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Text: 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, CFO; and our three segment Presidents, Greg Toczydlowski of Business Insurance; Tom Kunkel of Bond & Specialty Insurance; and Michael Klein of Personal Insurance.
They will discuss the financial results of our business and the current market environment.
Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures.
We are very pleased to report third quarter core income of $798 million or $3.12 per diluted share, and core return on equity of 13.5%.
Our bottom-line result this quarter reflects strong underlying underwriting income resulting from record net earned premium of $7.4 billion and an underlying combined ratio that improved 2.6 points to a strong 91.5%.
We're pleased with the underwriting results in all three segments with improved underlying profitability in both Business Insurance and Personal Insurance.
In Business Insurance, the underlying result improved due to margin expansion as earned rate exceeded loss trend.
In Personal Insurance, the benefits from lower frequency in the auto business more than offset higher levels of non-catastrophe weather and wildfire losses.
In Bond & Specialty Insurance, the underlying combined ratio was elevated, consistent with the outlook we shared on the call last quarter.
I'll note that the combined and underlying combined ratios were still under 90% generating a solid return in a challenging environment.
Profitability in all three segments continues to reflect the benefit of our strategic focus on productivity and efficiency, resulting in a sub-30% consolidated expense ratio.
Core income for the quarter also included catastrophe losses of $397 million pre-tax, which were meaningfully above the 10-year average per quarter.
We hope for a quick recovery for all those who have been impacted.
I also want to express my gratitude to our dedicated claim team for taking care of our customers during these extraordinary times.
Of the 100,000 or so claim notices we received so far this year, arising out of the record number of PCS catastrophes in the US, our claims team has met our objective of closing over the 90% of the claims within 30 days.
A quick resolution results in a better experience for our customers and a more efficient outcome for us.
In addition to the Property Cat Aggregate Treaty which has mitigated our losses, recent actions to improve the balance sheet and risk reward meaningfully reduced our exposure to wildfires.
To illustrate the point, in the areas impacted by the five costliest California wildfires this season, our exposure is about a third lower than it was two years ago.
Turning to our investment portfolio.
This quarter, we again benefited from our well-defined and consistent investment philosophy with our high-quality investment portfolio generating net investment income of $566 million after tax.
Lastly, before I turn to the top-line, I'll share that the uncertainty surrounding business interruption claims continues to resolve favorably and consistent with our expectations.
So we remain confident on that front.
In terms of the top-line and production, we continue to generate strong results.
Net written premiums in the quarter grew by 3% driven by strong renewal rate change and retention in all three segments.
In our commercial businesses, exposure change on renewed accounts was only modestly negative for both the quarter and year-to-date compared to a much more significant reduction in economic activity.
We believe that in addition to generating a better underwriting result, our high-quality portfolio of accounts is more resilient to economic hardship.
In Business Insurance, we achieved record renewal rate change of 8.2%, 4 points higher than the prior year quarter, while retention remained strong.
We achieved higher renewal rate change year-over-year and sequentially in each of our lines of business other than workers' compensation.
In Bond & Specialty Insurance, net written premiums increased by 4% as renewal premium change in our domestic management liability business rose to 8.1%, including record renewal rate change while retention remained at an historical high.
In Personal Insurance, net written premiums increased by 8%, driven by strong retention and new business in both Agency Auto and Agency Homeowners.
In our Agency Homeowners business, we achieved renewal premium change of 8.2%, its highest level since 2014.
Across all of our businesses, we've made good progress achieving rate gains and managing other levers of profitability to improve the outlook for returns in those lines that need it, and we'll continue to execute to meet our return objectives.
For all the reasons we've discussed previously, from the loss environment to the interest rate environment, we expect continued momentum in the marketplace.
Notwithstanding our focus on successfully managing through the pandemic and addressing other headwinds impacting the industry, it's important to note that we haven't been distracted from pursuing our strategic agenda.
We remain focused on leveraging our scale and resources to continue to invest and innovate.
As we said before, we believe the winners in our industry will be those with deep domain expertise that can deliver industry-leading results, while innovating successfully on top of a foundation of excellence.
From a position of strength, we continue to focus our efforts on extending our advantage in risk expertise, providing great experiences and improving productivity and efficiency.
In our commercial businesses, we continue to make progress in digitizing virtually every aspect of the value chain, while at the same time, enhancing our advanced analytics.
Just as one example, our BOP 2.0 small commercial product, which we launched in 2019 benefits from both.
In the states in which we rolled it out, we've seen about a 15% increase in both submissions and new business premiums.
This product uses AI and third-party data to improve underwriting segmentation, operational efficiency and the agent experience.
That point, the artificial intelligence eases the burden on the agent and has resulted in a substantial improvement in classification accuracy.
In Personal Insurance, we're balancing sophisticated total account solutions that streamline the agent and customer experiences.
For example, we completely redesigned the experience of our IntelliDrive auto-telematics offering and introduced a distraction reading.
We rolled this out in nine states during the second and third quarters and have plans to launch in an additional 10 states in the fourth quarter.
We're observing a nearly 30% increase in the rate of adoption for IntelliDrive and have received strong agent feedbacks.
Also, in the fourth quarter, we're rolling out an enhanced customer self-service tool in a new mobile app.
In our Claim organization, we're advancing the rollout of virtual end-to-end claim service tools, embracing the pandemic-driven trends at accelerated digital adoption by individuals and businesses.
Customer and agent satisfaction are up, while payout discipline remains strong.
To sum it up, we see [Phonetic] better performance in the face of a pandemic and a challenging underwriting environment.
It reflects the importance of the strong underwriting culture, the benefit of data and analytics and the franchise value we offer to our customers and distribution partners.
All of that, together with our highly engaged and talented workforce, we're confident that we're well-positioned to capitalize on opportunities as the economy continues to reopen.
Our core income for the third quarter was $798 million, generating core ROE of 13.5%, both up significantly from core income of $378 million and core ROE of 6.5% that we reported in the prior year quarter.
These increases resulted primarily from this year's favorable third quarter QID compared to net unfavorable QID in last year's thrid quarter, as well as a significant increase in underlying underwriting profit.
More on both of those items in a minute.
Our third quarter results include $397 million of pre-tax cat losses compared to $241 million in last year's third quarter.
This quarter's cats included Hurricane Laura, Tropical Storm Isaias, the severe straight line winds that impacted the Midwest in August, and several large wildfires in the Western United States.
The increase in the level of cat activity was even more pronounced than those numbers suggest as our net cat results in the quarter was tempered by recoveries under the Aggregate Catastrophe XoL Treaty.
We have recognized a full recovery under that treaty in our third quarter results with $233 million pre-tax benefit in the cat line and $47 million pre-tax benefiting non-cat weather in our underlying results.
Recall that last year, we did not have any recoveries under the treaty until the fourth quarter.
Of course the full recovery in this year's third quarter means that there is no coverage remaining from this treaty as we enter the fourth quarter.
The underlying combined ratio of 91.5%, which excludes the impacts of cats and QID improved by 2.6 points from 94.1% in last year's third quarter.
The underlying loss ratio improved by 2.4 points, and benefited from favorable auto frequency related to COVID-19 and the impact of earned pricing in excess of loss trends, partially offset by an increase in non-cat weather losses including wildfires.
The expense ratio of 29.3% is two-tenths of a point favorable to last year's third quarter results, and reflects our strategic focus over a number of years on improving productivity and efficiency.
Setting aside quarter-to-quarter variability, our year-to-date expense ratio of approximately 30% is a figure we're comfortable with.
Our top-line proved to be resilient with a 3% increase in net written premium, as continued strong renewal rate change and retention, in all three segments, more than offset modestly lower insured exposures in the commercial businesses.
For the quarter, losses directly related to COVID-19 totaled $133 million pre-tax with $92 million in Business Insurance driven primarily by workers' comp and $41 million in our Bond & Specialty business predominantly driven by management liability.
More than offsetting those losses were lower levels of auto claims and to a lesser extent, fewer non-COVID workers' comp NGL claims due to lower levels of economic activity.
The net impact of the COVID environment on the consolidated underlying combined ratio amounted to a benefit of about 2 points, mostly in Personal Insurance.
Given the ongoing uncertainty in this environment, we continue to take a cautious approach in estimating the net impact of COVID-19-related losses.
Consistent with my commentary last quarter, the majority of direct COVID losses that we booked year-to-date through September is still sitting in IBNR.
Looking at the year-to-date impact of direct COVID losses, net of related frequency benefits and other underwriting items, our underwriting results have benefited by a little more than $100 million pre-tax or about 0.5 point on a consolidated underlying combined ratio, including the impact of premium refunds to policyholders.
However, year-to-date net investment income reflects the significant adverse impact on our non-fixed income portfolio.
Turning to prior year reserve development.
As previously disclosed, third quarter includes approximately $400 million of pre-tax benefit from the PG&E subrogation.
About 80% of that benefit is reflected in Personal Insurance, with the remainder reflected in Business Insurance.
Setting PG&E to the side, QID results in the quarter were as follows.
In Personal Insurance, net favorable development of $40 million pre-tax was driven by auto results coming in better than expected for recent accident years.
In Bond & Specialty Insurance, there was no net impact from QID.
In Business Insurance, we recognized unfavorable development of $295 million pre-tax as a result of our annual asbestos review.
While there was some slight improvement in several of our asbestos indicators, the overall level of paid losses and general claim activity has persisted at levels higher than we had anticipated.
This year, as we do every few years, we reviewed certain macro assumptions underlying our actuarial analysis.
Our updated view of ultimate asbestos-related losses resulted in an increase in the low end of the actuarial range.
This year's asbestos charge is greater than last year's charge as a result of our updated view of the range for ultimate losses, not as a result of increases in paid losses or severity.
There are some indications that the environment is improving in terms of the emergence of new asbestos claims going forward.
Of note, as you can see on the bottom two lines of the table, the decline in mesothelioma deaths was much more pronounced in all of the younger age groups.
This trend is directionally consistent with our expectation that over time, the high risk group of people actually exposed to asbestos in the workplace prior to the late 1970s will get smaller and will not be replaced by younger people as those who entered the workforce sometime in the 1980s should not have been exposed to asbestos to nearly the same degree as their predecessors.
Excluding the impacts of the PG&E settlement and the annual asbestos review, there was virtually no net prior year reserve development in Business Insurance.
Favorable development in workers' comp was offset by an increase to the reserves from legacy liabilities in our run-off book, related to a single insured arising out of policies issued more than 20 years ago.
After-tax net investment income increased by 7% from the prior year quarter to $566 million.
The increase was driven by our non-fixed income returns where results for our private equity, hedge funds and real estate partnerships are generally reported to us on a one quarter lag.
Because of that reporting lag, the recovery experienced in the broader markets during the second quarter benefited our non-fixed income results in the third quarter.
Fixed income returns decreased by $31 million after tax as the benefit from higher levels of invested assets was more than offset by the decline in interest rates, consistent with our comments on last quarter's call.
Also consistent with our prior commentary, we expect after-tax fixed income NII in the fourth quarter to be down $35 million to $40 million compared to a year ago.
Looking ahead to 2021, our current expectation is for after-tax fixed income NII to be between $420 million and $430 million per quarter.
Turning to capital management.
Operating cash flows for the quarter of $2.3 billion were again very strong, all our capital ratios were at or better than target levels and we ended the quarter with holding company liquidity of approximately $2.3 billion, well above our target level.
Recall that in April we pre-funded the $500 million of debt coming due in November with a new 30-year $500 million debt issuance.
So our holding company liquidity at September 30 is temporarily elevated by that amount [Phonetic].
Investment yields decreased as credit spreads tightened during the third quarter, and accordingly, our net unrealized investment gain increased from $3.6 billion after tax as of June 30 to $3.8 billion after tax at September 30.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $94.89 at quarter end, up 2% from year-end of 2019 and up 5% year-over-year.
We returned $218 million of capital to our shareholders this quarter via dividends.
We did not repurchase any shares during the quarter.
Looking ahead, there is no change in our approach to capital management.
Until there is more clarity on the state of the economy, we may buy back some shares in the coming quarters or we may continue to choose to buy none.
Business Insurance produced $365 million of segment income for the quarter, a significant increase over the prior year quarter with prior year development, underlying underwriting income and net investment income, all contributing to the year-over-year increase.
The underlying combined ratio of 94% improved by almost 2 points, driven by more than 1 point of earned rate in excess of loss trend.
A modest favorable net impact from the pandemic contributed about 0.5 point to the improvement.
As for the top-line, net written premiums were 1% lower than the prior year quarter, with strong rate and high retentions mostly offsetting modestly lower insured exposures and lower levels of new business.
As Alan mentioned, we are very pleased with the resilience of our top-line in the face of the ongoing macroeconomic challenges.
Turning to the domestic production.
We achieved record renewal rate change of 8.2%, up 4 points from the third quarter of last year and almost 1 point from the second quarter of this year, while retention remained high at 83%.
We feel very good about the headline numbers, but as we've shared before, the quality of the execution and segmentation underneath the headline numbers are just as important.
To that point, while we achieved meaningful rate increases in all product lines, set workers' comp, our underwriters are making deliberate and granular decisions with respect to rate and retention and account-by-account or class-by-class basis.
New business of $505 million was 9% lower than the prior year quarter.
We attribute the decline to lower levels of economic activity, as well as careful risk selection by our underwriters.
In our core middle market business, for example, while submissions are up, our quote ratio is lower as we are taking a disciplined approach, given our view of quality of new business in the market.
As for the individual businesses, in select, renewal rate change increased to 2.9%, marking the seventh consecutive quarter in which renewal rate change was higher than the corresponding prior-year quarter.
Retention of 80% was down a couple of points from recent periods, largely driven by policy cancellations that were deferred to the second quarter due to our pandemic-related billing relief program.
In middle market, renewal rate change increased to 8.3%, while retention remained strong at 85%.
The 8.3% was up by more than 4.5 points from the third quarter of 2019, and we achieved positive rate of more than 80% of our accounts this quarter, up from about two-thirds in the third quarter of last year.
To sum up, we feel terrific about our results and execution in a challenging underwriting environment.
We also feel very good about the investments we're making for the future and the benefits we're seeing from those investments.
Those investments include enhancing the experiences for our customers and distribution partners, digitizing the underwriting transaction, and creating efficiencies.
For example, we've recently launched multiple pilots to automatically incorporate data from our distribution partners' agency management systems directly into our systems, substantially reducing the time and friction in the process, while also improving data quality.
We're as confident as ever, there are meaningful competitive advantages to position us well for long-term profitable growth.
Bond & Specialty delivered solid returns and growth in the quarter despite the ongoing headwinds of COVID-19.
Segment income was $115 million, a $24 million decrease from the prior year quarter as the benefit of higher volumes was more than offset by a higher underlying combined ratio.
The underlying combined ratio of 89% increased 5.4 points, primarily driven by estimated losses from COVID-19 and related economic conditions.
Given the products that we write, we expect the results of the segment to be impacted in times of severe economic downturn.
We experienced that during the financial crisis and we're seeing elevated loss activity in the current environment.
We contemplate economic volatility in our underwriting and in our pricing, and as Alan said, in these circumstances, we feel good about the returns we generated in the quarter.
We expect that the underlying combined ratio will continue to be elevated at around this level over the near term.
Net written premiums grew 4% for the quarter, reflecting strong growth, driven by improved pricing in our management liability business, partially offset by lower surety production due to the continued economic impact of COVID-19 on public project procurement and related bond demand.
In our domestic management liability business, we are pleased that the renewal premium increased to 8.1%, driven by record rate.
This marks the eighth consecutive quarter in which RPC is higher than the corresponding prior-year quarter.
Retention remained at a historically high 90%.
These production results demonstrate the successful execution of our strategy to pursue rate where needed, while maintaining strong retention of our high quality portfolio.
We will continue to pursue rate increases where warranted.
Domestic management liability new business for the quarter decreased $14 million, primarily reflecting our thoughtful underwriting in this elevated risk environment.
Similar to what you heard from Greg in Business Insurance, submissions are up, while quote activity is down.
So Bond & Specialty results remained resilient despite the challenges brought on by COVID-19.
We continue to be pleased with our strong execution and feel confident about our ability to navigate through this challenging environment and continue to deliver strong returns over time.
In Personal Insurance, this quarter, we are very pleased with our continued execution in the marketplace as we delivered excellent profitability and grew net written premiums by 8%, achieving record levels of domestic policies in force.
Personal Insurance segment income for the third quarter was $392 million, up $261 million from the prior year quarter, driven by the pre-tax impacts of an improvement of $163 million in the underlying underwriting gain, and $343 million of higher net favorable prior year reserve development, partially offset by $174 million of higher catastrophe losses, net of reinsurance.
Our combined ratio for the quarter was 86.4%, an improvement of 11.6 points from the prior year quarter, driven primarily by the increase in net favorable prior year reserve development.
Higher catastrophe loss experienced in the quarter was largely offset by improvement in the underlying combined ratio.
The improved underlying combined ratio reflects the continuation of favorable auto loss experience in the quarter, partially offset by higher non-catastrophe weather-related losses.
I'll discuss both of these dynamics in a bit more detail next.
Agency Automobile profitability was very strong with a combined ratio of approximately 80% for the quarter.
The underlying combined ratio of 81% improved nearly 12 points, continuing to reflect favorable frequency levels.
Approximately 8 of the 12 points of improvement relate to current quarter favorability.
The remainder results from favorable reestimates of activity in the first half of 2020.
We continue to observe lower claim frequency as a result of fewer miles driven in light of the COVID-19 pandemic.
For the third quarter, data from our IntelliDrive program indicates that miles driven increased relative to last quarter, but continue to be down from pre-COVID- 19 levels.
In response to this continued favorable loss experience, we filed modest rate reductions in a handful of states during the third quarter.
We will continue to analyze and incorporate current trends into our underwriting and pricing decisions as we balance business volumes and profitability.
In Agency Homeowners and Other, the third quarter combined ratio was 92.8%, an improvement of 9.2 points from the prior year quarter, resulting from 26 points of higher net favorable prior year reserve development, mostly from the PG&E subrogation recoveries, partially offset by elevated levels of catastrophe losses and an increase in the underlying combined ratio, driven by higher non-catastrophe weather-related losses.
Our catastrophe and non-catastrophe experience reflects a very active quarter with a record 31 PCS events.
West Coast wildfires represented almost half of the total PCS events in the quarter.
Consistent with Dan's comments earlier, the quarter's catastrophe losses for Personal Insurance were also impacted by the Midwest Derecho, Tropical Storm Isaias, and to a lesser extent, Hurricane Laura.
In addition to pursuing rate increases in property, as we have been for some time, we continue to review and modify terms and conditions and implement loss mitigation actions in response to the elevated loss activity.
Our actions to date have enabled us to reduce or avoid losses we would have otherwise incurred and improved returns as we continue to grow the line.
Turning to quarterly production.
Our domestic Agency results were again very strong.
Our retentions remained high, quotes in new business were up versus the prior year quarter, and we remain pleased with our policies-in-force growth.
Agency Automobile retention was 84% and new business increased 9% from the prior year quarter, both contributing to accelerating growth in policies-in-force.
Renewal premium change was again lower as we continued to moderate pricing in response to favorable loss activity.
Agency Homeowners and Other delivered another very strong quarter with retention of 86% and a 22% increase in new business.
Renewal premium change increased to 8.2% as we remain focused on improving returns and property while growing the business.
During the quarter, we continued to respond to the needs of our customers and distribution partners.
At the same time, we continue to deliver new capabilities in the marketplace.
Alan already mentioned both IntelliDrive and our new MyT [Phonetic] mobile app, both of which are key tools in helping us attract and retain customers.
We also expanded the availability of our digital quote proposal that gives agents and brokers the ability to send a Travelers Insurance quote for their clients mobile phone and interact with them digitally about the terms of the proposal, making the transaction more seamless for both the agent and the customer.
And after reaching our goal of planting 1 million trees for customer enrollment and paperless billing, we extended our partnership with American Forests to plant an additional 500,000 trees by Earth Day 2021.
We have already achieved that milestone well ahead of schedule, providing our customers the digital experience they seek, while benefiting the environment.
These examples and others, illustrate our ability to develop and deliver the capabilities our partners and customers value.
Operator, we're ready to start Q&A.

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travelers companies qtrly core earnings per share $3.12.
travelers companies - qtrly core earnings per share $3.12; qtrly earnings per share $3.23.
travelers companies - qtrly catastrophe losses, net of reinsurance, $397 million versus $241 million.

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