Good morning ladies and gentlemen. Welcome to the fourth quarter results teleconference for Travelers. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on January 23, 2018. At this time, I would like to turn the conference over to Ms. Gabriella Nawi, Senior Vice President of Investor Relations. Ms. Nawi, you may begin.

Thank you. Good morning and welcome to Travelers’ discussion of our fourth quarter and full year 2017 results. Hopefully all of you have seen our press release, financial supplement and webcast materials 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 Alan Schnitzer, Chairman and CEO; Jay Benet, Chief Financial Officer, and Brian MacLean, Chief Operating Officer. They will discuss the financial results of our business in the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take questions. In addition, other members of senior management are in the room, including Bill Heyman, Chief Investment Officer, Michael Klein, President of Personal Insurance, Tom Kunkel, President of Bond and Specialty Insurance, and Greg Toczydlowski, President of Business Insurance. Before I turn it over to Alan, I would like to draw your attention to the explanatory note included at the end of the webcast. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied 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 and 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 of our website, travelers.com. Now, Alan Schnitzer.

Thank you, Gabby. Good morning everyone and thank you for joining us today. This morning, we reported fourth quarter core income of $633 million, generating a core return on equity of a little over 11%. That brings our full-year core income to $2.43 billion and full-year core return on equity to 9%. The fact that we were able to generate that level of profit and profitability given the extraordinary catastrophe losses for the industry this quarter and year on top of a decade of historically low interest rates and several years of a relatively soft pricing environment speaks to the earnings power of the franchise. It’s the value of our competitive advantages, starting with underwriting excellence and investment expertise. For the year, catastrophe losses were manageable and we generated an after-tax underlying underwriting gain in excess of $1.2 billion and after-tax net investment income of nearly $1.9 billion. Our results and strong balance sheet enabled us to grow adjusted book value per share by 4% during the year after returning $2.2 billion of excess capital to our shareholders. As I’ll share in a minute, we’re encouraged about the outlook for 2018. Overall, we were pleased with our underlying combined ratio of 92.6% for the year, which was impacted by high levels of non-cat weather and non-cat fire-related losses relative to our expectations. Underneath that, our commercial businesses continue to perform well. For the year, business insurance delivered a strong underlying combined ratio of 94.9%. Bond and specialty insurance delivered an impressive underlying combined ratio of 83.2% even after a charge in the fourth quarter for a single surety loss outside the United States. In personal insurance, we were pleased with an underlying combined ratio in the quarter of 90.4%, bringing the full year to 91.5%. Those results reflect continued success…

Thanks Alan. Core income was $633 million, down from $919 million in the prior year quarter, while core ROE was 11.1%, down from 16.4%. As has been the case all year, these reductions in core income and core ROE were not driven by changes in our underlying performance. Our underlying performance remains strong and actually improved over the prior year quarter. Rather, these reductions were reflective of a continued high level of cat activity and the inclusion of an $82 million after-tax benefit in the prior year quarter from the settlement of a reinsurance dispute. The strength of our underlying underwriting results is evidenced by our consolidated underlying combined ratio of 92.4%, similar to the 92% we produced in the prior year quarter. Cat losses were $324 million after tax compared to only $89 million in the prior year quarter. This $235 million increase was driven by losses from the California wildfires of $426 million after tax, comprising $382 million after tax for the October wildfires in northern California and $44 million after tax for the December wildfires in southern California, partially offset by current year net favorable development of $102 million after tax for catastrophes that occurred earlier this year, almost all of which related to the third quarter hurricanes Harvey, Irma and Maria. For both Harvey and Irma, the benefits of our underwriting actions over many years, including management of overall exposure, limits and deductibles, resulted in more favorable claim outcomes than we had expected. For Maria, given that the storm occurred late in the third quarter and access to the impacted areas was extremely limited, our estimate was based on an exposure analysis. That initial estimate has come down due to our receiving fewer claims than we had expected. Net favorable prior year reserve development, for which…

Thanks Jay. Starting with this quarter’s results in business insurance, segment income was strong at $637 million and the combined ratio for the quarter of 88.6% was flat to the prior year. Income was down from the prior year due primarily to the settlement of a reinsurance dispute in the fourth quarter of 2016. The underlying combined ratio for both the quarter and the full year was about a point higher than 2016. In both cases, the increase was driven by the loss ratio with loss cost trends that modestly exceeded earned pricing, while the full-year variance also reflects an unusually high number of large non-cat fire losses in 2017. The full-year expense ratio of 31.9% was half a point lower than the prior year. As Jay mentioned, the fourth quarter included the impact of some tax-related actions, so the full year is a better indication of our expense run rate. Net written premiums of $3.4 billion for the quarter were up about 5% year-over-year with domestic net written premiums up about 4%, driven by continued strong production results in middle market. International net written premiums were up 15% or 11% excluding the impact of the change in foreign currency rates. The growth in international was driven by strong production results in Europe and Canada, along with some normal fluctuations in the Lloyd’s volume. Turning to domestic production, we were very pleased with our results in the quarter. Renewal rate change was 1.4% and renewal premium change was 4%, and as Alan said, for both the highest the level in about three years. Retention remained at a historically high level of 85% and new business was strong for the quarter at $478 million, up 16% from the fourth quarter of 2016. Looking at the individual businesses, in select, production remains…

Thank you. Before we go to the Q&A portion, Alan has a few additional words.

Thanks Gabby. As bittersweet as it is, we have one last piece of business before we open it up for questions. I just want to acknowledge and thank Brian MacLean, who will be retiring at the end of March after a spectacular 30-year career and, after today, something like 53 consecutive earnings calls. He’d never take credit for it, but we owe so much of what we’ve accomplished over so many years to him. He’s been a great colleague to so many and he’s been an important partner and friend to me. Thank you, Brian. With that, let’s open it up for questions.

[Operator instructions] Our first question comes from the line of Kai Pan with Morgan Stanley. Please proceed.

Thank you, good morning. First, congratulations to Brian for three decades at Travelers and best wishes for your retirement. That doesn’t count as a question, so my first question is on pricing. So there is a saturation of BI pricing, and you mentioned that your outlook for 2018 the BIs lower underlying combined ratio, but the 1.4% increase is still lower than the general loss cost trend of 3 to 4%. Just wondering what’s behind the scenes that you expect the pricing to accelerate.

Yes Kai, good morning, it’s Alan. Thanks for the question. It’s all the things that we talked to you about quarter over quarter in terms of our ability to pull levers and manage profitability, and I’ll remind you that exposure is a piece of that, and that significant portion of exposure contributes to it, but so does selection and mix and the way we segment and the way we price the product claims handling, risk control, expense management. All of those things contribute to our outlook on profitability in the underlying combined ratio.

Okay, then my follow-up is on the tax rate. What’s your overall effective tax rate for the corporation in 2018, and Alan, from your comments it looks like most of the tax benefit will flow through to the bottom line.

This is Jay Benet. The reason I gave you the pieces is that the effective tax rate is always going to be a function of the relationship of the tax-exempt interest to the total interest, so in whatever modeling you’re doing, you need to come up with what you believe the tax exempt interest is going to be, apply a 5.25 tax rate to that, and then everything else that’s U.S. domestic will be at the 21% rate. So the effective tax rate is going to move, but again that’s the way of calculating it.

Kai, just reflecting back on your other question, you were talking about the pricing outlook, and I would just remind you that, as Brian shared with you, that assumes that in BI, the non-cat weather and elevated fire losses, and for that matter in PI, the non-cat weather will both return to normal levels by historical standards. Obviously weather and large losses are going to be what they’re going to be, but the outlook reflects that as well. In terms of the benefit from tax reform and what’s going to happen to it, we--as I tried to express in my prepared remarks, it goes into the mix of everything else that we use to generate the prices we need, so yes, I do think that it will fall to the bottom line.

Thank you very much.

Thank you. Continuing on, our next question comes from the line of Ryan Tunis with Credit Suisse. Please proceed.

Thanks. Just for Alan, and a follow-up to Kai’s question, just thinking about the fact that last quarter we had a 2018 outlook for broadly consistent margins, and now three months later the outlook is they’ll improve, just wanted to drill down a little further on what it is you’ve seen over the last three months, because I think your outlook on pricing then was also pretty positive. But I guess over the last three months, what’s given you more confidence to really think that margins will be better?

You’ve got to remember that when we talk about underwriting margins, we’re talking about dollars, and combined ratio we’re talking about combined ratio points. That’s a function of the written volume, for example, and everything else that goes into the mix, so it’s a combination of all the things that impact margins and combined ratio. I’m not sure how else to express that.

Okay. I guess just on auto, then, I think what you said is you think that RPC will be a similar level to this year as it was last year, and it seemed like this year, it was several points above loss trend. If you could just talk a little bit about what you’re seeing there, because that sounds like a decent amount of rain. I don’t know if there’s a severity uptick beyond what you expected, or something along those lines. Thanks.

Hey Ryan, it’s Michael Klein. Thanks for the question. The short answer is no, it doesn’t reflect anything beyond what we expected. It’s just the follow-on steps in our existing game plan, and I think when you think about pricing, think of it in three pieces, so the written rate we’re going to achieve in 2018 is partly based on the rate we have already filed in addition to the rate we’ll file in ’18, and so that drives a lot of our rate outlook. What I think you’ll see as you look ahead to 2018 is RPC in the first half of the year will be higher than the numbers you see on the page from the first half of 2017, and the back half of the year will be lower than the numbers you see for the back half of ’17. Importantly, on an earned basis since written rate has accelerated through ’17, earned rate will actually rise in 2018 relative to 2017, so that’s sort of the way that we think about it. But no, the broadly consistent RPC outlook doesn’t reflect anything unanticipated in our loss experience.

That’s helpful, thanks.

Thank you. Our next question comes from the line of Amit Kumar from Buckingham Research Group. Please proceed.

Thanks and good morning. Maybe just staying on personal auto with Michael Klein, you gave some good color on RPC. How should we think about the PIF growth from here, just based on the fact that a majority of your book is 12 months? When should we see some change in that number down the road?

Thanks Amit, appreciate the question. I think if you think about just the broad themes on auto, what we talked about in 2017, our objective was to improve profitability and manage growth, manage meaning being reduced. As we think about our objective for ’18, it’s really to try to achieve more balance between growth and profitability in auto, and I think you can certainly see as we talked about last quarter, we felt like we turned the corner on auto profitability in the third quarter. You’re seeing in the year-on-year adjusted underlying combined comparison that improvement accelerating, but again consistent with our RPC outlook, still work to do there. So again, we’re looking to achieve a balance between profitability and growth in ’18, and then as that profitability continues to improve, we’ll look to resume growth. But right now, we’re trying to level off and then move it forward.

Thanks, that’s actually helpful. My follow-up, switching back to commercial lines, I know there was some good texture on the pricing change. I’m curious, if we were to step back and think about the active cat quarter for Q3 and Q4 and its impact on the marketplace, would you say that it’s early days for, I guess, a broad-based firming of the small and middle commercial market, or is it more isolated near term?

Amit, it’s Alan. You know, we tried to give you a perspective by line to really address that because putting workers’ comp aside, and that is its own story, the price increases we were able to achieve in the quarter were broader than just the properly lines. As I shared in my prepared remarks, I think the more significant factor driving the pricing is where margins were, certainly for us, and that’s probably true relative to the industry. So you know, I can’t tell you exactly what the industry is going to do or what’s going to happen, but I can tell you what we’re going to do, and that’s to thoughtfully and in close coordination with our agent and broker partners continue to push for rate where we need it to improve the outlook and trend of returns.

Okay, I’ll stop here. Thanks for the answers.

Thank you. Our next question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, thank you. Good morning. My first question, in terms of the margin outlook for business insurance for next year, can you quantify the impact that non-cat weather had this year so we know what to adjust for when thinking about ’18? In your margin outlook, how are you thinking about the expense ratio versus the loss ratio as we think about you potentially earning in better rate next year?

Hey Elyse, this is Greg Toczydlowski from Business Insurance. In terms of your first question, think about a point in terms of where large losses and non-cat weather are relative to our longer term expectations for 2017, and that would be a good way to think about a going forward perspective.

Elyse, on your question about expenses, we’re going to try to resist the temptation to break out the go-forward perspective on the loss ratio versus the expense ratio. We give you an outlook on the combined ratio, at least qualitatively, because you get into some judgements and a level of precision that is probably further than we’d like to go, at least from an outlook perspective. Jay Benet did say in his opening remarks, or maybe it was Brian, that looking at the full year was probably a better perspective on the outlook, and I will add, just following up on our comments at our recent investor day, that productivity and efficiency are important strategic initiatives for us. We’ve seen that benefit of that this year. We’ve got real productivity and efficiency enhancements on the shop floor right now, and we think there’s more to come, and what that does for us, it’s not necessarily that we’re trying to dial in a much lower expense ratio. What we’re trying to do is create all the benefits that come from operating leverage, so we can take those incremental dollars and, as I’ve said before, we can let them fall to the bottom line, we can use it to invest in important strategic capabilities, or we can put it into pricing, and it really is that flexibility that we’re looking for going forward. But in terms of the outlook, we’re going to stick with the broader commentary on overall margins.

Okay. My second question, in terms of the pricing environment, going back to business insurance again, you said in your opening remarks that you want rates to keep pace with inflation. What are you pegging inflation at right now within your commercial lines book, and when you make that comment, I guess that’s what we should compare when we think about the RPC going forward within business insurance?

Yes Elyse, we’ve said for a long time that our long-term outlook, and again that’s long-term perspective for all of business insurance, is about 4%, and really no change on that. There’s some texture underneath by line, for example. I’m not sure what your question was about RPC, but rate contributes to margin, and there’s a portion of exposure that’s obviously part of RPC that also contributes to it, so I’m not sure if that’s the texture and color you were looking for.

I guess what I was thinking about was your RPC was about 4% in the quarter, and then you were saying that inflation was about 4%, but then to your commentary it seems like you are pushing for more price across your book of business from where we were at in the fourth quarter, so I was just trying to tie those two comments together.

Yes, so Elyse, I would say think of RPC as having two components - one, pure rate, and two, exposure. Of the piece that’s exposure, a portion of that behaves like margin and there’s a portion of it that has real loss content in it and doesn’t. So you know, RPC needs to be above the overall loss trend in order for us to consider margins to be expanding, and you could look at those numbers and you’d say, at least on a written basis, we’re getting close. Although, we do think--I do think over time that insurance like most other businesses, pricing ought to keep up with inflation, but I would say that given where we are now and in terms of the outlook and trend for returns, we’re looking to do a little bit better than just offset inflation, were looking to expand margin.

Okay, thank you very much. I appreciate the color.

Thank you. Our next question comes from the line of Yaron Kinar with Goldman Sachs. Please proceed.

Good morning everybody. Thanks for taking my questions. My first question is with regards to the rate increases in business insurance. If I strip out commercial auto, I think if my calculation is correct, I get to roughly flat rate for the rest of the business. Am I thinking about that correctly, or are there maybe areas or lines where you are getting more rates outside of commercial auto?

Yes Yaron, I don’t think you’re doing the math entirely correctly. There’s a lot of different pieces underneath the net written premium change, which I think you’re trying to back into, so we’re certainly, as Alan said earlier, very much focused on where some of the more distressed lines are - automobile and the catastrophic exposed areas of property, but we’re also pushing ahead on all the products, so the math doesn’t come out where we’re flat on all the other product lines.

I would just direct you back to Brian’s comments where he gave you a view of pricing by line, so price is positive in every line outside of workers’ comp, higher both sequentially and year-over-year. We can follow up with you and walk you through the math if that’s helpful.

Yes, we’ll do that. Then one other question on tax reform. Alan, if I understand your comments correct, basically you’re looking at the results of--you’re targeting a certain return, and tax reform ends up helping that return. I’m just trying to get a sense of are you expecting any change in investment allocation that would further boost or decrease the impact of tax reform?

Let me turn that over to Bill Heyman and ask him to respond to that.

I think it was possible there will be over time some reallocation. The elimination of corporate AMT removed a ceiling in terms of the amount of municipals we can own, although that’s very theoretical. Every day we look at what the market throws up in terms of assuming roughly equal credit quality, which is rarely the case, where is the highest after-tax return. I think going forward, that will more often in certain segments of the curve be in taxables rather than municipals. It may even be that we buy taxables and sell municipals in certain parts of the curve, and the reason for that is for the first time I can remember, individual investors and corporate investors have very different utility functions, so at many parts of the curve your municipal is not worth as much to us as it used to be, but it’s worth more to an individual investor than it is to us. So there may be opportunities to pick up after-tax yield on advantageous terms, but obviously we can’t guarantee them or quantify them. But I suspect if you looked at the portfolio three years now, the mix would have changed.

Thank you very much.

Thank you. Our next question comes from the line of Paul Newsome with Sandler O’Neill.

I wanted to ask whether or not the outlook for M&A for Travelers has changed with tax reform. Does it make it easier or more interesting to buy something outside the U.S. for Travelers?

Good morning, Paul. What I can tell you is that tax reform for us and others who are similarly situated obviously just makes us a more competitive buyer relative to a non-U.S. taxpayer who previously had the benefit of some structural advantages, structural tax advantages. Those advantages have gone away, so that levels the playing field, so relatively speaking we’re a more competitive buyer, so that’s changed for sure. What hasn’t changed, Paul, is either our lens or our propensity to do transactions, and by that I mean we are always looking for opportunities, both organic and inorganic, and when we can make them happen on terms that are attractive to us, we’re going to try hard to do that. As I’ve said before and just to reiterate it, we’re going to try to do deals when it improves our return profile, lowers our volatility, or provides us with other important strategic benefits, so maybe our positioning relative to others changes but our lens or propensity doesn’t. The other thing that won’t change is our capital management strategy. We will continue to think about and allocate capital the same way we have historically. I guess given tax reform and all other things being equal, there’s probably higher earnings and capital to put to through that capital management filter, but our thought process around capital management doesn’t change.

That’s it for me, thanks. Congrats on the quarter.

Thanks Paul.

Thank you. Our next question comes from the line of Jay Gelb with Barclays. Please proceed.

Thank you. My first question is on capital deployment in 2018. Should we still consider 100% of operating earnings as being deployable for share buybacks and dividends, absent another opportunity emerging?

Hi Jay, it’s Jay. As Alan just said, the way we think about capital management hasn’t changed, so we’re always going to try to fund growth, we’re always going to look for opportunities to create shareholder value, and to the extent that we continue to create excess capital, we’ll manage it the same way - returning it to shareholders through dividends and share repurchases, and the driver of that is the earnings of the play. So no change there, and what we’ve said in the 10-K and the 10-Q all along with regard to that still holds.

I appreciate that. Then if I can try one on tax, using your supplement, if I look at the tax-free municipal income and apply the rate you mentioned, I guess I get kind of driven down to a 15.5 to 16% overall effective tax rate. Am I in the neighborhood on that?

If the calculation you’re doing is looking at the supplement, taking some view as to what the average asset base would be for the munis, applying the rate that we show in the supplement as the earnings rate on that, you’ll get the pre-tax muni NII, apply 5.25% to that, and you’ll have that component of the tax accrual, and then the rest, whatever you’re assuming with regard to the non-muni income, not just NII but underwriting, apply the 21% to and you’ll get an effective tax rate.

Okay, thanks Jay.

Thank you. Our next call is a question from Jay Cohen with Bank of America Merrill Lynch. Please proceed.

Thank you - back-to-back Jays. A couple of questions. First is the surety premiums went up. You said there was more activity. Do you see this being a function of the economy, and should we expect the top line on the surety side to possibly expand, especially if we’ve got more infrastructure spending?

Jay, this is Tom Kunkel, good morning. I think the way we’re looking at the surety production in the month is it really can be episodic, and those are some very well performing businesses and accounts that we were doing that volume with but I wouldn’t say that we in any way view it as indicative as an increase in activity for the type of work that drives surety bonding. So as they say, a little lumpy.

Got it. Other question, on the commercial lines market, your effort to raise prices a bit more aggressively has been met with a retention that has stayed at a historically high level. It suggests the rest of the market is coming along as well, and I’m wondering if you could speak qualitatively about what you’re hearing from agents and brokers regarding how your competitors are responding to the same pressures that you are.

Jay, it’s Alan. We don’t talk a lot to our distribution partners about the way our competitors price. It’s a competitive marketplace, and they do what they do and we do what we do. I will tell you that just in terms of our process, we do a lot of work and we’ve got a lot of talent out there in the field, and our underwriters are out talking to our distribution partners about accounts 90, 120 days out to make sure that we’re working in partnership with them and making sure that we’re sharing with our customers why we’re doing what we’re doing. So you know, we’ve got, I think just a tremendous field organization and I think they’ve done a great job. Obviously we do operate in a competitive marketplace, and so I do think that what you see in our results is to some degree a reflection of the market. I’ve always thought that there are probably two reasons that maybe we have a little bit of incremental pricing power. One is just the franchise value we bring to the marketplace in product breadth and risk control and claims--an unbelievable claims organization, and I think that our agent and broker partners are proud to sell that and I think our customers see value in it. The other advantage I think we have to some degree is data analytics. It’s about risk selection and pricing, and we’ve been a pioneer for a long time in not just data analytics but delivering that data and analytics to the screen of the local underwriter at the point of sale. So I do think those two things probably give us a little bit of an advantage, but certainly there is a marketplace dynamic to what we’re able to achieve.

Got it, thanks Alan.

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

Yes, thanks. Two quick questions here for you. The first one, I’m just curious, could we parse a little bit business insurance as far as what’s going on from a rate perspective? I’m just curious, when small commercial, not a lot of rate, it just doesn’t need it, more competitive pressures, and also on your large ticket property business, that’s one that you had excluded a while from your rate calculations because it’s so competitive, how is that trending now and maybe relative to your expectations? And then I have one follow-up.

Brian, this is Greg. I’ll start with the small commercial one. We’ve been focusing on the small commercial business for a number of years now, really trying to get the margins to a place where we feel very comfortable with them, and we are very much within our target thresholds of where we want to be from a small commercial, so we’ve had a deliberate set of execution around our rate plan there, so that’s the first element around why you see a smaller level of rate in small than middle. The second one really is around our express business, which think of it as the straight through processing of small commercial, really has a more prescriptive flat rating environment, and so when we see some of the pressures of rate reductions in workers’ comp given the extraordinarily profitability on that line over time, we see that more immediately impact that business. Those are the two reasons that are driving the small commercial.

And on the property, large account property?

What was your question on the large property?

How is that--the large account property, how is that playing out from a rate perspective right now? Is it getting the rate that you kind of need in that area, or not?

Given the hurricanes were in the third quarter, we’re very pleased with our agility one quarter in, in terms of what we’ve been trying to do on the national property side. As Alan said, we think franchise value matters, and we’re seeing that inside our numbers where we’ve been able to push thoughtfully and, at the same time, retain the book of business.

Brian, just one comment on top of that. Looking back over significant cat events over the years, the impact in the large property book on rate is usually two, three, even sometimes four quarters out, the peak of that, so we’re optimistic that there could be more to come, but that’s just looking at the historical trends.

And we made good progress in the quarter.

Yes.

Great, and then just on personal lines, and just on tax, I appreciate the comments on how it’s going to fall to the bottom line, but I guess my question more on the personal line space is as you look out, understanding you need more rate to get to the right returns that you really want in that business, but should we expect that kind of your combined ratios, where you’d like them to get, are going to be higher here going forward as a result of tax, and specifically related to at least certain states have return on capital type benchmarks that they look at, is there going to be pushback from those regulators on returns here with tax reform?

Brian, it’s Michael. Thanks for the question. I would say where you started is probably where we start, which is we’re not at target returns yet and we’ve got work to do. I think consistent with Alan’s comments in the opening, a lower tax rate sort of helps move us closer but doesn’t get us all the way there, so when you think about it from a filed rate and a regulatory standpoint, we certainly see and actually have seen just this week news from some regulators on the fact that they are thinking about the tax rate and looking to apply it in some of those conversations, but generally speaking it doesn’t change the direction we need to move rates, particularly in auto. We still have work to do there to get to target returns, and we’re going to continue down that path.

Right, it’s just the magnitude you need going forward is probably less today than it would have been before tax reform?

I would say all else being equal, but again to Alan’s point earlier, you’ve got expenses, you’ve got loss experience, you’ve got investment yield, a whole bunch of things that go into that mix, and it’s just one factor that we need to consider.

Great, thanks for the answer.

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

Thanks. I don’t know if I’m over-thinking this, but I guess I was surprised that the outlook for 2018 for personal insurance was only a slightly lower combined ratio with auto earned rates likely to approach double digits. Am I missing something there?

Meyer, this is Michael. Thanks for the question, and appreciate it because Brian did give you the overall outlook for the segment, but there’s a little bit of texture underneath. So if you think about auto specifically when you see the 10-K outlook, what you’re going to see is our commentary there is for improved margins and combined ratio. The home outlook, on the other hand, is broadly consistent both from a margin and a combined ratio standpoint, assuming more normalized levels of non-cat weather activity. When you put those two pieces together, you get improved margins and a slightly improved combined ratio in the aggregate. Part of that, I guess the other factor is as auto premium is growing more than home, and auto carries a higher combined ratio, mix impacts the adjustment in the combined ratio.

Okay, that makes a lot of sense. Thanks. Second, I guess this is a broader question. You’ve talked a lot in the past about how some elements of exposure act like rate. Are those elements more, I guess, reflective of the price of the exposure to the values that are being insured, or of exposure unit growth or on a real basis?

I’m not totally sure I understand the question, but I think it’s more of a value than it is unit, right? You increase the value of a unit and it’s that increase in exposure that behaves more like rate. When you actually add another unit of exposure, you have another unit of loss content, so I think that’s the right way to think about it.

Okay, perfect. That’s exactly what I was asking.

Thank you. Our next question comes from the line of Sarah Dewitt with JP Morgan. Please proceed.

Hey, good morning. Wanted to try one more on the tax rate. What would the pro forma tax rate have been this year under U.S. tax reform?

Actually, it’s not something we actually calculated, so I think we would suggest you do the same thing - just look at what the NII was for the tax exempt portfolio and then for everything else, apply the 21% rate. But we haven’t done the calculation.

Okay. Yes, I’m coming up with some slightly different numbers than in the previous question, so just--I mean, if you were willing to disclose that, I think that would be helpful.

Well just to add, the information is in the supplement, so maybe it’s something Gabby can follow up with you on.

Okay, great. Thank you. Then secondly, just on the auto insurance underlying combined ratio, it improved nicely this quarter but it’s still above 100. How long should we be thinking about it will take to get below 100, given some of the pricing actions you’re taking offset by the new business penalty?

Thanks Sarah, it’s Michael. I want to just put a point on Brian’s comment earlier about reflecting seasonality to start with. So if you’re looking at Page 15 and you’re looking at the 101 for the full year versus the 104 for the quarter, that is pretty consistent with the seasonality we would typically see in the quarter. In terms of how long it takes, I think we’re certainly optimistic, and as we said last quarter, we feel good about the progress we’re making towards our target combined ratio and see that continuing as we look ahead into ’18 and ’19. I think with the outlook that we’ve given you for RPC, you can sort of make your own estimate of what the earned rate will be, apply a loss trend and get to an earned combined ratio pretty quickly, and I guess at this point as we look at our experience, we don’t see anything that would cause us to tell you to do it any differently.

Okay, great.

Just as a follow-up to your tax question, in terms of the going forward approach to calculating an effective tax rate, what I said is absolutely on point - there is a little bit of foreign income that’s taxed at a slightly different rate, but that shouldn’t matter. That will matter more this year than in the future because of today’s 35% tax rate versus the future. But one of the other things that we should point out, and you’ll see it in the press release, we did have a favorable tax settlement earlier in the year that would have affected this year’s effective tax rate, so if you’re going to a pro forma for this year, you have to take that into account. Then in addition to that, I mentioned in my commentary that we did some tax planning initiatives in the year that had some impact on the effective tax rate as well, so really the calculation you want to do is not about this year, it’s about going forward.

Okay, great. Thank you.

Okay, this will be our last question, please.

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

Thank you. If you can believe it, I still have a question to ask. So going back to tax reform and the level playing field, aside from the benefits that might be there on the M&A side, from an operating standpoint or from a business line standpoint, where do you think the most concrete benefits might arise given the more level playing field?

You know, I guess the way we think about that is the tax line is an expense line like any other expense line that we work into our pricing models, and to the extent that we’ve got a level playing field and aren’t at a disadvantage in that regard, I think again on a relative basis from a pricing perspective, that helps. I would say after M&A, and maybe even before M&A, that that’s a significant factor in terms of a level playing field.

But in terms of business insurance, specific lines, there is none that necessarily jump out more than others?

I think the same math applies to all of our pricing models for all of our products, so I don’t think I would make a distinction there.

Okay. Then just with better economic growth perhaps on the horizon, do you think that all things equal, small commercial premium growth should maybe catch up to the middle market and maybe even grow faster in an improving economic environment?

I’m not really sure how to answer that question. I do think across all of our businesses, we’re pretty well leveraged and pretty well positioned to benefit from an improving economic environment. In terms of--you know, if you’re asking about growth in GDP by small enterprise versus large, I don’t know that I’ve got a better view on that than you or anyone else. If you’re talking about our own market position, small versus large, there’s so many things that go into growth and we actually don’t think about it that way. We execute, as you’ve heard us say many times, at a very granular level, so whether it’s small or large, we’re trying to keep our best business, improve the profitability on the business where we need to, and do a lot of hustle in leveraging our competitive advantages, trying to generate new business. When that very granular strategy adds up to growth, we grow, so that’s the way I think about it and we don’t really think about the small differently than the large from that perspective.

Great, thanks.

Thank you.

Thank you. I’ll now turn the presentation back to Ms. Nawi. Please proceed.

Excellent. Thank you all for joining us today, and as always, if you have any additional questions, we are available in Investor Relations. Thank you and have a great day.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you, have a great day.