The Travelers Companies, Inc. (NYSE:TRV) Q1 2024 Earnings Call Transcript

The Travelers Companies, Inc. (NYSE:TRV) Q1 2024 Earnings Call Transcript April 17, 2024

The Travelers Companies, Inc. beats earnings expectations. Reported EPS is $4.84, expectations were $4.71. TRV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to the First 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 April 17, 2024. At this time, I would like to turn the 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 first 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 prepared remarks and then we will take your questions.

Before I turn the call over to Alan, I’d like to draw your attention to the explanatory note included at the end of the webcast 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 turn the call over to Alan Schnitzer.

Alan Schnitzer: Thank you, Abbe. Good morning everyone, and thank you for joining us today. We are very pleased to report excellent top and bottom line results for the quarter. Core income was $1.1 billion or $4.69 per diluted share, generating core return on equity of 15.4%. After-tax core income increased by $126 million, despite a $211 million one-time tax benefit in the prior year quarter. On a pre-tax basis, this year’s core income was $413 million or 45% higher year-over-year. Strong core income is driven by record net earned premiums of $10.1 billion up 14% compared to the prior year period and an excellent combined ratio 93.9%. The combined ratio improved 1.5 points notwithstanding elevated catastrophe activity primarily in the central and eastern regions of the United States.

The underlying combined ratio improved 2.9 points to an outstanding 87.7% driven by strong underlying results in each of our three segments. Looking at the two commercial segment together, the aggregate BIBSI [ph] underlying combined ratio wasn’t excellent 88.8% for the quarter. The underlying combined ratio in personal insurance was 86.1% a 6.8 point improvement over the prior year. Turning to investments, our high-quality investment portfolio continue to perform well generating after tax net investment income of $698 million for the quarter driven by strong and reliable returns from our growing fixed income portfolio and higher returns from our non-fixed income portfolio. Our underwriting and investment results together with our strong balance sheet enabled us to grow adjusted book value per share after returning $620 million of excess capital to shareholders through dividends and share repurchases and making important investments in our business, as we notched another quarter of successful execution on a number of important strategic initiatives.

In recognition of our strong financial position and confidence in the outlook for our business, I’m pleased to share that our board of directors declared a 5% increase in our quarterly cash dividend to $1.05 per share marking 20 consecutive years of dividend increases with a compound annual growth rate of 8% over that period. Turning to the top line, we grew net written premiums by 8% to $10.2 billion in the quarter. All three segments and excellent execution by our colleagues in the field contributed to our top line success. In Business Insurance, we grew net written premiums by 9% to $5.6 billion. Renewal premium change remained very strong at 10.6%, our retention remained high. The combination of strong pricing and retention reflects deliberate execution on our part and a marketplace that continues to be generally disciplined in the face of persistent headwinds.

The segment generated a very strong $691 million of new business in the quarter, 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 6% to $943 million. That was driven by strong retention of 90% and record new business in our high quality management liability business along with excellent production in our market leading surety business, where net written premiums were up 15%. Given the attractive returns, we are very pleased with the strong production results in both of our commercial business segments. In Personal Insurance, continued strong pricing drove 9% growth in net written premiums.

Renewal premium change was 16.6% in our auto business and 13.4% in home. You’ll hear more shortly from Greg, Jeff and Michael about our segment results. Before I turn the call over to Dan, I’ll share that more than a hundred of my Travelers colleagues and I just returned from our Travelers leadership conference, TLC as we call it. It’s a multi-day event that we host every year for the principals and senior leaders of our most significant distribution partners. Most of our guests have been coming for years, some for decades. We’re also pleased every year to host a number of first timers. The represented firms are industry leaders and collectively account for more than half of our premium volume. We all returned home with the continued confidence that our relationships with these business partners and their firms are as strong as ever.

We confirm that they remain very supportive of the strategic initiatives that we have underway and we took away valuable feedback on how we can accomplish even more together. The independent agent and broker channel remains a robust and growing part of our industry. At Travelers, we proudly partner with more than 15,000 agent broker firms across their 35,000 locations. We’re a top three market for the majority of these firms that’s a critical advantage because distributors place a disproportionate amount of their business with their top few carriers. We don’t take these relationships for granted. As we’ve shared before, the vision for innovation agenda includes optimizing our value proposition as an indispensable partner to our agents and brokers.

We continue to make significant investments to ensure that we realize that vision by offering best-in-class products, services, and experiences. Case in point, in our Bond & Specialty business, we recently conducted a blind survey of agents and brokers, ours and others, to determine how we ranked on the 10 attributes they identified as most likely to impact their placement decisions. Among our key competitors, we ranked first or tied for first in each of the 10 categories. We are over and over again that Travelers deep specialization across a wide range of modernized, simplified, and tailored products, along with a broad and consistent appetite are major differentiators for us in the market. For example, in Business Insurance, we offer a wide variety of coverages and product solutions.

Admitted and DNS, across industries representing more than 85% of domestic GDP. Everything from a bought product for a local florist to a package solution for a main street middle market account to a loss sensitive workers compensation for a large national account. Across our three business segments, our distribution partners generally don’t need to go to multiple carriers to satisfy customers’ insurance needs. And the more lines per account we write, the higher the lifetime value of the customer. The primary focus of ours has been digitizing the value chain, in part to create value and provide great experiences for our agents and brokers, and in part to create efficiencies for them and for us. I’ll share a few examples. In Business Insurance, we believe we were the first to offer agents and brokers a comprehensive portfolio loss data exchange, which allows us to digitally transfer to a small commercial or middle market distributor, loss information on their entire book with us.

This capability enables our distribution partners to efficiently develop important insights into their books of business and supports their marketing efforts. In our middle market business, we believe we were the first carrier to offer multi-line digital submission capabilities. In our small commercial business, agents can transact with us through APIs or through our new quote and issue platform Travis, which is reduced quoting time by 25% for our leading BOP product. Across Business Insurance, nearly all of our largest distributors are currently leveraging one or more of our digital capabilities. In Personal Insurance, earlier this year, we added our proprietary aerial image reviewer to our agent portal. This advanced capability integrates a high resolution, over time photo series of a home into agents quoting workflow.

This gives our partners a bird’s eye view, helping them to better understand the customers or prospects insurance needs and how they may have evolved. We bring our franchise value directly to agents and brokers through distribution, underwriting, sales and claim professionals in more than 80 local offices. Through our expansive and empowered field organization, we foster deep relationships with our partners and are well-positioned to deliver the strength and expertise of travelers at the local level. We’re also investing in our distribution partner’s workforces by providing education and training programs to their up and coming producers. Our Flagship Travelers agency leadership program and agency producer school provide in-person training to invited participants.

We also offer larger virtual programs that have trained thousands of producers, including more than 3,000 just last year. We remain deeply committed to our vision of being the undeniable choice for the customer and an indispensable partner to our agents and brokers. Our pole position with this, with leading distributors is a significant competitive advantage and one that’s hard to replicate. To sum it up, the year is off to a terrific start with strong profitability and production in all three segments, as well as higher investment income. In short, we’re firing on all cylinders. We also continue to invest in important strategic initiatives. We have demonstrated success in executing our innovation strategy, which has contributed to superior returns with industry low volatility, both in our premium base and higher adjusted book value per share.

With this momentum and the best talent in the industry, we remain well positioned for success this year and beyond. And with that, I’m pleased to turn the call over to Dan.

Dan Frey: Thank you, Alan. Core income for the first quarter increased by 13% to $1.1 billion. And core return on equity was 15.4%. The growth in core income was driven by higher net investment income, and despite the one-time tax benefit in the prior year that Alan mentioned, higher underlying underwriting income, partially offset by a higher level of catastrophe losses. Our pre-tax underlying underwriting gain of $1.2 billion was up 50% from the prior year quarter, reflecting higher levels of earned premium and an underlying combined ratio that improved by 2.9 points to 87.7%. The underlying combined ratio was among our best ever and featured continued strong results in both Business Insurance and bond and specialty, complemented by a strong result in personal insurance, reflecting another quarter of significant improvement.

We were pleased with the first quarter expense ratio of 28.7%, which was flat year-over-year despite the impact of Corvus, for which we had a full quarter of expenses, but very little earned premium, as there was no unearned premium carried in from the closing of the transaction on January 2nd. For the full year, we remained comfortable with an expense ratio expectation of 28% to 28.5%. We reported net favorable prior year reserve development of $91 million pre-tax in the first quarter. There was no net prior year reserve change in Business Insurance, as favorable development and workers comp of nearly $100 million was largely offset by modest increases for liability coverages in recent accident years, along with modest charges in our runoff book.

In Bond & Specialty, net favorable PYD of $24 million pre-tax was driven by better than expected results across multiple lines. Personal Insurance recorded net favorable PYD of $67 million pre-tax, with improvements in both auto and home. After-tax net investment income increased 25% from the prior year quarter to $698 million. Fixed income NII was higher than in the prior year quarter and in line with our expectations, benefiting from both higher levels, higher yields, and a higher level of invested assets. Returns in our non-fixed income portfolio were also up from last year’s quarter. Our updated outlook for fixed income NII, including earnings from short-term securities, is $640 million after-tax in the second quarter, growing to approximately $665 million in the third quarter, and then to around $690 million in the fourth quarter.

Regarding income taxes in the first quarter, recall that last year’s quarter included a one-time tax benefit of $211 million related to the repeal of Internal Revenue Code Section 847, and that’s the main reason you see a higher effective tax rate in this year’s quarter. Turning to capital management. Operating cash flows for the quarter of $1.5 billion were again very strong, and we ended the quarter with holding company liquidity of approximately $1.6 billion. As interest rates increased during the quarter, our net unrealized investment loss increased from $3.1 billion after-tax at year-end to $3.7 billion after-tax at March 31st. Remember, the changes in unrealized investment gains and losses do not impact how we manage our investment portfolio.

We generally hold fixed income investments to maturity. The quality of our fixed income portfolio remains very high, and changes in unrealized gains and losses have little or no impact on our cash flows, statutory surplus, or regulatory capital requirements. Adjusted book value per share, which excludes unrealized investment gains and losses, was $125.53 at quarter end, up 2% from year-end, and up 8% from a year ago. Share repurchases this quarter included $250 million of open market repurchases. We had an additional $138 million of buybacks in connection with employee share based compensation plans. We have approximately $5.8 billion remaining under prior board authorizations for share repurchases. Dividends were $232 million in the quarter, and as Alan mentioned earlier, our board authorized a 5% increase in the quarterly dividend to $1.05 per share.

In summary, the quarter’s strong results once again demonstrate the significant earnings power of our ability to grow premiums across our well-diversified book of business while maintaining very attractive margins, along with steadily increasing net investment income from our growing and fixed income portfolio. And with that, I’ll turn the call over to Greg for discussion of Business Insurance.

Gregory Toczydlowski: Thanks, Dan. Business Insurance continues to deliver exceptional results with a strong first quarter of 2024 in terms of both the top and bottom lines. Segment income of $764 million was up from the first quarter of 2023 driven by higher net investment income and higher pre-tax underlying underwriting income. We’re once again particularly pleased with the quarter’s exceptionally strong underlying combined ratio of 89.2% among our best ever. Net written premiums increased 9% to an all-time quarterly high of $5.6 billion. Renewal premium change was once again historically high at 10.6% with renewal rate change of 7% driving most of the strong pricing. Retention remained excellent at 86% and new business of $691 million was an all-time first quarter high.

Let me give you a little more texture on the continued strong pricing environment. Renewal rate change remained high, coming in at 7% or higher for the fourth quarter in a row. It was also up almost 2.5 points from the first quarter of 2023. In our select and core middle market businesses, renewal rate remained consistent with the fourth quarter. Renewal rate change in our national property book was strong and in the double digits, but down a couple points sequentially. That’s an appropriate result threading the needle between healthy returns in the business and continued weather volatility. From a line perspective, umbrella, property, and auto led the way. All with renewal rate change in or very close to double digits. Renewal rate change was higher compared to the preceding and prior year quarters in GL, Umbrella, Auto, E&CMP [ph].

In workers’ comp, renewal rate change was about half a point more than negative than the preceding and prior year quarters. With continued healthy exposure, renewal premium change in comp continues to be positive in the low single digits. Again, an appropriate result given the strong results in the line. Retention remained healthy across the board. We’re pleased with our production results, the exceptional granular execution by our field organization, and the resulting growth in top line and attractive margins. As for the individual businesses, in select, renewal premium change remains strong at 10.4% with renewal rate change of 4%, consistent with the fourth quarter and up more than two points from the first quarter of 2023. Retention also remained strong at 84%, while new business increased 22% from the prior year quarter to $156 million, driven by the continued success of our BOP 2.0 product.

We’re also encouraged with the impact we’re seeing from Travis, our new front end rate, quote, and issue interface platform that Alan mentioned. In middle market, renewal premium change was 10% with renewal rate change of 7%, consistent with the strong fourth quarter result and up close to three points from the prior year quarter. Retention remains strong at 87%. To sum up, Business Insurance had a great start to the year. We continue to grow our profitable book while investing in capabilities to enhance our position as the undeniable choice for the customer and an indispensable partner for our agents and brokers. With that, I’ll turn the call over to Jeff.

Jeffrey Klenk: Thanks, Greg. Fund & Specialty started the year with another quarter of strong returns in our 29th consecutive quarter of profitable net written premium growth. Segment income was $195 million, driven by strong earned premiums and a combined ratio of 84.5%. Underneath the combined ratio, the underlying loss ratio improved 2.7 points to an excellent 46.4%. As Dan mentioned, the expense ratio was elevated compared to recent periods, primarily due to the Corvus acquisition. We expect that to continue to be the case for the next several quarters as we integrate and earn in Corvus’ business. Turning to the top line, we grew net written premiums by 6% in the quarter. In our high quality domestic management liability business, we again delivered excellent retention of 90% with slightly higher sequential renewal premium change.

We grew new business by 34% from the prior year quarter to a record $91 million, driven by Corvus production. As a reminder, we are in the midst of transitioning Corvus’ $200 million profitable book of business onto Traveler’s paper, which will continue to be reflected in our new business production in the coming quarters. Net written premiums in our market-leading surety business grew a terrific 15%, reflecting continued strong demand for our surety bonds. So we’re pleased to have once again delivered strong top and bottom line results this quarter. And now I’ll turn the call over to Michael.

Michael Klein: Thanks, Jeff, and good morning, everyone. I’m pleased to report Personal Insurance generated first quarter segment income of $220 million and a combined ratio of 96.9%, both of which are significantly improved relative to the prior year quarter. The underlying combined ratio of 86.1% reflects a 6.8 point improvement compared to the prior year quarter, driven by higher earned pricing in both automobile and homeowners and other. Net written premiums grew 9% as a result of continued price increases in both auto and home. In automobile, the first quarter combined ratio of 94.6% improved 10 points compared to the prior year, primarily reflecting a lower underlying combined ratio, as well as favorable prior year development.

The underlying combined ratio of 94.9% improved 8.5 points compared to the prior year, driven by the benefit of higher earned pricing. At the same time, vehicle severity trends moderated, and the quarter also included a modest frequency benefit from the mild winter. As a brief reminder, the first quarter underlying combined ratio is typically our seasonally lowest in auto. We are very pleased with the trajectory of auto profitability. In homeowners and other, the first quarter combined ratio of 99.1% was impacted by higher catastrophe losses, reflecting an active cat quarter, with 19 PCS designated events for the industry, more than 50% higher than the long-term average. The underlying combined ratio of 77.6% improved 5 points, primarily driven by the impact of earned pricing.

Turning to production, our results demonstrate continued disciplined execution of rate and non-rate measures to balance profitability and growth. In domestic automobile, retention of 82% remained strong, and renewal premium change of 16.6% was consistent with our expectations. Given the improving profitability of our book, we continue to expect renewal premium change to moderate throughout 2024. New business premium was consistent with the prior year quarter. Underneath this headline number, new business volumes grew in states where we have achieved written rate adequacy. In homeowners and other, retention of 84% remained strong and was consistent with recent quarters. Renewal premium change of 13.4% reflected higher renewal rate change, and was consistent with our expectations, as we have largely closed the gap in insurance to value.

We expect renewal premium change to remain at these levels throughout 2024, as we continue to seek rate in response to elevated loss costs. The declines in homeowners’ new business and policies in force reflect our ongoing efforts to thoughtfully deploy capacity, as we continue to manage rate adequacy, catastrophe risk, and regulatory risk. Personal Insurance team has made notable progress on improving the underlying fundamentals of our business, while sustaining investments in key capabilities for the future. We’re moving closer to our goal of delivering target returns. Auto profitability continues to improve. We have reached written rate adequacy in all but a few states, and are continuing to temper non-rate actions accordingly. For homeowners, we remain focused on managing growth, while improving profitability.

At the same time, we’re delivering key strategic capabilities. In February, we completed two noteworthy product launches, Quantum Boat 2.0 in the U.S., and Optima Home in Canada. Quantum Boat 2.0 delivers a better agent and customer experience, with improved segmentation, and strengthens our position as a provider of total account solutions, building on the success of Quantum Auto 2.0 and Quantum Home 2.0. Optima Home is an extension of our market-leading Quantum Home 2.0 property product, enabling us to deliver a more robust total account solution in the Canadian market. Both product launches mark further progress on our journey to modernize our products and platforms, making us an even more compelling choice for customers and distributors.

To sum it up, I’m very pleased with the positive start to the year in Personal Insurance and grateful to our team. Now I’ll turn the call back over to Abby. Now I’ll turn the call back over to Abbe.

Abbe Goldstein: Thank you. We’re ready to open up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of David Motemaden of Evercore. Your line is open.

David Motemaden: Hi. Thanks. Good morning. I had a question just on the more recent accident year reserve increases in Business Insurance and some of those liability lines that Dan was highlighting. I’m wondering, is there any more detail you can provide here with regards to specific accident years? It sounded like GL. Also, I don’t think you guys are alone in seeing some adverse on these years. I think everyone had thought that these were better priced years relative to 2019 and prior. Could you just talk about what exactly is the disconnect here and why there’s some adverse coming on those years?

Dan Frey: Hey, David. It’s Dan. Sure. I’ll take that. Yes. By more recent accident years, we’re not talking about 15 through 19. We’re talking about years more recent than that. I guess the thing I’ll reiterate from my comments is we’re talking about some pretty small movements here. We had some adverse in those recent accident year liability lines. We also had some modest charges in the runoff book. I think what we’re doing here, David, is trying to be reactive to all the information we’re seeing those recent accident years in the liability lines, which tend to take longer to develop and be on the books for a while, are more leveraged to IB&R. We’re just trying to get some more IB&R into those lines to recognize that uncertainty.

Alan Schnitzer: David, its Alan. The other thing I’d add is there’s not any significant new developments here. These are generally the same trends we’ve been talking about for a long time, a little more of the same. Again, to reiterate Dan’s comment, when you look at the overall reserves we have for these lines, these are very small adjustments.

David Motemaden: Got it. Okay. That’s helpful. Then, maybe just switching gears to the personal auto business, Michael, I think you had mentioned that there was maybe some benefit just from mild frequency given a warmer than typical first quarter. Is there any way you could size that just to help us think about the sustainability of the improvement in the auto business?

Michael Klein: Yes, sure, David. I think the mild frequency impact on the underlying combined ratio was a little less than a point.

David Motemaden: Great. Thank you.

Operator: Your next question comes from the line of Gregory Peters with Raymond James. Your line is open.

Gregory Peters: Good morning, everyone. For the first question, I’ll focus on the Business Insurance segment. In the comments and in the stats, I think there’s 7% or higher renewal rate change for four consecutive quarters. Retention seems to be holding up, maybe slipping a little bit. Maybe you could step back and give us some context about, or texture I think is the word you used, about the competitive environment. Curious, given all the rate change that’s coming through, why we haven’t seen more aggressive actions on behalf of some of the competitors yet, or maybe there’s still reconciling previous year’s results as well. I don’t know. Just some color there would be helpful.

Alan Schnitzer: Good morning, Greg. It’s Alan. I’ll start and then turn it over to Greg. Hard for us to comment for competitors, but we do think that in the pricing we’ve been able to achieve with these retentions, you do see a reflection of the competitive environment. I’d say that everybody is, well, what we would speculate is that everybody’s reacting to the same things that we’re reacting to. There’s returns in a much better place after years of pricing and improvements in terms and conditions, but there are some headwinds and some uncertainty out there. All the things we’ve talked about, there’s social inflation, economic inflation, a tight labor market. Weather, geopolitics, I think, puts a certain lens over the way we all see the world. I suspect what you have is a marketplace that’s reacting to an overall level of risk and uncertainty.

Gregory Peters: I guess I’ll pivot then. If you look at the proxy statement, I know ROE targets are a very important metric for you all. I think the target was 12.8% for 2023 up from 11.6% from 2022. Can you talk about how you’re looking at the ROE targets for the company for 2024, please?

Gregory Toczydlowski: Yes, I don’t think we’re going to share that target. It gets competitively sensitive and close to pricing. But I will say we think about that in terms of the overall outlook for our business. We think about the rate at which the interest rate environment is earning into the fixed income portfolio, which turns over on a lag basis. And we think about really what we want to achieve as a margin over both the 10-year treasury and our cost of equity. So those are the things we think about as we put the plan together. Dan, anything else I’m missing there?

Dan Frey: No, you got it all.

Gregory Peters: Got it. Thanks.

Dan Frey: Thank you.

Operator: Your next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open.

Elyse Greenspan: Hi, thanks. My first question is on personal auto. I think you guys said that Q1 is seasonally the lowest combined ratio quarter, but you still have a good amount of rate earning in the book. So shouldn’t that obscure some of the seasonality, or would you expect Q1 to be better from a combined ratio perspective on the underlying side relative to the other three quarters of the year, even knowing you have rate to earn in?

Michael Klein: Sure, Elyse. It’s Michael. So just taking a step back and talking about auto, the seasonality comment is a long-term average comment. Typically, Q1 is roughly three points lower than the overall combined ratio for the year. But that’s, again, a long-term average and largely an all-else equal environment. So that three points doesn’t adjust for earned effective pricing potentially having impact in the back half of the year. And so you have to make an adjustment for that, no question. But, again, I would just take a step back and maybe put a little more color around my response to David as well. So the mild winter weather benefit we would view as sort of a one-off in the quarter that we wouldn’t expect to continue, we don’t see any reason to assume adjusted for that.

That seasonality is any different today than it was historically. And at the end of the day, to the premise of your question, the earned effective pricing is far and away the biggest driver of the improvement in the quarter, and there’s more of that to come going forward.