Second Quarter 2024 Transcript

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This transcript is a textual representation of The Travelers Companies, Inc. (Travelers) conference call on July 19, 2024, at 9:00 a.m. EST and is provided by Travelers only for reference purposes. This transcript should be read with the accompanying webcast, related press release and financial supplement which are available on Travelers website www.travelers.com. While efforts are made to provide an accurate transcription, there may be inaccuracies or omissions in the attached transcript.

The information in this transcript is current only as of the date of the earnings conference call transcribed herein and may have subsequently changed materially. Travelers does not update the information in this transcript to reflect subsequent developments or to delete outdated information and assumes no duty to do so. For further information, please see Travelers reports filed with the SEC pursuant to the Securities Exchange Act of 1934 which are available at the SEC's website (www.sec.gov).

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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Operator

Good morning, ladies and gentlemen. Welcome to the second quarter results teleconference for Travelers.

We ask that you hold all questions until the completion of 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 July 19, 2024. At this time, I would like to tuthe conference over to Ms. Abbe Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin.

Abbe Goldstein

Thank you. Good morning, and welcome to Travelers' discussion of our second quarter 2024 results. We released our press release, financial supplement and webcast presentation earlier this morning. All of these materials can be found on our website at travelers.com under the Investors section.

Speaking today will be Alan Schnitzer, Chairman and CEO; Dan Frey, Chief Financial Officer; and our three segment Presidents: Greg Toczydlowski of Business Insurance, Jeff Klenk of Bond & Specialty Insurance and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through the prepared remarks, and then we will take your questions.

Before I tuthe call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors.

These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-K filed with the SEC. We do not undertake any obligation to update forward- looking statements. Also in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement and other materials available in the Investors section on our website.

And now I'd like to tuthe call over to Alan.

Alan Schnitzer

Thank you, Abbe. Good morning, everyone, and thank you for joining us today.

We are pleased to have generated a strong bottom-line result in the quarter that included a record number of severe convective storms across the United States. Excellent underlying results, favorable net prior year reserve development and higher net investment income contributed to core income of $585 million or $2.51 per diluted share. Underlying underwriting income of $1.2 billion pretax was up 55% over the prior year quarter. This year's exceptional result was driven by record net earned premiums of $10.2 billion and a consolidated underlying combined ratio that improved 3.4 points to an excellent 87.7%.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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Net earned premiums were higher in all three of our business segments. The underlying combined ratio in our Business Insurance segment was an excellent 89.2%, and the underlying combined ratio in our Bond & Specialty business improved 1.7 points to a very strong 86.1%. Looking at our two commercial segments together, the aggregate BI/BSI underlying combined ratio was an outstanding 88.7% for the quarter. The underlying combined ratio in Personal Insurance improved by nearly eight points to a terrific 86.3%.

Turning to the top line. We grew net written premiums by 8% to $11.1 billion in the quarter. Outstanding execution by our colleagues in the field across all three segments contributed to our top line success. We are very pleased to report terrific production results in our commercial segments, where, as you've heard, margins are attractive.

In Business Insurance, we grew net written premiums by 7% to more than $5.5 billion. Renewal premium change remained very strong at 10.1%, while retention remained high at 85%. The combination of strong pricing and retention reflects deliberate execution on our part and a marketplace that continues to be generally disciplined.

New business increased 9% to a record $732 million, a reflection of the fact that our customers and distribution partners value the products and services that we offer and the experiences that we provide.

In Bond & Specialty Insurance, we grew net written premiums by 8% to more than $1 billion, driven by very strong retention of 90% in our high-quality Management Liability business and excellent production in our market-leading Surety business, where we grew net written premiums by 11%.

At year-end 2023, we shared that across our two commercial segments, our E&S writings had reached $2.5 billion for the year, double the level from 2021. Year-to-date, we've grown E&S net written premiums by 16%. The margins continue to be quite attractive.

In Personal Insurance, continued strong pricing drove 9% growth in net written premiums, with growth of 10% in Auto and 8% in Home.

We'll hear more shortly from Greg, Jeff and Michael about our segment results.

Turning to investments. Our high-quality investment portfolio continued to perform well, generating after- tax net investment income of $727 million, driven by strong and reliable terms from our growing fixed income portfolio and higher returns from our non-fixed income portfolio.

Our investment results benefit from the strong cash flow we've generated over a sustained period. This quarter marks the seventh consecutive quarter in which we've generated more than $1 billion in operating cash flow. This isn't a measure that we or the industry talk a lot about, but it's important. Cash flow is what enables us to make strategic investments in our business, retuexcess capital to shareholders and grow our investment portfolio. Since 2016, we've invested $11 billion in important technology initiatives, returned more than $20 billion of excess capital to our shareholders and grown our investment portfolio by more than $25 billion.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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It's a virtuous cycle as well conceived and executed strategic initiatives and effective capital management strategy and a thoughtful investment strategy contribute to attractive returns and growth in adjusted book value per share. Strong underwriting is the flywheel that sets it all in motion. Thanks to exceptional franchise value and excellent marketplace execution, we've profitably grown our premium base from about $25 billion in 2016 to more than $40 billion today. Our growth over this period of time has been largely organic, selling products in which we have deep expertise through distribution partners with whom we have long-standing relationships, and in geographies where we have a thorough understanding of the regulatory environment and other market dynamics.

In other words, our competitive advantages have enabled us to effectively execute a relatively low-risk growth strategy. The success of that strategy is evidenced by a retuon equity that has averaged about 900 basis points over the 10-year treasury over that period at industry low volatility. But all this boils down to is steady consistent growth in adjusted book value per share after making important investments in our business and returning substantial excess capital to shareholders.

And as a leader in the U.S. P&C market with broad product capability, demonstrated success with innovation and plenty of market share headroom, we're confident there's a lot more opportunity in front of us. To sum it up, we continue to be very confident in the outlook for our business. Our results for the first half of the year include strong premium growth, an excellent bottom line result, record operating cash flow and steadily rising investment returns in our growing fixed income portfolio. With the strong and diversified business and balance sheet, we delivered 13.6% core retuon equity over the last 12 months despite substantial industry-wide catastrophe losses. With this momentum, we remain well positioned for success this year and beyond.

And with that, I'm pleased to tuthe call over to Dan.

Dan Frey

Thank you, Alan. We're pleased to have generated record levels of earned premium this quarter and an underlying combined ratio of 87.7%, a 340-basis-point improvement from last year's strong result and the third consecutive quarter below 88%.

This led to one of our strongest ever underlying underwriting gains of $952 million after tax, up $337 million, or 55%, from the prior year quarter. The expense ratio for the second quarter was 28.8%, in line with our expectations and once again benefiting from the combination of our focus on productivity and efficiency, coupled with strong top line growth. We continue to expect 2024's full year expense ratio to be 28% to 28.5%. As Alan mentioned, the industry experienced a very active cat quarter, and our second quarter results include $1.5 billion of pretax catastrophe losses driven by a record number of severe convective storms. As disclosed in the significant events table in our 10-Q, we had five events surpass the $100 million mark in Q2, all in the month of May.

Turning to prior year reserve development, we had total net favorable development of $230 million pretax.

In Business Insurance, net favorable PYD of $34 million resulted from approximately $300 million of better-than-expected loss experience in Workers' Comp across a number of accident years, largely offset by about $250 million of strengthening in General Liability, driven by Umbrella for accident years 2021 through 2023. In terms of the umbrella line, these are very young accident years made up almost entirely of IBNR.

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While we will obviously continue to evaluate loss activity as it comes in, we believe we have been proactive and decisive in addressing the latest observed loss activity and adjusting our view of loss development factors to allow for the prospect of rising settlement costs and lengthening settlement patterns. Importantly, our picks for accident years 2015 through 2020 did not require much adjustment in the first half of this year. It's also worth noting that our returns in the Umbrella line for the impacted accident years remain attractive. As we saw five years ago, when we were the first to call out a change in loss levels tied to an increase in attorney rep rates, sharpening our view of loss costs early in the development of immature accident years and long-tail lines positions us to enhance our risk selection, pricing and claims strategies, ultimately setting us up to outperform in terms of growth and profitability. And on a related note, with court backlogs from the COVID shutdown now largely resolved, that element of uncertainty is, to a large degree, behind us.

In Bond & Specialty, net favorable PYD was $24 million pre-tax. Personal Insurance had significant net favorable PYD of $172 million pre-tax with good news from recent accident years in both Home and Auto.

After-tax net investment income of $727 million increased by 22% from the prior year quarter. As expected, fixed maturity NII was again higher than the prior year quarter, reflecting both the benefit of higher average yields and higher invested assets. Returns in the non-fixed income portfolio were also up from the prior year quarter. Our outlook for fixed income NII, including earnings from short-term securities, has increased slightly. We now expect approximately $675 million after tax in the third quarter and $695 million after tax in the fourth quarter. New money rates as of June 30 are still above the yields embedded in the portfolio. So fixed income NII should continue to improve beyond 2024 as the portfolio gradually turns over and continues to grow.

Turning to capital management. Operating cash flows for the quarter of $1.7 billion were again very strong, and we ended the quarter with holding company liquidity of approximately $1.7 billion. Interest rates increased during the quarter, and as a result, our net unrealized investment loss increased modestly, from $3.7 billion after tax at March 31 to $4 billion after tax at June 30. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $126.52 at quarter end, up 3% from year-end and up 10% from a year ago.

We've returned $498 million of capital to our shareholders this quarter, comprising share repurchases of $253 million and dividends of $245 million. We have approximately $5.5 billion of capacity remaining under the share repurchase authorization from our Board of Directors.

Turning to reinsurance. Page 19 of the webcast presentation shows a summary of our July one reinsurance placements. We increased coverage when we renewed our Northeast property CAT XoL treaty, which now provides $1 billion of coverage above the attachment point of $2.75 billion. A year ago, we purchased $850 million of coverage and the attachment point was $2.5 billion. We also renewed the Personal Insurance hurricane cat excess of loss treaty for coastal exposure, which continues to provide 50% coverage for the $1 billion layer above an attachment point of $2 billion.

Recapping our results. Q2 was another quarter of strong premium growth, excellent underwriting, underlying underwriting profitability and continued growth in net investment income, all of which bode well for our future returns. Our ability to absorb $1.5 billion of pretax cat losses and still deliver $585 million of core income for the quarter is a testament to the overall strength of our diversified franchise and the fundamentals of our business.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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To give a little more color on that. Underlying underwriting income has become an increasingly reliable and important component of our earnings power. Going back to the combination of Travelers and St. Paul, from 2005 through 2019, annual underlying underwriting income averaged $1.2 billion after tax. Our focus on profitable premium growth, which began accelerating around 2016, resulted in underlying underwriting income surpassing $2 billion for the first time ever in 2020, and we stayed above $2 billion through 2022. We then surpassed $3 billion in 2023, through the first half of 2024 underlying underwriting income of just over $1.9 billion is up by 32% compared to the first half of 2023.

In short, underlying underwriting income has become a significant and growing contributor to our ability to continue generating industry-leading returns with industry-low volatility.

And now for more color on each segment results, I'll tuthe call over to Greg to begin with a discussion of Business Insurance.

Greg Toczydlowski

Thanks, Dan.

Business Insurance had another strong quarter in terms of both top- and bottom-line results. Segment income was $656 million, up more than 60% from the prior year quarter, driven by prior year reserve development, higher net investment income and higher underlying underwriting income. We're once again particularly pleased with the quarter's exceptionally strong underlying combined ratio of 89.2%, our best second quarter result ever. For modeling purposes, property losses for this quarter were about a point favorable to our expectations. Net written premiums increased 7% to an all-time second quarter high of more than $5.5 billion.

Renewal premium change was once again historically high at 10.1%, with renewal rate change of 6.5% driving the majority of the strong pricing. Retention remained excellent at 85% and new business was up 9% to a record quarterly high of $732 million. In terms of pricing, we're pleased to sustain strong levels of renewal premium change, which was double digits for the fifth quarter in a row. The strong pricing was broad-based with renewal premium change in every line other than Workers Comp at or pretty close to double digits. In terms of pure renewal rate change, we're pleased that the exceptional granular execution by our field organization reflects and appropriately balances the current retuprofile and environmental trends for each line.

In terms of sequential rate movement from the first quarter, CMP, Auto, Umbrella and Workers Comp all increased. Umbrella and Auto led the way with double-digit rate increases. Renewal rate change in our Property line moderated, driven the National Property business, reflecting strong returns after several years of substantial compounding rate and improvements in terms and conditions. Even with these strong pricing levels, retention was improved or flat in every line other than Property. Where some large accounts in our National Property business, in particular, traded away to the subscription market this quarter on terms we weren't willing to accept.

As for the individual businesses, in Select, renewal premium change was exceptionally high at 12.3%, with a renewal rate change of 5.3%, up 1.5 points from the first quarter and more than two points from the second quarter of last year.

Retention remained healthy, but ticked down a bit from recent periods to 83% as we begin to purposely optimize our risk/retuprofile in a couple of targeted geographies and classes. New business remains strong and increased 8% from the prior year quarter. We're pleased with the impact that our production, product and platform initiatives are having in the marketplace and building a high-quality mix of business and driving profitable growth in this market.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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In Middle Market, renewal premium change remained strong and consistent with recent levels at almost 10%. Renewal rate change of 7% was up more than a point from the second quarter of last year, and that has now been at or around the 7% mark for the fourth consecutive quarter. Retention also remained strong at 89%, and new business of $383 million was the highest ever second quarter result.

Lastly, fresh off my most recent round of field visits, I couldn't be more pleased with our team's execution, ideation, energy and enthusiastic adoption of the tools and capabilities that have come from the strategic investments we've been making. And our distribution partners were once again crystal clear about our team's value and shared many examples of how our local teams, the best in the business, distinguish themselves. These trips continue to highlight for me the value of our high-performing talent and training curriculums, as well as the dividends we are receiving from our investments to be the undeniable choice for the customer and an indispensable partner for our agents and brokers.

With that, I'll tuthe call over to Jeff.

Jeff Klenk

Thanks, Greg.

Bond & Specialty posted another strong quarter on both the top and bottom lines. We generated segment income of $170 million and a strong combined ratio of 87.7%. The underlying combined ratio improved

1.7 points to a very strong 86.1%. The underlying loss ratio improved 4.1 points to an excellent 46.4%, reflecting the comparison to an elevated level of losses in the prior year quarter from a small number of Surety accounts. As we discussed last quarter, the expense ratio is modestly elevated primarily due to the Corvus acquisition. We expect that to continue to be the case for a few more quarters as we integrate the operation and as premiums from Corvus' attractive book of business ramp up and eain.

Turning to the top line. We grew net written premiums by 8% in the quarter to a record high. In our high- quality domestic Management Liability business, we again delivered excellent retention of 90% with positive renewal premium change that is generally consistent with recent quarters. We're pleased that we grew new business by nearly 60% from the prior year quarter to a record $111 million, driven by Corvus.

As a reminder, all of Corvus production will continue to be reflected in new business through next quarter. We grew net written premiums in our market-leading Surety business by a terrific 11% in the quarter, reflecting a robust construction environment and continued strong demand for our Surety products and services. So we're pleased to have once again delivered strong top- and bottom-line results this quarter.

And now I'll tuthe call over to Michael.

Michael Klein

Thanks, Jeff, and good morning, everyone.

In Personal Insurance, an excellent underlying underwriting results and strong net favorable prior year reserve development drove a significantly improved bottom-line result relative to the prior year quarter despite another period of elevated industry-wide catastrophe losses. The underlying combined ratio of 86.3% reflects nearly an eight-point improvement compared to the prior year quarter, primarily driven by higher earned pricing in both Automobile and Homeowners & Other. Continued strong price increases in both Auto and Home drove 9% growth in net written premiums.

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In Auto, we're pleased with another quarter of improved profitability and with the underlying fundamentals of the business. The second quarter combined ratio of 97.9% improved more than 10 points compared to the prior year quarter, due to a lower underlying combined ratio as well as favorable prior year development. The underlying combined ratio improved more than eight points, driven by the benefit of higher earned pricing and, to a lesser extent, lower losses from physical damage coverages. For modeling purposes, we view roughly 2.5 points of the improvement in the quarter as non-recurring.

In Homeowners & Other, the second quarter combined ratio improved over 16 points compared to the prior year quarter, reflecting a lower underlying combined ratio as well as higher favorable prior year development. While catastrophe loss dollars were similar to the prior year quarter, they had a smaller combined ratio impact as price increases continued to benefit earned premiums. Catastrophe losses this quarter, primarily resulting from severe convective storms, again, significantly exceeded long-term industry averages. The 28 PCS-designated cat events were the most ever for a second quarter, and 150% of the historical 10-year average.

Our catastrophe losses in the quarter were consistent with our market share, and, for context, our average annual cat losses over the last five and 10 years remain below our market share. This most recent experience will, of course, be reflected in our models going forward, and we will continue to weigh our recent experience more heavily in our ongoing process of optimizing our exposure, underwriting and pricing. The underlying combined ratio of 77.6% improved 7.6 points due in large part to lower-than- expected fire and non-weather water losses as well as the benefit of earned pricing. For modeling purposes, we expect approximately five points of the improvement in the Homeowners & Other underlying combined ratio to be non-recurring.

Turning to production. Our results reflect the ongoing execution of a granular state-by-state strategy as we balance profitability and growth across the portfolio. In Domestic Automobile, retention of 82% remains strong. Renewal premium change of 15.8% continued to moderate as anticipated. Auto renewal premium change will continue to gradually decline, reflecting the improved profitability in the line. While new business premiums were higher than the prior year quarter in many states, new business premium in aggregate was down slightly relative to the second quarter of last year.

This is the result of our continued efforts to manage Auto profitability in a few remaining challenged states, as well as the cross-line impact resulting from some of our Property actions, particularly in high-risk cat areas. Production results in Homeowners & Other reflect our focus to manage growth while improving profitability. Renewal premium change increased sequentially to 15.1%, reflecting higher rate change, while retention remained strong at 85%. We expect renewal premium change to remain at this level through year-end. As we intended, new business and policies-in-force declined, reflecting our efforts to thoughtfully deploy capacity.

To sum up for the Personal Insurance segment overall, we are pleased with our progress as we continue to deliver improved profitability. We're confident that the actions we've taken and continue to take will result in a profitable growing portfolio of Personal Lines business over time. Now I'll tuthe call back over to Abbe.

Abbe Goldstein

Thank you, and operator, we're ready to open up for Q&A.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern

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Operator

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star-one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw that question, again, press star-one. And please limit yourself to one question and a single follow-up. For any additional questions, please re-queue.

Your first question comes from David Motemaden with Evercore ISI. Please go ahead.

David Motemaden

Thanks, good morning.

I just had a question on the moving pieces around reserves in Business Insurance. So just the $250 million of recent accident years Umbrella charges, that comes after $100 million last quarter. So I guess I'm wondering if you could just elaborate on some of the more puts and takes and maybe give some confidence that you've put this behind you after the changes you made this quarter?

Dan Frey

Hi David, it's Dan. So you're right. We've seen Umbrella and the General Liability lines require some strengthening in the last few quarters. As we said in prepared remarks, we think that we're being proactive in reacting early and being decisive and meaning that we're being reasonably comprehensive by reacting in a meaningful way to what we're seeing.

I think the confidence we have is two pieces. One is we are reacting both to the changes in actual versus expected and allowing for longer development factors going forward on the very recent accident years.

So for the most part, we haven't even seen these claims come in yet, but we are allowing for the fact that when claims come in, they're likely going to cost more and take longer to settle. And then I think importantly, the 2015 through 2020 period has held up pretty well given the actions that we had taken through the end of 2023.

David Motemaden

Got it. Okay.

And maybe also within Business Insurance, the underlying loss ratio, if I sort of adjust out the light non- cat weather this quarter and then in 2Q '23, there still was around 50 basis points of improvement year- over-year on a clean basis. Could you talk about, I guess, what was driving that improvement? And especially given all these changes, was there any change to loss trend baked in there?

Dan Frey

Yes, David, it's Dan again. So I'll take that.

So I'll start with the second part first. So every time we have an impact PYD, we re-evaluate, it's not going to have an impact on current loss year, jump-off point or loss trend. We said last quarter that we had added beginning last quarter, some IBNR to the current accident year. So we had already taken some action. The changes that we made in PYD had some carry forward impact on the Umbrella line. But there's puts and takes across a variety of lines, and when you blend them all together inside of Business Insurance, it did not result in a big movement.

The Travelers Companies, Inc. July 19, 2024 at 9:00 a.m. Eastern