing, we like its performance and on a long-term basis or a plan basis we think it’s performing well. It’s just not performing as well as it did in the prior year quarter. But if you look at it on a quarter-to-quarter basis, I think you’ll see the second quarter is very much in line with some recent quarters. And as you know, it’s got a combination mostly of private equity and real estate partnerships and real estate owned. So there’s going to be some fluctuation in it. But we liked the performance of the portfolio.

But not far off from what you normally expect?

Actually, it’s probably a little better than what we would normally expect.

Okay. That’s helpful. Thanks.

Great. Thank you all for joining us.

This concludes today’s conference call. You may now disconnect.