The Travelers Companies, Inc Management Discusses Q3 2010 Earnings Call Transcript

Oct.21.10 | About: The Travelers (TRV)

The Travelers Companies, Inc (NYSE:TRV)

Q3 2010 Earnings Call

October 21, 2010 09:00 a.m. ET

Executives

Gabriella Nawi - SVP, IR

Jay Fishman - CEO

Jay Benet - CFO

Brian MacLean - President & COO

Greg Toczydlowski - President, Personal Insurance

Doreen Spadorcia - EVP & CEO, Claim Services & Personal Insurance

Bill Cunningham - EVP, Business Insurance

Analysts

Keith Walsh - Citi

Jay Cohen - Bank of America Merrill Lynch

Brian Meredith - UBS

Cliff Gallant - KBW

Matthew Heimermann - JPMorgan

Jay Gelb - Barclays Capital

Vinay Misquith - Credit Suisse

Greg Locraft - Morgan Stanley

John Hall - Wells Fargo Securities

Operator

Good morning ladies and gentlemen and welcome to the third quarter earnings review for Travelers. (Operator Instructions) As a reminder, this call is being recorded today Thursday, October 23, 2010.

At this time, I would like to turn the call over to Ms. Gabriella Nawi, Senior Vice President of Investor Relations. Ms. Nawi, you may now begin.

Gabriella Nawi

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

Speaking today will be Jay Fishman, Chairman and CEO; Jay Benet, Chief Financial Officer; and Brian MacLean, President and Chief Operating Officer. Other members of senior management are also in the room, available for the question-and-answer period.

They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation and then we will open it for questions. Before I turn it to Jay, I would like to draw your attention to the explanatory note on page one of the webcast.

Our presentation today includes forward-looking statements. The Company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those projected in the forward-looking 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 website, travelers.com.

With that out of the way, here is Jay Fishman.

Jay Fishman

Well thank you Gabby. Good morning everyone and thank you for joining us today. We're very pleased with our third quarter results, having posted net income of $2.11 per share, an increase of 28% over last year and operating income of $1.81 per share, a 12% increase over last year's amount

Operating return on equity was a strong 14.3% and we experienced very solid underwriting results across each of our business segments. Our consolidated GAAP combined ratio was 19.6%.

In an insurance pricing environment that remains largely flat in the commercial businesses, we were pleased to produce an increase of 2% net written premiums for the quarter.

Investment returns remained reduced from historical patterns as remarkably low interest rates, particularly short rates continue to impact net investment income. Lastly we've grown our book value from year-end 2009 by 13% to $59.11, a in a very strong quarter.

This morning we're going to do things a bit differently than we have in previous quarters. All of the data that we have historically provided is still included in our webcast.

However we're only going to hit the highlights and you can review the details on your own and obviously Gabby is available later to take any questions you may have. Instead, we're going to take the opportunity to share a few additional insights into our business that we think you'll find interesting.

First, we've spoken at length in previous presentations about our program's design to grow our business organically. This morning we're going to share with you summery analytics of our business insurance account growth and we suspect that a number of you will be surprised with the growth we've achieved. Second, a number of you have asked about the impact of reduced interest rates on our net investment income.

Jay Benet shared an analysis of the impact of reinvestment rates at an investor conference in September and we've updated it for current conditions. We've analyzed the maturities in our fixed income portfolio for the next three years and we'll share with you the projected impact on net investment income if re investment rates remain at current levels.

The municipal bond environment remains a topic of some interest. We've updated an analysis of our municipal bond portfolio that we did for the second quarter webcast based on current ratings and market conditions. As we've said before, it is an actively managed portfolio where we are constantly evaluating risk and return of individual securities. There are never any guarantees but we couldn't be more pleased with the positioning of the portfolio.

Finally, before I turn it over to Jay Benet, I want to comment on a topic that we're thinking about regularly. As we've discussed before we believe the most thoughtful way to run a property casualty business for the long term is to produce superior returns on equity. As many of your understand, we can't promise consistent growth in either revenues or earnings and do so maintaining a thoughtful risk profile.

Consequently a number of years ago consistent with our aspiration for superior returns on equity and given what we viewed as typical underwriting and investment environments. We determined that we will target a mid-teens return on equity overtime and do so by achieving top tier profitability and returning access capital to shareholders.

Two very important origin that previous sentence are overtime. Since January 2005 the first full year after the merger of St. Paul and Travelers, our average annual operating return on equity is 14.1%, then we have recorded more than $20 billion in operating income and have returned nearly $17 billion in total shareholders, $13 billion in share repurchases and nearly $4 billion in dividends. Given the current general economic and investment environments few people have asked whether we intend to change our goal now.

We are certainly not economists nor do we what the future holds. However, the underlying assumption we are making is that the economy will eventually return to a more typical investment environment particularly with respect to the fixed income world.

Consequently we are not changing our goal now, having said that we have been very clear in the recent past that the current environment simply doesn't permit achievement of a consistent mid-teens return right now if one assumes no favorable reserve development and normal catastrophes in weather costs.

If in fact the market ultimately presents long term meaningfully reduced investment returns not only for us but also for the market at large which for us are not offset by improved underwriting conditions.

We will obviously rethink what that means for our aspirations and what investors can expect of us. So for now our target remains intact and we continue to execute in the marketplace consistent with that goal.

We seek rate selectively and thoughtfully where weight is needed especially in those cases where account loss experience has been inconsistent with our underwriting expectations.

But we are always managing rate and retention with a clear view of maximizing long term value to our arbitrarily and aggressively seek rate and be a victim of adverse selection and watch our retention drop perfidiously will not be a smart or thoughtful reaction to the current environment. As Brian will explain in greater detail our field people take their lead from us and right now their direction is unambiguous.

We feel great about how they are executing and we believe that we will continue to be amongst the best performing property and casualty companies around. With that let me turn it over to Jay.

Jay Benet

Thanks Jay, I would like to start with a few overall comments about the quarter relating to page four through 10 of the webcast. Operating results ex-cap and favorable reserve development and including net investment income were generally inline with our expectations as they have been all year.

The third quarter results benefited from a relatively low level caps a $117 million pre-tax which was lower than prior year CAT losses of a 158 million pre-tax as well as what we “normally planned for in the third quarter”. I would remind you though that year-to-date CAT losses have been quite high over a $1 billion on a pre-tax basis as compared to 441 million pre-tax in the first nine months of last year which would approximate a more normal year-to-date amount.

We had another quarter of net favorable prior year reserve development in each of our segments concentrated this quarter in DI and FPII. The quarters reserve development included and asbestos reserve increase of a $140 million pre-tax. Included in this asbestos reserve increase and therefore in the current quarters operating income was a $70 million pre-tax benefited related to the recent favorable ruling we received against Munich Re and certain members of (inaudible).

The total awarded to us by the court in this ruling was $417 million, broken down as follows, $251 million owed to us under the terms of the reinsurance agreement and interest of $166 million.

Based upon this ruling, we reduced our uncollectible reinsurance reserve by $70 million, thereby reflecting in our financial statements the full $251 million owed to us under the terms of the reinsurance agreement. Importantly the benefit of the $166 million interest award was not reflected in either the current quarter asbestos charge or in the current quarter's operating income since GAAP requires its interest to be treated as a contingent gain generally until all appeals have been exhausted and or the dollar amount is received.

All of our capital leverage and liquidity measures remained at or better than target levels. We are holding company liquidity at $2.8 billion at the end of the quarter, which was more than twice the target level due to the timing of share repurchase activity and the timing of dividends from our operating companies for our holding company.

During the third quarter we repurchased $600 million of our common shares, a higher amount than we would normally repurchase in the third quarter due to the strength of our balance and the light wind season we have experienced thus far and paid $169 million in common stock dividends bringing the total cash we returned to our shareholders in the past nine months to almost $4 billion. Third quarter operating ROE was 14.3% and book value for share once again increased, up 6% in the quarter and up 15% from a year ago.

Page 4 makes reference to our very high quality investment portfolio which includes a $4.6 billion pre-tax net unrealized gain at the end of the third quarter; up significantly from the $2.8 billion pre-tax net unrealized gain we recorded at the beginning of the year. A little over 60% of the net unrealized gain relates to the muni bond portfolio.

Page 5 provides an update of certain data we previously provided to you related to our muni bond portfolio. There have not been any significant changes in the portfolio recently, not withstanding our active management of the portfolio based upon a risk reward view for each individual holding due to its very high quality.

The portfolio currently includes bonds that have gross unrealized gains of $2.8 billion pre-tax and bonds that have gross unrealized losses of only $8 million. That's right, only $8 million of losses, not billions.

I'd also like to make some specific comments related to page 9 of the webcast. During a presentation I made at a recent conference, I referred to today's low interest rate environment and provided an illustration based upon our portfolio schedule bond maturities in 2011, 2012 and 2013 of the impact on net investment income in those years. If the current interest rate environment persists through this period of time and all of the variables such as average assets, mix, credit quality and duration remain constant.

The illustration I provided at the conference was based upon reinvesting a 10 year rate or approximately 100 basis points lower than the combined yield on the maturing bonds, rounding the interest rate differential to the nearest 50 basis points.

Since then interest rates have fallen even further and we have updated the illustration to reflect a 150 basis point interest rate decline. We've also added another line to the illustration which shows the differential between NII and the subsequent years. Again all other variables being held constant that includes the partial year impact of reinvesting 2010 maturities at lower interest rates. The full year impact of this activity will not be felt until 2011 in subsequent years since 2010 maturities will have taken place throughout 2010 rather than on the first day of the year.

As you model these years I would also remind you that NII will also be impacted by the reduction and average invested assets that results from our share repurchase program and with that let me give the mike over to Brian.

Brian MacLean

Thanks Jay. Our typical disclosures on the business segment is also around pages 11 through 22 and we will of course take questions on any topic. Instead of going through the slides I will give a few perspectives on our businesses and the marketplace. In business insurance we continue to be very pleased with the positioning of our franchisee. Both our account retention and flow of new business opportunities remain near historically high levels which we believe will enable us to grow premiums if and when the economy improves.

Core underwriting margins continue to contract modestly in the quarter consistent with both prior quarters and our expectations. In short the loss cost trend slightly outpaced through the rate changes.

We continue to see the negative impact as the economy is having on our insured exposures. Audit premiums which are retroactive premium adjustments charged to reflect changes and insured pay roll, vehicles, property values or business receipts have improved but are still negative.

The exposure change on renewals which is a perspective look has also improved throughout the year and is now approaching zero. On a combined basis these impacts are reducing premiums approximately 2% through the third quarter.

So in another word our data suggest that the economy is bottoming out but we don't see any evidence at current economic expansion. Given these trends our underwriting strategy remains consistent. Retain our quality business, optimize the profitability on this retained book by getting rate where it is warranted and write new business for long term profitable growth. Directionally this strategy maybe the same as many of our competitors but aligning it with our competitive advantages namely our talent, technology, actionable management information and breadth of distribution, we believe we are very well positioned.

Over the last seven quarters we have seen significant account growth and as a result we believe that we are growing market share. On slide 16, you can see that since year end 2008 we have grown accounts in business insurance by 8.5% compound annual growth rate.

On the next slide we have taken this data and broken it out for two of our major businesses. In our small commercial business or select accounts you can see that it is growing by a 10.6% CAGR. This increase has been driven by our select express product that's our no touch insurance solution for small business customers.

Through the combination of our sophisticated rating capability and cost efficient frontline delivery we are able to provide our agents and customers with an industry leading product and platform.

Within select in the plus end or the larger end of this market we have allowed our accounts to be decreased due to extremely competitive market conditions.

On the slide you can also see that we have grown commercial accounts by 4.4% compound annual growth rate. The increase in the number of accounts in this business is driven primarily by the continued introduction of the new products and the specialization and expertise of these products and our front line underwriting and claim staff bring to the marketplace.

This growth in commercial accounts is representative of what we are seeing across our middle market businesses. So we're encouraged by this increase in the number of accounts and again if and when the economy improves the resulting impact on exposure should create a compelling written premium trend.

Given both this top line dynamic and the current core underwriting profitability of this book of business, we remain very pleased with business insurance current performance and its position in the marketplace moving forward.

In the financial professional and international segment, I will make just a few overall comments. First, writings in our international businesses are down compared to prior year quarter as we are addressing risk in pricing in light of catastrophe and other severe weather losses over the past year.

Secondly, although we remain very pleased with the market position and quality of our construction surety business. The impact of the economy on construction spending has resulted in fewer new business opportunities and are writings in this quarter reflect this.

And lastly, we continue to monitor the analysis on impacts of the financial marketplace disruptions on our management liability business and our conclusions remain the same. That is our losses are developing within or slightly favorable to our expectations.

Turning to personnel insurance, we're extremely pleased with both the underwriting and production results in the quarter. In both agency, auto and property policies in force continue to grow and core underwriting margins expanded as earned rate increases outpaced loss cost trends.

In our property line of business, weather losses were both less than third quarter expectations and a welcome relief from the pattern we saw in the first half of the year. While the continental U.S. was not meaningfully impacted by any of the storms generated during the peak of the hurricane season, the number of near misses this quarter highlights the importance of underwriting controls and risk management policies in this business.

Agency property production results for the quarter continued to be strong in spite of the difficult housing market with quarter-over-quarter pip growth remaining at historically high levels. In agency auto our new business continued to improve and we had our best quarter-over-quarter policies in force increase since the end of 2008

Given the continued expansion in core underwriting margins and strong top line trends, we remain pleased with both our current and going forward positions in these businesses.

So across all of our businesses we feel great about our execution in the marketplace and one the primary reasons we believe our organization has executed so well in these times of uncertainty is that we have kept our message to the field clear, unambiguous and consistent. And that is and in these market conditions, just like pretty much any other, the role of our underwriters is to maximize the long term value of the portfolio to balance the desire to keep our quality business well at the same time optimizing the returns on that portfolio.

Fundamentally, they do that by making sure they understand the accounts risk characteristics and can estimate the potential losses from these exposures. They then seek the select risks in the marketplace where the premium level is appropriate for this view of the losses.

We believe our field understands their role as the best tools in the business to execute and as long as they keep doing this we will keep competing in the marketplace successfully. With that, let me turn it back over to Jay.

Jay Fishman

Thanks Brian. Page 23 summarizes our updated guidance for full year 2010 fully diluted operating income per share which we've increased from the previous range of $5.20 to a range of $5.75 to $5.95. In round numbers this should translate into an operating ROE of just under 12%. We're now assuming cut losses of $765 million after tax or $1.58 per diluted share, which incorporates our actual catalogue for the first nine months of the year and our original estimate for the fourth quarter.

No further estimates of prior reserve development either favorable or unfavorable, a low single digit decrease in average invested assets, ex-unrealized gains and losses this whole thing from a reduction of holding company with liquidity due to the share repurchases. Full year share repurchases of 4.5 to 5 billion and a weighted average diluted share count after share repurchases and employee equity awards of approximately 485 million shares. Jay would like to say some additional comments before we go to Q&A.

Jay Benet

Thanks Jay. Just before we open it up we had a pretty good run here for sometime and the folks around this table I think actually get an undue amount of credit for that performance. We have publicly acknowledged all the folks of the investment department, we have done a remarkable job in unprecedented conditions of keeping this company moving ahead but the fact is I want and our own folks listen to these calls and I just want to spend 15 seconds letting 10,000 people know that we recognize that the business is done in the field and trade at a time and we couldn't be more appreciative of the underwriting discipline and the thoughtfulness and your attention.

And I don't care whether their commercial lines underwriters or personal underwriters, but they refrain the technology or opts risk control. This is a complicated business I mean by 30,000 folks who understand it to keep the organization moving ahead and I just wanted to take a minute and say thanks and with that we are ready to go for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Keith Walsh from Citi. Please proceed.

Keith Walsh - Citi

Hey, good morning everybody. I guess first for Brian on auto, I guess a lots of talk in the industry about positive rate trends. So, why the decision here to loosen in terms of conditions with the 12 month product and also if you can comment on the direct initiative where we stand and I have got a follow-up. Thanks.

Greg Toczydlowski

Hey Keith this is Greg Toczydlowski from Personal Insurance. On the annual policy first of all take that one. There is a number of dynamics that we look at and the annual policy. Some of them being agency selling behavior, retention and pricing and we look at all those dynamics together we thought it was the appropriate time to drive that inside the business and I think the margins and the growth are showing that. That's clearly not the only feature that we have been throwing out there into the market as a positive impact.

And when we look at all them we feel good about having that in the product.

Brian MacLean

I will just make an observation on that agency costs matter very much in the equation too and instead of yielding obviously two rules a year you deal with one not an insignificant difference. On the direct initiative you don't actually have lots to say, we continue on course with the plan that we set. We said we are going to be investing and losing money and in fact we are on positive sides. We are beginning to learn a fair amount about the customers that respond. What they find attractive in the value equation and I will let you know if are doing about 5000 policies a month in our direct initiative now. So we are on our way to learning but make no mistake we view it as a very long term investment.

Greg Toczydlowski

Okay and then Jay just a follow-up on pricing I mean I acknowledge your comments that you said, the ROEs has been very strong last several years but the chart show clear price deterioration and why the continued focus on growing in certain business lines here when clearly the accident of your ROE is probably sub 10 at this point. Thanks.

Jay Fishman

I think the second half of your question or the statement is actually just in error. We look at a lot of data. In fact I'm not sure anyone analyses data any better or more robustly than we and I will tell you that even assuming current reinvestment rates now, current reinvestment rates now, the portfolio, meaning the combination of renewal and new, on our business insurance business is not in single digits. It's actually better than that.

Now the dynamic is we're focused on -- and I hope my comments really were fairly specific about this, we are focused on retention and I would say taking new business selectively. No one should come to the conclusion that we are focused on growth. There isn't anything in the comments or in the data that would give anyone -- should point anyone to the conclusion that we're focusing on growth as the word you use. It is a very selective approach. It is not only based on price but its risk selection. We spend most of the time on these calls speaking about rate. Our folks in the (inaudible) spend most of their time focused on the risk selection.

So it's as I said a complex business where you're balancing elements. I just couldn't be more pleased with how we're managing through this largely unprecedented environment.

Keith Walsh - Citi

Okay, thanks for clarifying.

Operator

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

Jay Cohen - Bank of America Merrill Lynch

Thank you. Two questions. I'll just ask both and let you guys address them. The first is Brian I think you mentioned that your kind of core combined ratio in business insurance have gotten worse but it looks like its gotten better and I'm wondering what's driving that, that ex development, ex catastrophes. And then secondly, maybe for Jay Fishman, when you think about your ROE, are you making any adjustments for your own cost of equity capital and given the changes interest rates presumably that has come down as well.

Brian MacLean

So first on the combined ratio and I'll throw it to Jay Benet for some of the specifics but obviously every quarter there is stuff running through the combined. We still see when we net out everything that we think is unusual a slight deterioration in what we call the core combined ratio. But Jay, why don't you go through some of the changes.

Jay Benet

Yeah Jay, in any period, a period comparison we try to look at as Brian said what are the key core underlying trends of price and loss cost but there are also things that will impact it. Small weather, not cut weather in quarter versus another year-to-date, one year versus another; we've talked in the past about large loss activity. Last year we made a re-estimation of the full year loss pick for business insurance in the fourth quarter. We also did that in the third quarter but when you do that it impacts prior quarters of the current year. So I think when you see the full year results, you'll see more of what Brian is talking about and if there are impacts associated with large loss activity and small weather we'll try to point that out as well.

Jay Cohen - Bank of America Merrill Lynch

That makes sense. Thanks.

Jay Fishman

In terms of the return on equity, it's actually an awfully simple story. The return on equity that we publish in our press release and in our financials is straightforward GAAP return on equity which is the earnings that we reported for the period divided by average equity for the period and Jay and Doug can take you through all of that. We obviously understand that if our entire $70 billion investment portfolio were re-priced today at today's reinvestment rates, that we would end up with a different return.

We understand that, internally the analytics that we have we actually do look at it that way. We actually do evaluate products and businesses and lines based upon investing cash flows at today's available rates and it's those analytics that form the basis of our pricing strategy and our growing strategy and they are proprietary.

They are important, they are the subject of substantial discussion here and it's that return that gives us our approach to whether we are aggressively growing, not aggressively growing or willing to strength. Brian spoke today about letting the large end of select strength because we are pricing with such and the risk selection effect that the returns are simply aren't adequate to support business.

So we are letting that shrink somewhat. And certainly we understand one of the reasons that Jay presented the schedule that he did about investment income is that if these investment markets continue. If they are what they are and the underwriting environment never changes and there is no favorable development. Now we are not going to be able to achieve mid-teens return on equity and we certainly understand that and it's actually not all that difficult to model out the business and see what you think it is.

We certainly do it all the time and it can be achieved. So we talk pretty simple, the numbers that you get in press release and GAAP things we are all getting and internally we have robust analytics that left us evaluate the current underwriting profitability based up on today's reinvestment rate and that's what establishes our underwriting energy or enthusiasm.

Jay Cohen - Bank of America Merrill Lynch

I appreciate. I guess my question really surrounded the hurdle way what you need, in another words if you are comparing your ROE versus your own cost of equity capital if that cost of capital has come down shouldn't the hurdle rate comedown as well naturally.

Jay Benet

Well that actually gets to the comments that I made and is just absolutely spot on. There has at least in my career never been a period with a gap between the cost of debt and the cost of equity has been any wider than it is today. I find it actually remarkable that they are high quality equities with the dividend is actually higher than the debt yield on the ten year debt, high quality companies.

So it tells you that the market place is at the moment somewhat upside down and the real question that you are asking and I think it's extra-ordinarily relevant one is that is going to continue and possibly been in an environment where the two year treasury is a 2.4% and the cost of equity is a 10 or will there not be arbitrage activities that will take place. But in one fashion or another we will lower that gap, reduce that gap into a more normal historical rage. We are extremely attentive to it. One can speculate that one way that cost of equity will go down is a rising equity market and some folks have asked me why do you think the market is generally is rising now. One of the answers to it is that it's reflecting at a decline cost of equity. It's somewhat kind of intuitive to think of it that way but frankly it's entirely possible.

So, I don't know what the cost of equity will be in a few years. My guess is that you got a financial company ten years from now in today's environment and you look back three years from now and the company has achieved a 10% cumulative return on equity and you will feel great.

You won't feel good, you will feel great and if you look broadly at the financial services arena and we do and I do and you will look at the returns that institutions of producing particularly in the banking arena where the rules and regulations and levels of dynamics are changing so much I think that the dynamic of what returns are going to be over the next few years is a fascinating question and what it is that investors are going to seek but my comment was for now our goal is our goal.

We will do the best we can. We are not going at arbitrarily and go out through the marketplace and say, the worst thing in the world to do is to go out to the marketplace and say we want five points of rate on every account. You'll get five points of rate on accounts that need 10 and you'll lose accounts that don't need any.

The easiest way to get adverse selection is to take away the underwriters authority to evaluate risk and return on an individual trade. So no mystery here. We acknowledge the environment is not possible right now, nothing we can achieve with these returns. But the two words overtime are just critical to us and that's how we think about. This is a long term business and we manage it over time.

Jay Cohen - Bank of America Merrill Lynch

Great, thanks Jay.

Operator

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

Brian Meredith - UBS

Yeah, good morning. Two questions here. First one, I was hoping Jay if you could talk about the general administrative expenses in the business and circuited the big, big drop this quarter. Anything unusual going on there and I have one follow-up.

Jay Fishman

I'm going to sound like I'm repeating myself a little bit from Jay Cohen's question but as it relates to the expenses and again in any quarter you can have some things go up and some things go down. I think last year we had some assessments that came through in the third quarter. This year we had some credits that came through in the third quarter. I think overall that we've been very thoughtful in trying to manage our expenses and keep the expense ratio in line and those are kinds of things that have created the period to period variability but there is nothing in particular from an operational standpoint that's driving it. We do have differences and timing of things like advertising cost and travel that go through. So I can't think of anything in particular that I'd point to that says this is a fundamental change.

Brian Meredith - UBS

Is there like an underlying rate we can think about that our expense is kind of flat or are down a little bit. Just trying to kind of think about it going forward. I don't want to essentially drop expenses by 10% a quarter here going forward.

Jay Fishman

That's I would say relatively flat, particularly if you look at it on an expense ratio basis.

Brian Meredith - UBS

Okay, okay. Terrific. And then the second question for Brian, lost cost inflation in the commercial lines area, we've heard a little bit this quarter about some tick up and some loss costs inflation from some other companies. I'm wondering what you're seeing.

Brian MacLean

So splitting it into two pieces, frequency for us has been very flat and granted that is compared to last year and the year before where we were having some significant declines in frequency and in some of our businesses. So the declines have leveled off but we're still pretty pleased with where they are leveling off at. The core loss inflation or severity component of it is pretty benign. It's not a zero. It's a plus number. But it's a mid to low single digits plus number. So overall loss inflation continues to be in a pretty good place for us.

Brian Meredith - UBS

Okay, thank you.

Operator

Our next question comes from the line of Cliff Gallant from KBW. Please proceed.

Cliff Gallant - KBW

Good morning. Two questions. First, pretty simple, there was recent news about Chinese Drywall in a settlement that looks like state farm was reaching. I was wondering if you had any comment on or an update on your view on Chinese Drywall and then second, I was wondering if you can to speculate on a sort of a larger basis, what you think the industry accident year combined ratios are or should the industry actually here the combined ratios, should the industry exit your ROEs look like in comparison to what you are reporting.

Jay Benet

We have enough trouble keeping track of our own. We are going to pass on try and estimate what the industry is.

Doreen Spadorcia

Good morning This is Doreen. I will take your Chinese Drywall question. Bottom-line we haven't seen anything that would cause us to change our view that we talked about previously. I think we showed you slide in the first quarter. We just don't think it creates a significant exposure to us and basically what's changed the first quarter as we have probably got a few more insured that had made claims against us and that on the positive side we actually had a ruling in the District Court in Virginia finding that our home owners policy is not provide coverage for Chinese Drywall.

The State Farm settlement, there has been some multi-district issues, there are two cases pending that have a lot of class action plaintiffs as well as a number of defendant. And some companies that have had large home owner populations have chosen to participate with some of those settlements where you have seen some of the Chinese Drywall manufacturers and some distributors putting in some dollars but for us we have not participated in those given where our exposure is and the positive ruling that we received.

Cliff Gallant - KBW

Okay. Thank you.

Operator

Our next question comes from the line of Matthew Heimermann from JPMorgan. Please proceed.

Matthew Heimermann - JPMorgan

Hi. Good morning everybody. Two questions, first could you give us a little bit more color on the BI account growth slide you showed. I guess I will be curious when whether or not there is a dramatic difference in accounts size for the new accounts versus maybe the existing book if you go back to year end '08.

And also just given what we have seen in premium, could you maybe just discuss how the exposure trends at those new accounts maybe contrast with exposure trend change on the existing book and then I will have a follow-up.

Jay Fishman

For starters on the mix dynamic within the account growth, what we try to break out the small commercial from the middle market and obviously the small commercial. We are absolutely growing it from a mixed perspective in the smaller array. So, that's driving some of the dynamic of the total but within that the express component of small commercial which would have a fairly consistent account sizes growing dramatically. So we feel good about that.

Jay Benet

And importantly just in other terms, Select Express is the technology platform that we introduce now I don't know maybe three years ago and that has really dramatically changed the way what smallest end of our small commercial business is processed. I have discussed this before but the predecessor platform was 20% underwritten in the technology, 80% was referred out to underwriters for review. This is a very slow approach to the smallest end of the business, 80% now is done in the technology and only 20% comes out for human intervention.

So it is dramatically different, this platform is the basis of the flow significant increase in quote activity that we have seen from ages. We are just been quoted a whole lot more with this platform because it's easier and more efficient and as a result that business is growing significantly. It is the smallest end of the small commercial business.

Jay Fishman

And I think Matt and correct me if I am wrong, just to your question are we getting the growth just because we are shifting mix or do we think we are actually growing like type of accounts and the answer is there is a piece of it that's mixed but the bulk of it is we're growing light type of accounts. So.

Jay Benet

Yes, in the middle businesses, the average account size that we're bringing in that was fairly consistent with our renewal book of business and the difference between the total gross is basically the exposure, the audit premium and the renewal exposure change that you're increasing your overview.

Brian MacLean

And help me a little bit with the second half of what you are asking.

Matthew Heimermann - JPMorgan

You got to it with the last comment. So that's helpful. The other question I had was, I need to follow up on Brian, actually maybe I'll ask a different one, on the direct side, I guess are you out of -- you used the -- I think you used the word experiment Jay but it looks like the premium volume is starting to decelerate sequentially kind of low to mid $20 million on a quarterly basis. You would expect that to grow I would assume but I guess are you proactively kind of trying to restrain the growth in that channel till you ensure you kind of understand the dynamics or you are now at a point where growth will be what it will be, you kind of have a more clear view of the appetite and some of the variables that you want to pay attention to.

Jay Fishman

I'll give you my perspective and I'll Greg to chime in as well. It's sure closer to the former than the later. We're actually -- I wouldn't say constraining. That's not quite the word but what we are doing is we're only doing that amount of business that we need to do to continue to advance the learning and the learnings are how do we get a customer to respond to an ad, how do we get that customer either through our call center or our technology platform to actually end up with quote, how do we convert that quote to a sale and then most importantly, who are we bringing in and what's the loss experience. What we -- you've said -- the pricing track we're using for direct is the same pricing track we use at our agency plant. It is our presumption that the loss experience between those two groups will be different, that the act of where one purchases is an identifying characteristic -- a projecting characteristic of loss experience. So we're just trying to do enough to keep the learnings moving ahead. We are not remotely at the level now where its goal, invest in advertising dramatically, or whatever we can do, we can do. If you can add to that.

Greg Toczydlowski

I'd just echo Jay's comments. We spend a lot of time watching the economics and the operational expectations of the business and they're both right within the target of where we want to be. As Jay said, the function of the top line is how we advertise, how we entertain ourselves out in the digital space and clearly that's the amount of investment that we put in this. I think it's a fair assumption that if you look at the last three quarter's run rate, that's a fair assumption of what we could expect for this business to continue running at both months going forward and as Jay said we're really trying to really maximize our learning with minimizing the investments inside this business and as we get more of those learning's we'll continue to grow the business. We're very cautious in how we're doing it.

Jay Fishman

We didn't characterize it by the way as an experiment. The implication of that is that we're committed to making this work and it will take years -- it will take years for us to get to the point where it gets to break even or frankly becomes profitable but we are committed to getting there and what we're doing is to Greg's exact point, is balancing the cost of investment with the value of the learnings that come out of it.

Matthew Heimermann - JPMorgan

Okay, that's fair. That was my poor word choice. I guess based on your last comment and isn't it fair to kind of think about quantum has a parallel in terms of -- because I think there was about a 24 month period of kind of rolling that out and to the point where you were kind of fully comfortable just letting it run. So it sounds be much longer.

Brian MacLean

Yeah it takes much longer than that. Yes.

Operator

Our next question comes from the line of Jay Gelb from Barclays Capital. Please proceed.

Jay Gelb - Barclays Capital

Thank you. I want to ask a broader picture of question on the situation with the bank dislocation with regard to mortgage servicing. Could you talk about how or what the implications might be from the insurance side on that from a Directors and Officers and Arizona's mission perspective as well as what the implications could be for Travelers investment portfolio. Thanks.

Jay Fishman

Let me take the first piece of that related to the insurance business. It's early days and when I say early days I mean in the context that we are still learning about the facts and circumstances and so it's hard to really come up with a definitive insurance exposure perspective in that environment but having said that you are taking a look at our exposure to the top 15 mortgage services and our exposure is really very, very limited there and that is in some respects of fall out of the credit crisis underwriting we have been doing going back to the first to second quarter of 2007.

So all the big names that you and we have been reading about in the news, we have very, very limited exposure there.

We don't view it as an exposure really to the community banks and we think that's because they just haven't been foreclosing the kinds of volumes that would involve the processes that is really in question here and we haven't seen any indication if that's the case.

So at least early days from the insurance perspective we are not doing it as an outside issue.

Jay Benet

On the investment side just suppose to couple of facts. First our entire portfolio of subprime and also ABS is are actually $300 million and $200 million of that was 2004 and prior and we have added $100 million selectively since the crisis began. So, not a significant investment there, still very highly rated.

On the residential CMO side that $2.3 billion of that again virtually all 2004 and prior we turned away from the market as both the mortgage market and the real estate market really heated up.

862 million of it is agency and 1.4 billion is non-agency. The facts and circumstances of this what actually is happening and the implications are as confusing as I have ever seen it, and it's not at all clear what the long term issue really is. If we are talking about episodic relatively short term delays in foreclosure activity, our assessment is no problem with respect to the investments and we have already seen some of that episodic short term delay.

And the other extreme is the notion of a long term industry wide broad-based foreclosure moratorium. We don't know how to access that, I don't know how to access some thing that actually has never happened before and frankly I think of all of the issues that will incur the impact of asset backed securities may actually be the smallest in that kind of environment.

So I don't know to size up that kind of long term broad-based moratorium. Again the episodic short term stuff we could be wrong on this but our assessment is no underlying problem.

With respect to the flip side of the issue which is the ability to put mortgages back to the originating institutions, of course the GFCs have always have had that. There is nothing particularly no on that front and again we could be wrong on this but our assessment has been that it's hard for us to figure out a scenario where mortgages get put back to the originating institution and the bond holders lose -- the originating institution seems to me it could be in a position to lose but we have some difficulty figuring out the scenario where the bond holder loses but early days on this would even be an understatement. It's right at the beginning. Bill?

Bill Cunningham

I wouldn't add much. You obviously read the story about Pimco and the Federal Reserve Bank of New York sending to Bank of America with a list of 115 tools, where they would like to see mortgages put back. We looked at that list. We own three of them. We think -- I think there are three cross currants. One the validity of foreclosures which have taken place, two the ability on our perspective basis to foreclose and courts are beginning to get more particular in terms of what they demand and that's probably good. And three the whole put back phenomenon and they would cut differently across the portfolio. My guess is the probability of any of the three having a significant impact to us or anyone else, that might be more remote than the newspapers are suggesting and whatever happens is going to happen over time to the extent that if there was a put back phenomenon we would benefit. It's easier for GSEs to put back mortgages than non agency pools because all the GSEs have to do this pool they weren't confirming. So we'd be beneficiaries but we're not counting on much.

Jay Gelb - Barclays Capital

Thanks and that was very comprehensive. Just to circle back to the property casualty exposure, is there a standalone mortgage servicing E&O type of coverage that would be meant to respond to that or is that all sort of lumped into the in the E&O programs if there is availability for that these days.

Bill Cunningham

When we think about our exposure its way heavily weighted toward the D&O and E&O side and again underweight on the larger institutions. They is coverage that I think is available in that market. We just don't write a lot of it.

Jay Gelb - Barclays Capital

All right. Thank you.

Operator

Our next question comes from the line of Vinay Misquith from Credit Suisse. Please proceed.

Vinay Misquith - Credit Suisse

Hi good morning. On the personal order side, could you provide some color on your PIF growth in the agencies channel? Some of it by end that the direct way is the way to go and you seem to be growing in that channel pretty well.

Greg Toczydlowski

Its Greg Toczydlowski again. We've been focused very much on a couple of areas. One that we talk about earlier is some of the features in the automobile is some of our geographic expansion. We've seen an under penetration in the mid-west and the west and we've been appointing agents out there over the past few years and based on those two really its been driving some of the sequential PIF growth that we have inside the book of business.

Vinay Misquith - Credit Suisse

Okay, that's great. The second question is on pricing in the business insurance. It appears that you're happier to take maybe pricing is done just a tad just to keep your business and to grow a little. Just wanted your perspective on the risk to that strategy. We are at all time historical lows in terms of frequencies. Do you think that this is the right time maybe to grow your business?

Jay Fishman

Well I'll let Brian step in but I want to start off with the premise that the tactical and strategic imperative number one two and three is retention and again somehow the conversation always seems to kind of drive to growth but we start out with a focus that the book of business that we have is the book of business that we understand, that's priced appropriately that's got highest return and so we approach our retention book in a very, very thoughtful kind of way.

The growth dynamics that you are seeing here in the charts, the account growth, I got to go back and talk to the fact that once been driven by Select Express which is a technology platform that lowers cost, lowers agent cost and lowers our cost significantly and so it's been a platform based dynamic of growth not price based. A platform based dynamic of growth and in Bill Cunningham's in his middle market business it's really been about new product development and role out. We have provided lots of information about that previously not a price driven strategy and again the data. It's so clear that it supports this, you are looking at retention that is historical highs and renewal pricing that's more or less a flat a little below or flat and so our focus is not and it destined to get confused to some folks is not to cut price too aggressively grow our book.

It's to use our competitive advantages where they exist, like the express, like the new product development in middle market that allows us to the geography that Greg spoke about. Where there are ways to grow your business without being pricing competitive to do it.

Brian MacLean

And then the other dynamic within pricing and you used the right words, I mean if you look at any of our business insurance statistics that are in the package. The negative price that we are talking about is it's somewhere around a negative one but and we have talked about this a lot in the past and Jay touched on it. It's the spread across the portfolio that really matters there. If we were getting minus one on each and every account that's one strategy, we have got accounts in here where we are getting plus 10s and we have got accounts that are certainly getting minus 10s. It's blending to something pretty close to neutral. We feel good about the profitability about our book and we wake up every morning wanting to retain most of the accounts.

So, I think to characterize our strategy is taking down prices to grow, in our minds it's not consistent with how we think about it but.

Jay Benet

And I want to take the opportunity to clarify something because I am quite certain Gabby will get ten calls before the end of the day on this and it gets back to the analytics but I was keeping you that before that evaluates returns on a investment return basis today.

Let me be a little more specific. So we are talking about allocating capital. Each of our products, each of our business is based up on the duration and the volatility are actually defined and amount of capital too.

The embedded return that we calculate for the portfolio assumes that the premium dollars come in at new investment rates but that the capital, because the capital sits and just continues to roll has a much longer duration so the capital that supports it is somewhat more reflective of the historical capital embedded in the portfolio.

So, premiums come in entirely at new money rates. Again this is the analytics that we use, the capital based up on allocated capital to that product reflecting more of the historical duration kind of because again it supports the business as one piece of business rolls off and new piece of business comes on. The capital has a different duration than the new premium base and if you look at the business insurance segment in the aggregate as we did just yesterday and making sure that we can answer this question.

The policy view, the return that we see in the business that we are writing today is very low double digit. That's where we fall; I don't want to get more specific than that because obviously it's reflecting of our pricing strategy. But it wouldn't take much to move into high single digits but its very low double digits.

Vinay Misquith - Credit Suisse

Okay, that's fair. Thank you.

Operator

Our next question comes from the line of Greg Locraft from Morgan Stanley. Please proceed.

Greg Locraft - Morgan Stanley

Hi good morning. I wanted to follow-up on the holding company liquidity and get an update. I can't get the math to reconcile. I'm looking at the end of the second quarter. I added net investment -- I'm sorry, net income, took out share repo and dividends and it looks like liquidity was almost a couple of hundred million higher. Could you help reconcile the math there? Was there a dividend in the quarter perhaps?

Jay Fishman

Let's say, at the beginning of the quarter, for holding company liquidity we had about $2.4 billion. The way the mechanics of this thing are taking dividends out of the operating companies and bringing them up to the holding company. I mean there are other things that impact it like stock option and equity awards. That's a relatively small number. Tax has come into play. There is going on the other way interest on the corporate debt, shareholder dividend, stock repurchases themselves, any pension plan funding we do. So those are the components of it. I'm not sure you can really have full visibility to all those components but what ends up happening is that the 2.4 grows to 2.8 and the two major drivers of that are the size of the dividends coming up from the operating companies versus the amount of share repurchases that go out.

Greg Locraft - Morgan Stanley

Okay, but there was no special dividend. Like if I recall in the first quarter did you take a special dividend up and there was nothing in the quarter?

Jay Fishman

No we had a dividend in the quarter. Let me clarify what's going on with the dividends. I think in our 10-K at the beginning of the year of course, we had indicated that we could take dividends up without special authorization of something around $3.5 billion is my recollection. Somebody is going to look that up for me. But we also said during the first or second quarter, I'm not sure which one was that based on the capital positions of the operating companies which had gotten very robust, we were actually going to go to our regulators and say that we wanted to take capital out of the operating companies at a higher level than that would have indicated and get their authority to do that which we did and we did that in the first quarter. And when you do that it also changes the dynamics going forward of what constitutes normal dividend versus what constitutes a special dividend. So in each of the quarters we have gone to our regulators and said we'd like to take X out and in each of the quarters we've been given permission to do that. But its all in conjunction with a strategy as Jay has talked about of always rightsizing the capital at the place and you've heard me say before that we manage to a certain level of capital and the operating companies to support the AA ratings and that's what all we're doing. So our regulators understand that, the rating agencies understand it and it's just what's flowing through right now.

Greg Locraft - Morgan Stanley

Okay, so just to be clear the, so when we take your end of period holding company liquidity and we -- all we get is kind of what net income and then we know what you're buying back and we know what you are giving to your shareholders. What you are saying is there is an amount that you guys are going to the regulators intra quarter and requesting to take up from the subsidiaries and so -- and that doesn't necessarily correlate one to one with net income

Jay Benet

That's correct, I mean we take money out of the operating companies each quarter because we are making money in the operating companies each quarter and if you look and if you take a big picture view of what we have been saying for the year. Our guidance is for share repurchases of 4.5 to $5 billion. That if you look at what our year-to-date net income is and that certainly doesn't equate to a picture for the year of 4.5 to 5 billion.

Those two numbers are long that are showing that we are taking capital out of this.

Greg Locraft - Morgan Stanley

Okay so I guess to push one more level on that then is so therefore the payout can sustainably be ahead of net income for the foreseeable future?

Jay Benet

You get to a point where you have taken out the excess capital so you eventually get to a steady state where the payout is going to be based up on what is your net income, what are your capital needs in the company and what are your various targets for holding company and liquidity and debt and everything else.

So, eventually you do get to (inaudible).

Jay Fishman

We have talked previously as you all know that we are going to stop the practice and giving guidance when we get to next year but one of the things I think that we probably do have to provide some continuing visibility on this projected share repurchases because to exactly your point you really can't independently make an assessment of what our capital position is and what's available.

So my guess is as that when we get to the fourth quarter and we got our plans and budgets all squared away for next year. We really are not going to speak to EPS but we will give you a robust understanding of what our capital management plans are?

Greg Locraft - Morgan Stanley

Okay. Great that's helpful. Thanks. The other one on capital management is just a dividend policy, could you just remind us how probably set that because the dollars allocated to dividend obviously have been flat for a while, while the share counts gone down.

So just how do you think about that going forward?

Jay Benet

I will look at it historically whatever you are comfortable on.

Jay Fishman

I mean if we take a look at what the dividend yields are for comparable companies and the property causality space. We look at payout ratios and we recognized that we are in a business where the wind blows and the earth shakes. We take that into account in the past and what we have been fortunate enough to be able to do over the last couple of years is look at well we have a very solid earnings stream and we have paid out roughly $700 million if you look at the dollar amount in each one of the years. You are absolutely right our share count has gone down as a result of the repurchases. So we have been increasing the dividend to bring the dollar payout roughly back up to the same level which has basically kept the payout ratio and the yields very competitive.

Greg Locraft - Morgan Stanley

Okay. Totally shifting gears from capital management, can you comment at all on the workers comp pricing environment, we are hearing stuff out of Florida and others. What are you seeing at the margin there?

Brian MacLean

Yeah sure this is Brian and if you look at our numbers you will see that we have been growing our workers comp and it's actually that we are growing it for about 10 years. We have been growing it fairly gradually. In the aggregate for our book we feel very good and while the economy is clearly impacted the exposures and pay roll changes and some places have been dramatic. We have been adding accounts and seeing some moderate growth in the line.

The bottom line is Tom maybe more than any other products we do is a state-by-state industry-by-industry, account size-by- account size kind of dynamic. So we look at a very granular level and really believe it's the classic risk selection gain and feel good about it. One thing I would comment on and maybe I'll throw to Bill Cunningham is the AM best data on comps have a good bit of play and that's just a slice of the industry and you need to understand what it is that's looking at.

Bill Cunningham

That study of the price referencing was a composite of the state fund business and the mono line workers comp market business and as you look at that, many of those state funds are markets of less resort and obviously as we talk about selection and the things that we have in place. Selection is not possible when it's a market of last resort and the pricing is not always appropriate. So as we look at the profile of our book and our results are much different than that.

Brian MacLean

Yeah and so Greg we would agree that there are certain states and certain industries where we'd be very concerned with comp and be pulling back but in the act that we feel good about our book.

Greg Locraft - Morgan Stanley

Okay, are rates at the margin, is pricing going up or down for that line?

Jeff Fishman

Again it's a state by state and for competitive reasons we aren't going to get into state specific. So we'd say on an overall basis our workers comp pricing has been fairly consistent with the approach we've been taking over the last few quarters. We have not seen a dramatic change.

Greg Locraft - Morgan Stanley

No shift. Okay. Okay. Last one from me on direct cost.

Gabriella Nawi

What is it Greg?

Greg Locraft - Morgan Stanley

Just on direct auto, just because there is a lot of money that's being spent in that direction, just so I understand, you're pricing that business the same to both agents are you are to the direct customers. So there is no benefit for going direct to the travelers at this point, to the customer?

Jeff Fishman

Relative to the agent. They get the same price whether they go to the agent or they come direct. It's the only pricing track we have. We don't have one -- we have no experience in the direct channel. So we don't have an ability to create a pricing track yet based on experience.

Greg Locraft - Morgan Stanley

Okay, I'll follow-up with that more offline. Thanks guys.

Gabriella Nawi

And we have time for one more question.

Operator

Our last question comes from the line of John Hall from Wells Fargo Securities. Please proceed.

John Hall - Wells Fargo Securities

Great, thanks very much. I have only two questions. I'll give them straight up. The first one has to do with whether you're utilizing any enhanced commission structure as you go after any new business, whether that's part of your program on a commercial line side and the second one has to do with the comment that Brian made. You talked about the economy or if and the when the economy providing it having a very positive effect on exposure and potentially premium trends. I was wondering if that notion is factoring into your retention strategy and how so.

Brian MacLean

So first on the commission side, nothing unusual. We pay base commissions and we pay supplemental…

Jeff Fishman

We don't have any -- we don't have any specials on with respect to growing or anything else. [Multiple Speakers]

Brian MacLean

Our fundamental programs there over the last several years have remained very constant both in structure and in amount.

Jeff Fishman

We will obviously shoot predominantly our fixed value based commission to differentiate one producer, one agency versus another, those that grow more will have a higher fixed value based supplement than others but there's nothing special on with respect to growing this month or anything like that.

John Hall - Wells Fargo Securities

Okay. So you're not utilizing any of the platform savings you talked about in that direction?

Jay Fishman

In small commercial I don't think they have changed the commission structure as expressed. Did we put it out? We did for a little maybe years ago but not currently.

John Hall - Wells Fargo Securities

Okay great.

Jay Fishman

And the second question?

John Hall - Wells Fargo Securities

On the economy and.

Jay Fishman

It's been an interesting phenomenon that we speak about a lot and we talked about it for literally years that the renewed market has had a remarkable stability to it that actually is consisted with those of who us who are in the business in the 90s it's fairly. There is a robust competitive environment for new business but yet the renewed book seems to be and this is universal by the way. It's just not us if you look at any carrier, maybe quality carrier. You speak to agents, you speak to brokers they will all comment and the ones we speak to will observe that the renewal market has a remarkable stability, our customers are just happy. Most customers are happy just staying where they are and the fact is as long as the premium doesn't go up there they are happy with the broker, they are happy with the carrier and the experience is good and the business is just suppose is there.

John Hall - Wells Fargo Securities

And on the exposure change if your comment is getting at is there anything, let me answer it directly. There is nothing explicitly in how we are evaluating business or pricing business that contemplates a growth and exposure and therefore a different profitability dynamic on the account going forward.

Obviously we think about in these and we are hopeful in these conditions that if you got a account and you feel comfortable with them today as the economy expense is going to get bigger and that will be a better thing.

But we are not building it into the economics of how we are viewing the trade.

Brian MacLean

And the notion in today's environment I am sure like most of your employers the ability – the willingness of your employers to take on added costs that aren't justified with underlying activity is a substance of issue for every business and it's a substance of issue for our customers.

It's not particularly easy nor well received. If you go to a customer with – getting through a challenging economic environment and suggest that we raise the price for insurance. So our retention strategy is molded by the environment we are in that the economic environment we are in and the realization that there are real life customers on the other side of the transaction and you got to be responsive to the overall economic environment and manage the business for the long term and that really defines the approach.

John Hall - Wells Fargo Securities

Great. That answers the question. Thank you.

Operator

Ms. Nawi I will now turn the call back to you.

Gabriella Nawi

Well thank you all for listening and if you do have any follow-up questions please contact myself or Andrew Hersom in the Investor Relations Department. Thank you very much and have a good day.

Operator

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. Have a great day, everybody.

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