Q3 2022 Travelers Companies Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the third quarter results teleconference for travelers, we ask that you hold all questions until the completion of formal remarks at which time, you'll be given instructions for the question and answer session. As a reminder, this conference is being recorded on October 19th to.
22 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.
Thank you good morning, and welcome to travelers discussion of our third quarter 2022 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 dot com under the investors section.
Speaking today will be Alan Schnitzer, Chairman and CEO , Dan Fry, Chief Financial Officer, and our three segment President Greg Ted's Lasky of business insurance, Jeff Plank of bond and 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 statements involve risks and uncertainties and is not a guarantee of future performance actual results may do.
For 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.
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.
Thank you Abby good morning, everyone and thank you for joining us today.
I'd like to start by acknowledging the devastation and loss of life caused by Hurricanes, Ian and Fiona.
We're thinking of all those who have been impacted and are supporting the Red Cross disaster relief efforts.
In addition, as always after events like these were focused on taking care of our customers.
We are on track to meet our objective of resolving 90% of our property claims arising out of the storms within 30 days.
My Thanks to all our claim colleagues, who are working hard to make that happen.
Moving to our results. We're pleased to report this morning, a solid bottom line for the quarter, particularly in light of the significant industry wide catastrophe losses.
Strong and improved underwriting profitability in our commercial business segments.
Progress addressing the environmental headwinds facing the personal insurance industry.
Meaningful contribution from net investment income, including positive returns from our alternative investment portfolio, notwithstanding the challenging equity market.
Very strong production in all three of our business segments, resulting in strong growth in net written premiums.
And another quarter of successful execution on a number of important strategic initiatives.
Okay.
Core income for the quarter was $526 million or $2.20 per diluted share generating core return on equity of seven 9%.
These results benefited from record net earned premiums of $8 $6 billion up 10% over the prior year quarter and a solid underlying combined ratio of 92, 5%.
The nine month core turn on equity was 10, 9%.
Given the challenging environmental issues impacting the personal insurance industry.
These consolidated results once again demonstrate the benefit of our diversified portfolio of businesses.
We're particularly pleased with the continued strong underlying results in our commercial businesses.
Looking at the two commercial segments together.
Aggregate B I B S. I underlying combined ratio was an excellent 88% for the quarter.
As expected results in personal insurance were impacted by elevated severity in both auto and home.
As you'll hear from Michael we're continuing to make progress addressing the environmental loss cost issues.
In terms of a catastrophe losses as Ive described before strategic efforts, we have undertaken in recent years have enabled us to more effectively manage our exposure to catastrophes and more efficiently mobilized our claim response.
While there is always the potential for us to have outsized exposure to an event.
Those efforts contributed to losses for us from Hurricane in that based on current estimates are favorable relative to our corresponding market share.
That's consistent with our experience over the past five years.
Our share of the industry's property cat losses over that period has been meaningfully lower than our corresponding market share.
Our capabilities position us well for kind of increasing frequency and severity of losses from natural catastrophes.
Turning to investments our high quality investment portfolio generated net investment income of $505 million after tax for the quarter, reflecting higher returns from our fixed income portfolio and positive returns in our non fixed income portfolio.
Our strong operating results over the past few quarters together with our solid balance sheet.
All this to grow adjusted book value per share by 7% over the past year after making important investments in our business and continuing to return excess capital to shareholders.
During the quarter, we returned $722 million of excess capital to our shareholders, including $501 million of share repurchases.
Turning to the topline thanks to excellent execution by our colleagues in the field and the strong franchise value we offer to our customers and distribution partners. We grew net written premiums by 10% this quarter to a record $9 $2 billion.
In business insurance net written premiums grew by 9%.
Renewal premium change was very strong at a historically high 10, 2%, while pure renewal rate change of 5% was higher than the first half of the year.
Retention remained very strong at 86% and new business increased 9% from the prior year period.
Underneath the headline numbers execution in terms of rate and retention at a segmented level continued to be exceptional.
In bond and specialty insurance net written premiums increased by 8% driven by excellent production in both our surety and management liability businesses.
<unk> net written premiums were up 18%.
Management liability premiums were up 4% driven by renewal premium change of 9% retention that increased to 89% and 20% growth in new business.
In personal insurance renewal premium change was meaningfully higher both year over year and sequentially as we continued to address the environmental headwinds.
You'll hear more shortly from Greg, Jeff and Michael about our segment results.
Before I turn the call over to Dan I'd like to comment on a public policy issue.
Hurricane and puts a spotlight on the troubled condition of the Florida insurance market.
Other states may be headed for similar challenges.
As policymakers consider how best to address the availability and affordability of insurance, we would urge them to consider the impacts of the unhealthy tort environment.
Fraud and abuse by a few that impact too many.
And regulatory practices that undermine free market principles.
I believe those factors are at least as consequential as the weather itself to the industry's ability to provide our communities with effective and efficient ways to manage risk.
We're looking forward to being a participant in constructive conversations about solutions in the days ahead.
Some things up building on our strong results. So far this year, we're confident about our outlook.
Our commercial lines businesses are generating terrific results.
We're achieving meaningful price increases in personal lines.
And our high quality investment portfolio is poised to generate meaningfully higher levels of fixed income NII going forward.
When we combine that and the success, we've had with our perform and transform call to action, we're very confident in our ability to continue to create shareholder value over time.
And with that I'm pleased to turn the call over to Dan.
Thank you Alan.
Core income for the third quarter, it was $526 million and core return on equity was seven 9%.
On a year to date basis core ROE is a healthy 10, 9%.
Our after tax underlying underwriting gain of $478 million was once again very strong.
We generated record earned premium in reported and underlying combined ratio of 92, 5%.
And both business insurance and bond and specialty the underlying combined ratios were particularly good.
And improved from the prior year quarter.
While in personal insurance the underlying combined ratio was elevated.
Brian Jeff and Michael will provide more detail on each segment's results in a few minutes.
The expense ratio for the quarter of 28, 1% was our best ever quarterly results, having improved one three points from last year's third quarter.
As a reminder, the expense ratio has improved even as we continue to increase our significant investment in strategic initiatives with.
With the improvement driven by our focus on productivity and efficiency, coupled with strong topline growth.
In our earnings call last quarter, we told you that we expected the expense ratio to be around 29% for the full year.
And with the year to date expense ratio at 28, 7%.
It looks like we'll do a little better than 29.
Our third quarter results include $512 million of pre tax catastrophe losses was $326 million related to hurricane in.
We hold ourselves accountable for managing our cat exposures over time and Ian is another illustration of our industry leading expertise.
As you heard from Alan based on available industry estimates for in travel to share of losses looks to be well below our weighted average market share in the affected states.
The investments we've made in talent technology and sophisticated payroll by apparel modeling are paying off in terms of risk selection pricing segmentation risk mitigation and our industry leading claim response capabilities.
Regarding cat losses and reinsurance.
On a year to date basis through September 30th we've accumulated $1 $4 billion of qualifying losses towards the aggregate retention of $2 billion on a property aggregate catastrophe ex ol treaty.
A couple of additional comments on reinsurance.
Based on what we're hearing from the reinsurance community.
It sounds like the market is in for higher pricing and capacity constraints.
In terms of primary carriers, that's going to impact some much more than others for.
For two reasons, we would expect to be less impacted than others.
First as a disciplined gross line underwriter, we just don't buy that much reinsurance compared to many others.
Second.
We have a long track record of strong underwriting performance consistently outperforming the industry.
The upshot of those factors is that we generally expect to be able to obtain the reinsurance coverage, we need at acceptable prices.
Also because we're less reliant on reinsurance, we should be less affected by price increases and capacity constraints.
Less of an impact on our cost structure, we should have the option to expand our margin advantage or to reflect that cost advantage and our pricing, making us more competitive for attractive new business opportunities.
Turning to prior year Reserve development.
Total net favorable development of $20 million pre tax in the third quarter and.
In business insurance net unfavorable <unk> of $61 million was driven by a $212 million charge related to our annual asbestos review larger.
Largely offset by better than expected loss experience in workers' comp across a number of accident years as well as favorable development in property.
In bond and specialty net favorable <unk> of $63 million was driven by better than expected results in fidelity and surety as well as the management liability book.
Personal insurance had $18 million of net favorable P y D with modest movements in both auto and home.
One additional comment on asbestos.
Loss activity and the level of deaths related to mesothelioma did moderate somewhat in the most recent data available for review.
But not to the degree we had projected.
Nonetheless, the long term trend is that mesothelioma mortality rates are declining.
After tax net investment income decreased by 22% from the prior year quarter to $505 million.
As expected returns in our non fixed income portfolio were below last year's excellent results. Although we were pleased that the alternative portfolio generated positive income despite the significant downturn in the broader equity markets.
Fixed maturity NII was higher than in the prior year quarter, reflecting both the higher level of invested assets and the impact of higher yields.
With interest rates, having moved higher during the third quarter. We are again, raising our outlook for fixed income NII, including earnings from short term securities.
Approximately $500 million after tax in the fourth quarter.
And approximately $540 million on average per quarter in 2023.
With an estimated $515 million in the first quarter growing to an estimated $570 million in the fourth quarter.
New money rates as of September 30th were about 150 basis points higher than what is embedded in the portfolio and with rates having moved up again in October that difference is now around 200 basis points.
As it relates to our non fixed income investments, let me take this opportunity to remind you that results for our private equities real estate partnerships and hedge funds are generally reported to us on a one quarter lag.
Since our non fixed income returns tend to directionally follow the broader equity markets. We expect the downturn experienced by the broader market in the third quarter the impact our fourth quarter results.
Turning to capital management operating cash flows for the quarter of $2 $5 billion were again very strong.
All our capital ratios were at or better than our target levels and we ended the quarter with holding company liquidity of more than $1 $4 billion.
Interest rates increased and spreads continued to widen during the quarter and as a result, our net unrealized investment loss increased from $3 $8 billion. After tax at June 30th two.
$6 $3 billion after tax at September 30th.
Yeah.
As we've discussed in prior quarters, the changes in unrealized investment gains and losses generally did not impact how we manage our investment portfolio.
We regularly hold fixed income investments to maturity the quality of our fixed income portfolio is as always very high and changes in unrealized gains and losses have little impact on the expected cash flow from those investments, our statutory surplus or regulatory capital requirements.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $111.90 at quarter end up 2% from year end and up 7% from a year ago.
We returned $722 million of capital to our shareholders this quarter comprising share repurchases of $501 million and dividends of $221 million, we have approximately $2 $5 billion of capacity remaining under the most recent share repurchase authorization from our board of directors.
To sum it all up we had another very good quarter in light of the impact from Ian with strong premium growth in all three segments terrific underlying underwriting profitability in our commercial businesses and further improvement to our outlook for fixed income NII.
All of that combined with another quarter of progress on important strategic initiatives as us well positioned to continue to grow at attractive returns and with that I'll turn the call over to Greg for a discussion of business insurance.
Thanks, Dan business insurance had an excellent quarter with segment income of $471 million were particularly pleased with our exceptional underlying combined ratio, which improved to 90% for the quarter.
This result is a testament to our execution and focus on achieving our targeted returns.
The underlying loss ratio increased by about a point as the benefit of earned pricing was more than offset by the comparison to both the low level of property losses, and the favorable impact associated with the pandemic in the prior year quarter.
The increase in the underlying loss ratio was more than offset by a lower expense ratio.
Benefited from our ongoing strategic focus on productivity and efficiency.
Net written premiums of $4 $4 billion were up 9% over the prior year quarter with growth in all domestic markets and lines of business.
Premiums benefited from strong renewal premium change and retention both of which were once again, historically high as well as higher levels of new business.
Turning to domestic production for the quarter renewal premium change of 10, 2% was once again exceptionally strong.
<unk> included renewal rate change of 5%.
Pick up from the second quarter and strong exposure growth.
Retention remained very strong at 86% and new business premium was more than $500 million up 9% over the prior year.
We're pleased with the strong production results and the excellent execution by our colleagues in the field.
Given our high quality book as well as several years of segmented rate increases and improvements in terms and conditions. We're thrilled to continue to produce historically strong retention levels.
The rate gains we achieved in the quarter reflect our deliberate execution.
Which balanced the persistent headwinds and uncertainty in the current environment with the improvement in profitability across our portfolio. After several years of strong pricing.
As always we will continue to execute our granular pricing careful management of deductibles attachment points limits sub limits and exclusions to maintain profitable growth.
As for the individual businesses in select renewal premium change remains healthy at 10, 6%.
While retention of 83% was up two points from the prior year quarter.
New business was up 8% from the prior year quarter, driven by the continued success of our BOP to point oil product.
In middle market renewal premium change remained very strong at over 9%, while retention was higher year over year and sequentially and an excellent 89%.
New business premium of $271 million was up 5% over the prior year.
To sum up business insurance had another terrific quarter.
We're pleased with our execution and driving strong financial results, while continuing to invest in the business for long term profitable growth.
With that I'll turn the call over to Jeff.
Thanks, Greg.
Bonded specialty had an outstanding quarter on both the top and bottom lines.
Segment income was $242 million up 39% from the prior year quarter, driven by record underlying underwriting income.
And a higher level of net favorable prior year reserve development.
The underlying combined ratio was a terrific 78, 4%.
An improvement of five points from the prior year quarter.
Reflecting both the benefit of earned pricing in about a two point impact from the favorable re estimation of losses for the first two quarters of 2022.
Turning to the topline net written premiums grew 8% in the quarter to a record high with contributions from all our businesses.
Domestic surety grew an outstanding 18% in the quarter driven by a larger average bond premiums.
In domestic management liability renewal premium change remains strong at 9%, while we improve retention by a point to a terrific 89%.
We're also pleased that we increased new business, 20% from the prior year quarter as we leverage the investments we've made and continue to make in our competitive advantages to grow these profitable businesses.
So both top and bottom line results for bond and specialty where again terrific. This quarter, reflecting continued excellent execution across our business and the value of our market, leading products and services to our customers and distribution partners.
And now I'll turn the call over to Michael.
Thanks, Jeff and good morning, everyone for.
For the third quarter personal insurance reported a combined ratio of 107, 2% up approximately two five points compared to the prior year quarter, primarily driven by a higher underlying combined ratio.
The four point increase in the underlying combined ratio reflects the continuing environmental challenge of elevated loss severity in both automobile in homeowners.
The loss impacts were partially offset by a two point reduction in the expense ratio.
For the quarter catastrophe losses were $285 million and included losses from Hurricane in most of which are Florida automobile losses.
Catastrophes were two points lower than the prior year quarter, which included Hurricane Ida.
Net written premiums for the quarter grew 13%, primarily driven by very strong price increases in both domestic automobile in homeowners and other.
And automobile third quarter combined ratio was 112, 2%, including nearly eight points of catastrophe losses.
The underlying combined ratio was 103, 9% an increase of six nine points relative to the prior year quarter.
The increase reflects another quarter of elevated vehicle replacement and repair costs and to a lesser extent the continued return towards pre pandemic driving in claim frequency levels.
Our primary response to the <unk> environmental challenges as higher pricing.
I'm pleased with our progress this quarter building on our actions to increase rates over the past few quarters.
While pricing continues to gain momentum it will still take some time for rate actions to fully earn into our results.
In homeowners and other the third quarter combined ratio was 102, 3%.
An improvement relative to the third quarter of 2021 as catastrophe losses in property were lower.
The underlying combined ratio of 94, 9% increased about a point and a half from the prior year quarter.
We continued to experience higher loss severity related to a combination of labor and material price increases in the quarter.
But that loss pressure was largely offset by the current quarter benefit of earned pricing lower non catastrophe weather losses, and a lower expense ratio.
Turning to quarterly production, we continue to make excellent progress in achieving pricing increases.
Ill discuss homeowners and other production first this morning before spending a bit more time on automobile.
For domestic homeowners and other renewal premium change increased to 14, 1% and retention decreased slightly to 83% both consistent with our expectations.
We expect renewal premium change to continue at these levels for the remainder of 2022.
Looking ahead to 2023, we expect renewal premium change to increase above these already very strong levels as we implement additional insured value increases.
For domestic automobile renewal premium change increased to eight 1% while retention was 83% also consistent with our expectations.
During the quarter, we implemented price increases in 26 states at an average of about eight 5%.
We expect that domestic automobile renewal premium change will get into double digits in the fourth quarter and be in the mid teens throughout 2023.
Britain pricing should reach adequacy in most states representing the majority of our business between now and mid 2023.
And that pricing will earn into our results over time.
In addition to increased pricing, we're also implementing additional non rate actions.
<unk> further tightening underwriting criteria.
Drifting binding authority for certain agents in certain states and removing our auto product from comparative raters in California and Florida.
These actions will help us manage growth and improve profitability.
Personal insurance had a strong track record of financial performance demonstrated by our over 40% net written premium growth and 97% combined ratio for the five year period from 2017 to 2021.
While we and the industry continue to face near term environmental headwinds, we remain confident in our ability to deliver attractive returns over time, while continuing to build the business for the future now I'll turn the call back over to Avi.
Thank you and we are ready to open up for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one telephone keypad. Your first question comes from the line of Greg Peters from Raymond James.
Good morning, everyone.
Thanks for taking my questions I guess I'm going to start out with the expense ratio improvement.
Dan you talked about it being a combination of top line.
Productivity and efficiency and now the target is a little bit below 29 for the year.
Maybe you could.
Give us a breakdown of where the improvements are coming from and more importantly, you know.
It seems like the trend disconnect continue the trend of improvement should continue beyond just this year, maybe you can comment a little bit on that.
Sure Greg.
No.
It's pretty broad based and it's sort of a continuation of the theme that we've seen really now for the past three or four or even five years.
Of <unk>.
Making important investments in strategic initiatives at the same time, we focus on productivity and efficiency.
And grow the top line in all three segments. So what you see is just a consistent pattern of <unk>.
Expense increases at a rate that's well below the rate that we're growing growing the top line.
In terms of you know.
And whether we expect that continue or providing outlook going forward you know, we'd said, probably a year and a half ago or so that we've gotten down to 30, and we were pretty comfortable at that level.
Then we said we got down to 29, and we were going to be pretty comfortable at that level.
At $28 seven on a year to date basis, I'd still put that in the around 29 bucket.
As Alan talked about many times, what we like about our focus on productivity and efficiency and expenses and it gives us optionality. We can continue to make important investments, which we will we.
We could let it drop to the bottom line, we could reflected in and more competitive pricing and Theres No reason for us and we're not going to declare at this point, what we think that's going to look like next year or a year or two out so suffice it to say that.
In the 29 neighborhood is a number that we're still still pretty comfortable with.
$28 seven through the first nine months feels really good.
Thanks, Thanks for the answer I guess the second question.
We will be just on reinsurance and I know youre pretty upfront.
In your record of being a gross line underwriters stance stance.
<unk> by itself so.
You know what.
And I think.
The truth is you do have in place like the aggregate ex ol Treaty.
And whatever excess loss property cover you have in place you you mentioned that pricing is probably going to change for the market next year.
What are you hearing about how those particular programs for the travelers might evolve and I guess, what I'm getting at is should we expect to increase retentions for the travelers and $23 24 as a result.
I think Greg too early to say you know well, we'll talk about the one one renewals when you know when we know how things turned out which will do probably at least in the fourth quarter call I think the point of the comments today, where we're really to just.
Reinforce for folks that one we're not a big user of reinsurance, especially relative to some other parts of the market and to our track record and our.
Our long tenure with a lot of our trading partners has us pretty confident that we're going to be able to place what we want to place at appropriate prices.
The cat aggregate ex ol Treaty, specifically, we've said I think we've said every year we had it.
We would either buy it or not depending on what we thought the pricing level was relative to our own appetite and you see us you've seen us place anywhere from 55% of that treaty to 85% of that treaty, depending on the pricing environment.
And if there is a year, where we decided to not place any of it will be perfectly fine with that but that's a decision we will make as we go through the through the renewal process, Greg It's Alan I would just add to that.
<unk> point, whether Retentions go up but they don't go up who knows but I think the important point is given the strategic way, we think about reinsurance and given the strength of our underwriting we're going to have the flexibility to make the right decision for our business.
Makes sense thanks Alan.
Thank you.
Your next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.
Hi, Thanks, Good morning, My first question.
Hurricane Andrew It seems like it's going to be a pretty large event.
You guys talked about below market share, but now insured loss is probably $50 billion to $60 billion now.
Now, which I think really is the impact to move from pricing. So I was hoping to get your views there Alan and then if you can tie that back you guys did make a comment about being a little less reliant on whats happening in the reinsurance market can be more competitive on the pricing front. So how do you think price plays out given this large.
In the reinsurance dynamic as well.
Yeah. Good morning, Lisa Thank you.
Just to start with basics pricing is a function of rate adequacy and given you know what what we all expect to happen to reinsurance there is theres going to be a rate need.
On top of that you know certainly as it relates to property theres going to be capacity constraints that are that will be significant I suspect across the market.
And I think on top of those things, which are probably largely quantifiable. It was just a big storm may be rivaling Katrina and that's just going to impact the way the market thinks about risk.
So we would expect that constellation of factors to put certainly upward pressure on property pricing and potentially extend into other aspects of the market as well, we will see but certainly as it relates to a property we would expect it to be upward pressure on pricing.
Yes.
Thanks, and then my second question.
You guys called out the <unk>.
Impact of the favorable accident year adjustment within management liability could you give us more details on.
What drove that this specific lines and was that better frequency or severity driven.
Yes, Lisa it's Dan I don't think were going to parse it out fire than that.
We have a loss pick at the start of the year.
Look at it as we get to the midpoint of the year and then each of the back couple of quarters of the year the.
The short answer is things have just come in a little a little better than we would've expected based on the plan.
And so that's what we're reflecting in this quarter's results.
Thank you.
Thanks Luis.
Your next question comes from the line of Ryan Tunis from Autonomous Research. Your line is open.
Hey, Thanks, just a couple from me.
So Dan you were talking about the NII guidance and how rates have moved since since 930.
Is that guide.
True up for where we are today in terms of rates or is that just as of where new money washing factory.
Yeah.
Youre getting a little fine there Ryan in terms of whether we're going to change. It every two weeks, we've seen rates move up and down a little bit it's been fairly volatile in the last 30 days I would say.
Generally speaking, it's reflective of the current environment.
And I wouldn't put a specific date on it.
Okay.
And then.
The cat number in auto.
<unk> was higher than we've seen how much of that $133 million auto cats.
Is from Ian and I guess I'm just curious.
How certain is that estimate at this point or is that pretty much a ground up loss or there's a lot of that IV in our kind of base off of.
Like an industry view, if that makes sense.
Sure. So it's Dan I'll start and Michael can chime in if he wants I think we feel pretty good about that number we watch it.
Very closely and very carefully as you would imagine given the unfortunate timing not only the unfortunate event itself, but the unfortunate timing for those of US who are accountants and actuaries trying to.
It will come up with an estimate at the end of the quarter, but we watch it all the way through the first week of October made our best estimate at this point.
A lot of it is unpaid.
Look at the data the way it continued to develop all the way through frankly, the time, where we're getting ready to push the button on reporting earnings and what came in was pretty consistent with what we'd expected before but to be clear we're doing it based on what we think our exposure is in the footprint of of the event.
And the way claims have actually come in in a couple of weeks since then.
It's not the blunt instrument have just taken an industry estimated expected market share.
Yeah, and Brian It's Michael I would just add I would just add part of the question might be the.
The number relative to some of the.
External estimates that have been floating around for auto and frankly give.
Given our footprint inside Florida, we werent surprised and.
<unk> <unk>.
We for a while have been avoiding southern Florida, So that means youre going to of course your market share to a more a higher level than your statewide average in the places that you are still writing so in the context of that in our local market share and our strategy in Florida.
The numbers are not surprising.
Okay.
Your next question comes from the line of David <unk> from Evercore ISI. Your line is open.
Hi, Thanks, Good morning, I wanted to focus on the business insurance underlying loss ratio and there was definitely some noise in lass last year's quarter. So I'm just wondering if you could clarify if we look at the at the underlying loss ratio in business insurance, how much of a bench.
<unk> earned pricing was done.
During the quarter and then maybe just talk about your view of that going forward I know Alan you mentioned some uncertainty in the environment. So maybe just some high level comments around that as well.
Sure David It's Dan I'll start.
So as Greg gave you in his in his script you know last year. There was some some good news from non cat property losses, and a little bit of what we felt was favorable impact related to the COVID-19 environment.
So we don't have that in this year.
Do have some benefit of price versus trend as you've seen over the last year or so the written rate number come down that number has trended down and it's now something less than a point.
We're not really going to put a put an outlook projection on it but you can see what rates done and exposure have done in the last in the last few quarters and thats been and that's been pretty steady.
The other comment I'd make related to that is while there was noise in last year's quarter. We don't think there's a lot of noise in this year's quarter. So that's why Greg didn't really call anything out as unusual in terms of what's in this year's underlying loss ratio.
Yeah.
Got it thanks, and then maybe if.
If you could just talk about Alan and maybe maybe Greg just talk about how your view of the rate environment in <unk> has changed over the last three months and I know you guys don't typically do this but I'm wondering.
If you could just give some color around rate movement by by line sort of high level I know Alan you just spoke about on the property side.
But maybe just wondering some of the other lines and sort of how youre thinking about that going forward do you think we continue to see an acceleration here.
Yeah, David Let me, let me start and then I'll look to Greg to add anything you'd like data I would describe the pricing environment as strong overall commercial pricing is near record levels. The breath of the pricing gains are very good at.
We always look at retention to give us a sign on the strength of pricing retention.
It really hasnt budged is hanging in there at a very high numbers.
The strong pricing led by property auto umbrella primary primary GL. So.
It's broad based and it at overall pricing levels that we would say our near records.
You heard me say that from here, we would expect there to be some upward pressure on pricing in property.
At the other end of the spectrum, you've got workers comp, where wed expect more of the same and the other lines will fall in between those two reflecting the two factors that Greg mentioned on the one hand, we continue to have headwinds from inflation and supply chain disruption and whether social inflation.
Our reinsurance et cetera, and on the other hand, we've had pretty good pricing for a number of years that has improved the overall returns of the portfolio. So I would say those other lines in between will reflect reflect the balance of those two dynamics.
Got it thank you.
Thank you.
Your next question comes from the line of Mike Zaremski from BMO. Your line is open.
Yes.
Hey, Greg good morning.
The first question.
Regarding capital management, if I look at kind of year to date Devitt.
Dividends and repurchases.
It looks like you.
Given back in a 100% ish of operating income despite very strong topline growth.
Like I recall, maybe it was a year ago or more you talked about kind of.
Making us kind of take into account that you needed to support that strong top line growth, which has continued to accelerate so any thoughts there on whether you can continue to buy back at such a high ratio.
Mike It's Dan. Thank you very much for listening to me two years ago I appreciate it.
That's still the theme I think that you know.
That will follow here, we're going to be we're going to be very strongly capitalized. Nonetheless, the business does continue to generate excess capital.
We'll look to deploy that excess capital if we can in a way that generates attractive returns and when we think we've exhausted all those opportunities we're going to do what we've done for the last 15 years and continue to give it back to shareholders.
It is hard to look at it.
Any one year or in this case as you know less than a year and do the due to the ratio of.
Buybacks and dividends relative to relative to core income and draw a conclusion.
We have said historically and I would repeat here.
It will not and cannot be 100%.
Going forward, we are going to need to hold onto some capital to support.
The business growth what we've done this year is partly a function of where we ended 2021 with really strong performance, especially in the third and fourth quarters of 2021 that put us in the position that we started the year with probably a very robust capital position.
Okay.
Okay.
That's helpful.
My last question just kind of back to David's question in your remarks on just the overall kind of competitive environment.
No.
How does travelers think about.
The dynamic of Mena.
Meaningfully improved.
New money rates on investment income I mean does that kind of allow you to travelers are you would you feel like maybe the industry to allow that kind of let off the gas on pricing or is it just kind of rates have been so volatile over the last many years and including today that.
It's tough to kind of bake in the.
The expectation that rates stay so high say stay at current levels.
Thoughts there thanks.
Sure. So the rate levels do impact our view of the outlook for net investment income, which showed you hear from Dan and you know there is some.
Judgment involved in how much of that we put into our pricing model.
But there's two things you got to keep in mind in terms of the impact of interest rates on pricing one is.
That earns in over time into the investment portfolio, because you've got such a small portion of it turning over in any one year and two are what we've got mid teens return on equity objective over time.
When we think about the near term, it's really we think about it as a margin over the risk free rate and so as those interest rates go up certainly as a function of the of the risk free rate. We're also increasing our return objectives and so it's just not as simple as looking at it saying Gee investment incomes going up pricing has come.
Down a little bit more of a complicated assessment and I would say the takeaway is certainly in the short term, we wouldn't expect a very significant impact.
Yeah.
Thank you.
Your next question comes from the line of Brian Meredith from UBS. Your line is open.
Yeah. Thanks, a couple of them here first Michael I'm, just curious in your comments you talked about.
It sounds like reducing kind of your appetite on the personal auto line of business by getting off of some comparative raters et cetera, et cetera is that kind of where you were alluding to because I look at your Pip growth continued to grow in personal auto did that kind of you think reverse trend here unless you really focus on getting profitability back in that area.
Your line.
Sure Brian . Thanks. Thanks for the question I think I think what I would say is again, we're really focused on improving profitability.
We're working to manage growth as we do that.
That said in the majority of jurisdictions, we have a pretty good line of sight to rate adequacy and so in those jurisdictions.
While we are renewing accounts and writing new business for the most part we're comfortable with what's going on.
A couple of jurisdictions that I did spike out are a little bit challenging in that regard.
In Florida. There is currently a moratorium on filing use for our price increases which is a change in their regulatory approach to rate filings in.
Before any of the department of insurance is still not considering auto rate increases and so in those two states in particular that really was what drove our decision to come off the comparative raters other than that most of those actions are things that we do in the normal course that we are.
Being a bit more aggressive on in places where profitability is challenged.
But again in most jurisdictions, we're comfortable we're either getting are going to get the right. We think we need in and focused on that and letting the growth come through so that's really what I was trying to trying to reflect there if that makes sense.
Gotcha that makes that makes sense and then Alan.
Bigger picture question I may have asked this before but just maybe remind us.
Travel is obviously, a phenomenal standard commercial lines carrier.
But it's just looking at what's happened with hurricane in and the complexities of risks that continue to emerge.
Give us your thoughts on whether travelers needs to be you know a more.
More active or in the excess and surplus lines market. If there's opportunities for you all there to maybe you know.
Grow or do something.
Yes, thanks for that Brian So two different questions do we need to be no I think we've got all the tools in the tool kit to be successful. So it's just something we need to do there is it an opportunity sure it could be.
And I would I would just start by saying, we already have meaningful E&S capabilities. So we've got our Northfield business. We've got a Lloyd's franchise, we've got E&S capabilities in our core business, we probably write a quarter of our national property business.
On E&S paper.
We're doing a lot in our management liability business through through E&S. So we've got we've got a lot of E&S capability and the ability to be creative inside our many of our admitted products too and so we've got a lot of flexibility to do what we want to do so.
Often if we lose an opportunity to the E&S market, it's often because we don't like the risk reward equation not because we can't do it.
Having said that over time could there be opportunities for us to strategically expand in E&S sure there could be not just not anything that we feel like we can't be successful in creating shareowner value. We've got a terrific business model and we're very comfortable with it but sure there could be more opportunity.
Thanks.
Thank you.
Your next question comes from the line of Josh Shanker from Bank of America. Your line is open.
Yeah, changing gears, a little bit maybe a question for David and Daniel.
Is there any thoughts about crystallizing, some investment losses for an opportunity redeploying the capital at a higher yield is there any penalty for doing that.
How do you think about redeployment prematurely selling a bond at this point in time.
Josh It's Dan I'll start and I think Dave Rowland is on the line and Dave can jump in as well.
Other than really selectively selling individual securities that we think.
Are at a position where it would make sense to sell them and we can redeploy the money into a new.
And the new preferable instrument, that's not really been part of our strategy. We're taking a long term view of how we manage a very high quality asset portfolio again that the unrealized loss doesn't causes cause us any concern. If we think there was a significant economic value.
New available, that's where you're going to see us make some trades, but for us that's a.
Very small percentage of the portfolio.
I would simply say that don't expect us to see us make a wholesale.
Turnover of the portfolio to to realize a bunch of losses, and then and then take higher yields on the money going forward I think economically that's sort of a wash and we're looking at what's best for the company from an economic perspective.
Alright.
And number easy question. Historically, you guys have done a wonderful job being fairly conservative about your catastrophe picks early on and they generally are matured favorably after.
Time has gone on when you have prior year favorable reserve development on a catastrophe does that show up in your P&L as a negative cat or prior year development.
It shows as prior year prior year Reserve development.
Okay.
Thanks, Josh.
Your next question comes from the line of Meyer Shields from K B W. Your line is open.
Great. Thanks, good morning.
First question I think it's for Michael where you've talked about state where youre either at adequate theory have line of sight.
When you talk about anticipating double digit.
Premium increases.
In 2023, and we combine that with the policy in force growth that we've seen so far this year can we infer that you will underwrite business that not adequately price now if there is line of sight to adequate pricing.
Yes. Thanks, Matt Good question, I mean, I think I think.
The way I would just describe it let me let me parse it out right. So youre looking at RPC numbers.
Production highlights.
That reflect the written impact of the rate that we've taken on the renewal book as the policies renew.
And so the first point I'd make is when you are looking at those numbers. They are a bit of a lagging indicator of the price that we've actually gotten filed and approved with the departments of insurance.
And so when I describe the the outlook that says that we believe we're going to be adequate in most states that reflect the majority of our business by mid year next year Im talking about that.
Britain price level at the point in time, we get that right approval.
And again, what I would say if we're confident that we're going to get the rates to where we want them to be then.
And yes, we will renew business in the ordinary course, and we will continue to be open for new business.
Again in most jurisdictions, where we have that confidence and by the way in most jurisdictions.
That next rate increase is a single digit number.
So it's not that we're talking about a significant number of places where we're double digit right away from adequacy.
In fact.
The eight 5% increase in the 26 states that average increase across 26 states that I talked about this quarter. Most of those states are additional increases on top of increases we've already gotten.
So hopefully that gives you a little bit of a flavor for our both our philosophy, but also in places where we arent necessarily adequate.
Sort of how far away, we think we are.
No that was very thorough and very helpful. Thank you and then a question for Alan I know, it's early in the process.
Florida getting its act together is there any receptivity.
<unk>.
Having the legislative reforms that you've talked about.
Receptivity in the state of Florida.
Yes, among the legislature.
Hi.
I'm, probably not the right person to speak on behalf of the Florida Legislature I do think that there is recognition that there's an issue there and and in recent months. They have made some progress I think probably not enough.
But I I suspect theyre getting to a point, where something's got to give but I'm certainly shouldnt speak on behalf of them.
Okay, asking from your perspective, but I understand thank you.
I hope so.
Okay.
Thanks, Matt.
Your next question comes from the line of Tracy <unk> from Barclays. Your line is open.
Thank you and good morning, Dan following up on your comments about reinsurance pricing and capacity constraint.
On a student perspective, when you were choosing reinsurance partner I assume youre looking at balance sheet strength and doing so are you excluding unrealized losses coming back.
Or are you looking through that as you determine who participate on your panel.
And ultimately determining their related participation.
I would say Tracy we're looking at the long term economic viability of our trading partners and the likelihood and confidence that we're going to that we're going to get collected so to.
To the degree that if someone else's and an unrealized loss position for a similar reason that were in an unrealized loss position, meaning it is not credit driven it is not investment portfolio quality driven it is nothing other than a function of the change in interest rates, which will definitively will reverse itself.
Over time.
From an economic value perspective, I think for the most part we're going to look through that.
Very helpful.
When I first heard of your objective of closing 90% of your property claims within 30 days I was thinking Gee that can really compete lost creek, but is there anything on the litigation side or regulatory side in Florida, given olinger public policy.
That could impede your ability to meet that objective as it relates.
Exactly.
Okay.
I think I think right now Tracy we feel pretty good about our ability to get to that level and in fact.
I mean, not object, we've had that objective in place for several years and we're routinely successful in meeting that objective and Theres always litigation of one sort or another and so I don't I don't I would expect that we'll get there we're not there yet so who knows but I would expect we'll get there.
Thank you.
Thank you.
Your next question comes from the line of Paul Newsome from Piper Sandler Your line is open.
Good morning, Thanks for taking my call my questions.
Yes.
A little color on the bond, especially outlook would be wonderful.
Is there any reason why.
Your business mix change or anything thats changing in that business.
Underwriting performance shouldn't somewhat track.
Sort of economic and credit quality, I think of that as a credit business, but.
But maybe things have changed.
Yes. This is this is Jeff Paul Thanks for the question.
You know, Mike, we don't give a lot of outlook relative to the bond and specialty business.
But I would reemphasize what you said it is a credit business, we feel really good about the underlying profitability of both the surety and management liability components of that business.
And we continue to invest for growth.
So I'd probably leave it at that and thanks for the question I guess, probably the other thing I would add is you could go back to the 2000 and the financial crisis you could go back to the pandemic I mean this portfolio has been challenged in other difficult credit environment, and it's performed extraordinarily well and it's it's the.
It's the same underwriting philosophy, it's the same tools, it's the same.
Et cetera, and so.
We don't we don't look at this.
Youre thinking.
Could be in for a bumpy economic times ahead, we agree with that but we're confident in this business and the way we manage it.
Okay.
No.
Great.
Through ordinary track record I'm, just wondering in your profitability.
Even for.
What travelers as seen in the past, so I'm not actually suggesting that it could be a horrible quarter.
I'm, just thinking whether or not.
Current sustained extraordinary profitability is sustainable.
But.
The second question.
Wanted to ask about.
Just cat exposures in general, let's kind of looking back over many years.
It looks like there was.
It looks like there might have been a reduction in.
Kind of your general view of exposures of cats.
And what you want to take on relative to your business in total, but there's been so much noise in the last three years, it's hard to tell with that.
Really the case, obviously, we have to have certain expectations the normalized cat load, but are you.
Essentially not changing this stuff.
Your sort of appetite for cat exposure.
And I really want to talk not just next quarter, but years.
Is the appetite changed at all for the travelers.
Not not really Paul.
When we think about our I mean, we write plenty of cat exposed business and and there hasnt been a really significant overall portfolio level shift I mean, certainly we found some geographies more attracted than others and we've moved capital around from that perspective, but we haven't.
A meaningful wholesale way withdrawn from cat exposure, nor do we feel the need to do that going forward.
We've been I think going back probably five years, taking a very thoughtful approach to taking a step back in and we've put dedicated teams in place for every payroll and our objective was to was to be the leader in understanding the science behind that peril in the underwriting around that apparel and also to develop.
Extraordinarily claim claim handling capabilities for those events and I think that's really what's paid off for us I don't I don't think its been a meaningful withdraw.
From the exposure.
Alright, thanks, guys congrats on the quarter.
Thanks, Paul.
Your next question comes from the line of Michael Phillips from Morgan Stanley . Your line is open.
Thanks, Good morning, Thanks for fitting me in.
I guess this question given given all the comments that Dan made in the opening comments about the property cat.
In reinsurance pricing.
Maybe.
Answers here would be more of a industry level. What you think the history does but if you want to put in what you do that that's fine too.
But.
Erratically, if we're paying more for property cat reinsurance will that translate into us charging more for our.
Casualty business isn't known because theyre separate businesses and yes, it's cost of doing business.
Or is there kind of some threshold that maybe we kind of that spills over in the retails in the primary book, what we charge there.
I know you're downplaying the impact on property cat reinsurance for you guys, but maybe Europe use there or what you have against we might do there.
I'm looking at Greg I do think you know the.
Every product and exposure sort of stands on its own but at the same time I think there is overall psyche in the market and a reaction to the overall level of risk that we perceive in the marketplace and so is there some of that that carries over and.
To what extent that.
The reinsurance pricing carries over.
I'll find out but it may be that that's a contributor to casualty pricing moving up a little bit, but I think on the whole I would expect these lines to stand on their own and Greg, Yes, I think thats. The case also element and that really will be reinsurer by reinsurer. If they think about account pricing or individual line, but to Alan's point I think most are so.
<unk>, they're going to be looking at the line and just as a reminder, casualty has its own headwinds with social inflation in the reinsurers certainly have been addressed in some of that incremental risk as we have on the growth side also that's a good point Greg.
Okay. Thanks that makes sense and second I guess it depends so much talk obviously on the headlines from personal auto, but I guess could you say what youre seeing on the commercial side for auto in terms of loss trends there and.
Kind of aware of rate adequacy today.
Yes, sure Michael we're making good progress overall on the auto in terms of your question relative to personal auto we're certainly not immune from some of the severity challenges Michael and his team are experiencing and yes, you can.
Think of two cohorts of vehicles on commercial private passenger light vehicles think light trucks vans and that sort and then you have the heavy vehicles and so we're seeing a little more of that severity pressure on that first cohort that has some of the zone same supply and demand dynamics that that Michaels.
But we're continuing to make good progress on pricing and underwriting and as I shared at the recent Investor day, we are bringing out a new auto product that we think is going to be really segmented and help us with our prospects even more.
Okay.
Okay, great. Thank you.
Your next question comes from the line of Alex Scott from Goldman Sachs. Your line is open.
Hey, Thanks for fitting me in here.
First one I had for you is just a high level question on loss costs.
Just interested in.
Europe dated views on how what we're seeing in CPI inflation and how that translates to actual insurance claims inflation for the business insurance business.
And just as that's evolving you know things like medical cost inflation, not not running away from us or something but but beginning to tick up a little more.
Are you having to evolve your view of those things in a bigger way or do you still view that as you know CPI prints getting worse, you know not really fully translate into insurance claims costs.
Yeah, Alex Yeah. We are we are always evaluating that practically on a daily basis, and we did increase our severity trend assumptions back in the first quarter.
And then we did that we did that with a degree of caution knowing that there was a fair amount of uncertainty out there and what we've seen subsequent to that in the second quarter and again this quarter was consistent with those expectations. So it's not it's not that we're not seeing or feeling that severity coming through we are but it's within the expectations that.
That we are.
Stablish back in the first quarter now as it relates to medical inflation.
You can't really focus on the medical CPI, because workers' comp is different right, where we're treating workplace injuries, we're not treating chronic diseases. So the components of of medical inflation that impacts workers comp.
Our probably inflating at a lower rate than the overall medical CPI.
And my comment on overall workers' comp loss trend is that it continues to be benign.
Got it that's helpful and.
Follow up question I had is on the unit exposure increases.
I'd imagine that the sort of real unit exposure increases as the economy's strengths and maybe help you a little more than just the <unk>.
Shared value inflation sort of impact.
You know as I think through price.
Yeah right.
Are the unit exposure acting as Ray.
I mean can you help me think.
As we approach periods of time, where you're lapping pretty strong economic growth.
So the benefits that you get from unit exposure increases begin to erode and is that so far enough out in the future that it's not a concern for now as we head into next year or is that something we need to think harder about as we get to sort of <unk> next year.
So.
I'm not I'm not sure that I exactly get the question, Alex but I'll make a few comments.
If I don't get to the answer that Youre looking forward, let me know but.
As we've shared many times over more than a decade exposure growth does contribute to margins and Theres. Two types is really two types of exposure growth through unit growth and then there is inflation.
And in particular, the inflation side of exposure is a more meaningful contributor to margin and true unit growth because that unit growth does come with some with some risk content I do think unit growth also contributes to margins by the way, but not at the same level that inflation does and so.
To the extent that continues to come in and we'll see what happens with the economy and we will see what happens to exposure over time, but to the extent that does come in it will continue to contribute to margins is that is that helpful.
Yeah that does clarify it.
Thank you for entertaining the questions I appreciate it.
Thank you.
And your final question comes from the line of Michael Ward from Citi. Your line is open.
Hey, guys. Thanks.
Last one on workers' comp.
Gross tailed off a bit in <unk>, just wondering if there was anything to read into there from a macro perspective, and I guess I'm wondering along those lines.
To what extent would.
Would you say mix contributed to your rate acceleration in <unk>. Thanks.
Michael Greg, Yes, there wasn't really any material change in workers' comp for this quarter across business insurances as Alan said it has continued to be the laggard in terms of pricing.
<unk> driven based on industry, and certainly travelers profitability of that line. So no real material change there.
Obviously, we're getting some strong exposure growth and Thats why youre getting an overall lift in written premium there. So nothing nothing to look into other than where the run rate has been.
And on your last question. The overall mix was not a contributor in any meaningful way to the overall rate number.
It was it was broad based.
Thank you guys. Thank.
Thank you.
And this brings us to the end of our question and answer session. I will now turn the call back over to Abbe Goldstein for some final closing remarks.
Thank you all very much. We appreciate your time this morning, and as always if there's any follow up please reach out directly to Investor relations have a good day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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