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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, Chief Financial Officer; 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're very pleased to report excellent underwriting and investment results for the second quarter and first half of the year.
Core income for the quarter was $879 million or $3.45 per diluted share, generating a core return on equity of 13.7%.
In terms of underwriting results, higher underlying underwriting income and net favorable prior year reserve development, as well as a lower level of catastrophe losses, all contributed to higher core income.
Underlying underwriting income was 8% higher than in the prior year quarter, driven by record net earned premiums of $7.6 billion and an excellent underlying combined ratio of 91.4%.
We are particularly pleased with the continued strong underlying fundamentals in each of our three business segments.
In Business Insurance, net earned premiums were higher and the underlying combined ratio improved by 3.7 points.
On the Specialty Insurance and Personal Insurance, both delivered meaningful increases in net earned premiums and continued strong margins.
Our high-quality investment portfolio generated net investment income of $682 million after tax, reflecting very strong returns in our non-fixed income portfolio.
These excellent results, together with our strong balance sheet, enabled us to grow adjusted book value per share by 13% over the past year after making important investments for the future and returning significant excess capital to our shareholders.
During the quarter, we returned $625 million of excess capital to shareholders, including $401 million of share repurchases.
Turning to the top-line.
The combination of the strong franchise value we offer to our customers and distribution partners, together with excellent execution by our field organization, produced terrific results.
During the quarter, we grew net written premiums to $8.1 billion, an increase of 11% or 8% after adjusting for the auto premium refunds in the prior year quarter.
Each of our three segments contributed meaningfully to the top-line growth.
In Business Insurance, net written premiums grew by 5%, driven by retention, which ticked up almost 1 point; renewal premium change at a near record high of 9.5%; and 9% growth in new business.
Combination of strong pricing and higher retention reflects continuing strength in the pricing environment.
Inside renewal premium change, pure renewal rate change was a strong 7.1%.
Greg will share more detail about the texture underneath renewal rate change in a few minutes.
Renewal premium change also included the highest exposure growth we've seen in nine quarters, an encouraging sign of improvement in U.S. economic activity.
In Bond & Specialty Insurance, net written premiums increased by 16%, driven by record renewal premium change of 12.7% in our management liability business, while retention remained strong.
In our commercial businesses, written pricing continues to comfortably outpace estimated loss trends, which will continue to benefit margins as it earns in.
Continuing strong pricing and retentions reflect the industry's clear-eyed view of the ongoing headwinds impacting returns for the industry, including weather volatility, low interest rates and social inflation.
We expect pricing to continue to outpace loss trends for some time.
Turning to Personal Insurance.
Production was again excellent this quarter.
Net written premiums increased 8% after adjusting for the auto premium refunds in the prior year quarter.
Policies in force in both Auto and Homeowners are at record levels, driven by continuing strong retention and growth in new business.
While the impact of the pandemic on claim frequency seems to be attracting a lot of attention when it comes to personal auto, we've been equally focused on applying our companywide perform and transform mandate to this business.
We are very pleased with the results.
We've accelerated our domestic auto policies in force growth from 1% to 4% over the last six quarters, bringing PIF count to a record high.
This demonstrates the ongoing success of our three-pronged strategy in Personal Insurance to meet customers where they are, serve them how they want, and get them what they need.
Going forward, we will continue to invest in advanced segmentation, multi-channel distribution and providing great experiences to continue to deliver profitable growth.
Michael will share more detail in a few minutes.
Our excellent top and bottom-line results this quarter and for the first half of the year demonstrate the continued successful execution of our strategy to grow the top-line at attractive returns, as well as the effectiveness of our well-defined and consistent investment philosophy.
Our focus and well-executed innovation agenda has been an important contributor to the growth and profitability we have achieved.
We will continue to relentlessly pursue our priorities of extending our lead in risk expertise, providing great experiences for our customers, distribution partners and employees and improving productivity and efficiency.
With the momentum we have, and the best talent in the industry, we are well-positioned to continue to create meaningful shareholder value over time.
Core income for the second quarter was $879 million compared to a core loss of $50 million in the prior year quarter.
The significant improvement was the result of positive factors across the business, including a lower level of catastrophe losses; improved results in our non-fixed income investment portfolio; more favorable prior year reserve development; and increased underlying underwriting income.
Our second quarter results include $475 million of pre-tax cat losses compared to $854 million in last year's second quarter.
This quarter's cats were somewhat below what we would have assumed for a typical second quarter, but year-to-date cat losses are still above what we would have assumed, given the high level of losses in the first quarter.
On a year-to-date basis, we have accumulated about $1.5 billion of qualifying losses toward the aggregate retention of $1.9 billion on our property aggregate catastrophe XOL Treaty.
The Treaty provides $350 million of coverage on the first $500 million of losses above the aggregate retention amount.
Underlying underwriting income increased 8% to $617 million pre-tax, reflecting a higher level of earned premium in each of our segments and a strong underlying combined ratio of 91.4%, consistent with the prior year.
As you'll hear from Greg, Tom and Michael, improvements in the underlying combined ratio in both Business Insurance and Bond & Specialty were offset by an increase in the underlying combined ratio in Personal Insurance.
Some of the increase in Personal Insurance was expected, given that last year's quarter benefited from unusually low auto losses as a result of the pandemic.
The underlying loss ratio came in at 61.7%, up 1.3 points from last year's second quarter as the beneficial impact of earned pricing in excess of loss trend was more than offset by the comparison to a very low pandemic-related personal auto loss ratio in the year ago quarter.
Expense ratio of 29.7% is 1.3 points lower than the prior year quarter as last year's result was elevated primarily due to the premium refunds we provided to our personal auto customers.
Turning to prior year reserve development.
In Personal Insurance, both auto and property losses came in better than expected for recent accident years, resulting in $65 million pre-tax net favorable PYD.
In Bond & Specialty Insurance, $44 million of pre-tax, net favorable PYD was driven by favorable loss experience in surety and fidelity related to recent accident years.
In Business Insurance, net favorable prior year reserve development of $73 million was driven by better-than-expected loss experience in workers' comp across multiple accident years, partially offset by reserve strengthening in our run-off book.
Net investment income improved to $682 million after tax this quarter.
Our non-fixed income portfolio turned in particularly strong results this quarter, reflecting performance in the equity markets, contributing $265 million after tax.
Consistent with our expectations, fixed income returns were down slightly from the prior year quarter as the benefit from higher levels of invested assets was more than offset by a decline in yields.
For the remainder of 2021, we expect fixed income NII, including earnings from short-term securities, of between $425 million and $435 million after tax per quarter.
Turning to capital management.
Operating cash flows for the quarter of $1.8 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 $2.4 billion.
During the second quarter, we took advantage of favorable market conditions and raised $750 million to help fund the future growth with a 30-year debt issuance at 3.05%, representing our second lowest 30-year coupon ever and achieving one of the tightest spreads ever for a 30-year note issued by an insurance company.
The market value of the bonds in our portfolio generally rose as U.S. treasury yields declined and credit spreads tightened during the second quarter.
And accordingly, our after tax net unrealized investment gain increased from $2.8 billion as of March 31 to $3.2 billion at June 30.
Adjusted book value per share, which excludes net unrealized investment gains and losses, was $103.88 at quarter end, up 4% since year-end and up 13% year-over-year.
We returned $625 million of capital to our shareholders during the second quarter with $224 million of dividends and $401 million in share repurchases.
Coming back to reinsurance for a moment.
The structure of our main cat reinsurance program is generally consistent with the prior year.
We renewed our Northeast cat treaty effective July 1 with substantially similar terms and pricing that was up only slightly on an exposure adjusted basis.
Our cat bond, Long Point Re III, is now in the final year of its four-year term.
In the annual reset for the 2021 hurricane season, the attachment point was adjusted from $1.87 billion to $1.98 billion while the total cost of the program was flat year-over-year.
A more complete description of our cat reinsurance coverage, including our general cat aggregate XOL Treaty that covers an accumulation of certain property losses arising from multiple currencies, is included in our 10-Q, which we filed earlier today and in our 2020 Form 10-K.
Before turning the call over to Greg, I'd like to make a few comments about inflation as the consumer price index has gotten a lot of attention lately.
We are relatively less leveraged to overall CPI-type inflation as compared to, say, medical inflation and social inflation.
One place a CPI-type inflation can impact us is in our short tail lines.
Notwithstanding our strong profitability in PI, as you'll hear from Michael, we are experiencing a degree of elevated severity.
However, relatively short payout periods in short tail lines limit the impact of that exposure.
And although it takes time to earn in over the policy period, we can price for those increases reasonably quickly.
Additionally, it's important to remember that we have some natural hedges in our business that mitigate the effects of inflation.
First, higher inflation is often associated with stronger economic activity, as well as higher wages and asset values, all of which contributed to higher insured exposures.
And as we've discussed before, higher exposure contributes to improved margins.
Second, although we're not seeing it at the moment, to the extent interest rates are correlated to inflation, we would benefit from higher returns in our investment portfolio as inflation increases.
Finally, let me reiterate that we are conscious of the inflation environment and the uncertainties surrounding it when we established our loss picks and our balance sheet reserves.
Business Insurance had a great quarter with strong financial results and terrific execution in the marketplace.
Segment income was $643 million for the quarter compared to a loss of $58 million in the prior year quarter.
Higher net investment income, lower catastrophe losses, higher underlying underwriting income, and favorable prior year reserve development, all contributed to the year-over-year improvement.
We're particularly pleased with the underlying combined ratio of 93.3%, which improved by 3.7 points from the second quarter of 2020, primarily attributable to three things.
First, about 2 points of the improvement resulted from earned pricing exceeding loss cost trends.
Another 0.5 point or so resulted from lower non-cat weather.
And third, the improvement also reflects the comparison to the modest net charge we took in the prior year quarter related to the pandemic.
In terms of non-cat weather, while the year-over-year improvement was about a 0.5 point favorable, as I just mentioned, this quarter's result was about 1.5 point better than what we assumed for the quarter.
Turning to the top-line.
Net written premiums were up 5%, benefiting from strong renewal premium change, including both strong renewal rate and exposure levels that are trending back to pre-pandemic levels and higher year-over-year new business volumes.
As for domestic production, renewal premium change was 9.5%, a historically high result and up almost 4 points from the second quarter of last year.
Underlying the RPC, we achieved strong renewal rate change of 7.1% and healthy exposure growth that reflects improving trends in our customers' outlook for their businesses.
As Alan said, our ability to continue to achieve historically high pricing with improved retention speaks to the stability of pricing in the market.
New business was up more than 9% with both select and middle-market contributing.
I'll discuss those results in more detail in a moment when I get to the individual businesses.
We are very pleased with these aggregate production results and our marketplace execution.
We've generated written pricing that has been in excess of estimated loss trend for some time now, resulting in significant improvement in the profitability of our book.
While this quarter's renewal rate change of 7.1% remains well in excess of loss trends, it was a little lower sequentially.
Let me provide a little more context around that.
A substantial majority of the decrease is attributable to a rational moderating of rate in our two specialty business units; excess casualty, which is inside middle market; and national property.
[Indecipherable] comes after three years of very strong compounding rate increases in these two businesses.
So the tempering of rate is appropriate considering the improved return profile.
Also, while renewal rate change was down sequentially for those businesses, rate increases were still in double-digits.
More broadly, the rate increases we are seeing across Business Insurance continue to be stable and widespread across both our lines of business and our distribution of accounts.
As illustrated on Slide 12, in our middle market and national property businesses, we achieved rate increases in 84% of the accounts that renewed in the second quarter, up from 81% in last year's second quarter.
Given persistent loss pressures and low fixed income yields, we will continue to see grade [Phonetic] to further improve our margins.
We will also continue to focus on all the non-rate levers to improve the risk profile and profitability across our portfolio.
For example, in our national property business, our underwriters continue to focus on improving terms and conditions, transaction-by-transaction.
Changes in terms like increased deductibles, management of sub-limits and reinsurance optimization are meaningful tools in enhancing our profitability and our underwriters continue to be active in utilizing all those levers.
As for the individual businesses, in Select, renewal rate change was 4.3%, more than 2 points higher than the second quarter of 2020, while retention was 80%.
These results reflect deliberate execution as we pursue improved returns in certain segments of the business.
And we're pleased with the progress we're making in this regard.
Exposure growth was up over 4% for the quarter, which is an encouraging sign as the economy reopens.
Lastly, new business was up 6% over the prior year quarter, driven by the continued success of our new BOP 2.0 product, which is now live in 31 states.
This state-of-the-art product includes industry-leading segmentation and a fast easy quoting experience.
We are encouraged with our agent's adoption of the new product as both submissions and new policies are up.
In middle market, renewal premium change of over 9% and retention of 87% were both historically high.
Renewal rate change at 7.4% remained strong and well in excess of loss trends.
Finally, new business was up 16% over the prior year quarter, driven by the success with larger accounts, as well as some improvement in the quality of the flow in the market.
As always, we remain disciplined around risk selection and underwriting.
To sum up, Business Insurance had a terrific quarter by all measures.
We're pleased with our execution in further improving the underlying margins in the book, and we continue to invest in the business for long-term profitable growth.
Bond & Specialty posted excellent returns and growth in the quarter.
Segment income was $187 million, considerably more than double the prior year quarter, driven by favorable prior year reserve development, a significantly improved underlying underwriting margin and higher business volumes.
The underlying combined ratio of 83.4% improved by over 4.5 points from the prior year quarter as pricing that exceeded loss cost trends drove a lower underlying loss ratio.
Turning to the top-line.
Net written premiums grew an exceptional 16% in the quarter with solid contributions from all our businesses.
In management liability renewal premium change was a record 12.7%, driven by near record rate.
Retention remained strong at 86%.
New business increased 6% from the second quarter of last year; our first quarterly increase since the beginning of the pandemic with strong new business pricing.
Surety also grew for the first time since the beginning of the pandemic and international again posted meaningful growth, including strong retention and rate.
So Bond & Specialty results were excellent and reflects our ability to successfully manage this business through a variety of business and economic cycles.
We're very pleased with our second quarter Personal Insurance results.
Segment income of $121 million was up $111 million from the prior year quarter, benefiting from lower catastrophes, higher net investment income and higher net favorable prior year reserve development.
Partially offsetting these improvements was a lower underlying underwriting gain, which I will discuss in more detail in a moment.
Our second quarter combined ratio improved from the prior year quarter by about 1.5 points to 99.7%.
Net written premiums grew 16%.
Recall that in the prior year quarter, we provided $216 million of premium refunds to automobile customers in response to the impact of the pandemic.
Adjusting for these premium refunds, net written premiums grew a very strong 8% with Domestic Homeowners up 12% and Domestic Automobile up 4%.
Automobile delivered another excellent quarter with a combined ratio of 91.6%.
The underlying combined ratio was an impressive 92%, although up 6 points from the prior year quarter, which reflected lower loss activity during the initial months of the pandemic.
The current quarter results reflect the benefits of modestly lower claim frequency compared to pre-pandemic levels.
As we exited the quarter, claim frequency was closer to pre-pandemic levels and we would expect that trend to continue into the third quarter.
Our strong current quarter profitability also reflect increased severity, particularly in collision and third-party physical damage claims, driven primarily by higher costs of used vehicles and parts.
As auto loss experience approaches pre-pandemic levels, we plan to begin filing for rate increases in selected states later this year as we continue to balance business volumes and profitability.
While it will take some time for future rate actions to earn into our results, we are well-positioned to continue to be -- profitably grow in auto.
In Homeowners and Other, the second quarter combined ratio of 108.3% was 6 points lower than the prior year quarter, driven by a 13.5 point reduction in catastrophe losses.
Partially offsetting the catastrophe favorability was an 8 point increase in the underlying combined ratio.
Approximately one-third of this increase reflects non-catastrophe weather losses which were in line with our expectations, but elevated over a less active prior-year quarter.
The remainder of the increase reflects continued elevated frequency and severity of fire and non-weather water losses.
The increased severity we saw in the second quarter includes higher repair costs due to a combination of labor and material increases.
We continue to see grade increases in response to these trends and we'll continue to actively monitor inflation and loss cost trend changes and factor them into our pricing and underwriting decisions.
Turning to quarterly production.
Domestic Automobile retention was up slightly to a strong 85%.
New business increased by 19% and policies in force grew 4%.
Domestic Homeowners and Other delivered another excellent quarter with retention remaining strong at 85%, renewal premium change increasing to 8.2%, and new business growth of 28%, reflective of increased quote activity and increase in average premium, along with the ongoing successful rollout of Quantum Home 2.0.
Policies in force grew 7%.
As Alan mentioned, our policies in force growth across both Auto and Homeowners are at record levels.
Actually, our policies in force across both Auto and Homeowners are at record levels, reflecting our ongoing effort to perform and transform in Personal Insurance.
When we launched Quantum Auto 2.0, we designed it with a modular product structure to give customers what they need and to deliver long-term performance.
This has enabled us to seamlessly introduce new rating variables, such as vehicle history, prior insurance history, and telematics, allowing us to continually improve our pricing segmentations.
Regarding telematics, we've seen take-up rates for IntelliDrive increase by 30% since the launch of our second-generation offering, which features a fully redesigned mobile experience, monitors distracted driving and improves our ability to match price to driving behavior.
Our momentum in Auto aligns very well with our goal of providing total account solutions for customers.
The Quantum Home 2.0 product is now available in over 40 states, generating consistent growth in policies in force.
Both distributors and customers continue to see value in our combined auto and property offerings.
Our multi-channel PI distribution strategy allows us to meet our customers where they are.
As a result of the success of our new products, our existing relationships continue to perform well.
Additionally, we've seen more demand for agent appointments, which is contributing meaningfully to our growth.
In order to serve customers how they want to be served, we are also investing in our digital capabilities.
With advancements in our MyTravelers mobile app, we continue to digitize the customer journey with over 600,000 customers already downloading the app since its launch earlier this year.
Going forward, we will continue to invest in solutions that meet customers where they are, give them what they need and serve them how they want, while working with our distribution partners to deliver profitable growth.
Tom's impact as the leader of our very successful surety and management liability businesses has been profound.
In addition to delivering exceptional financial results over many years, Tom and his leadership team fostered a culture of care, community and excellence that extends throughout our Bond & Specialty organization and throughout Travelers.
It's one of the many reasons why I'm so pleased that Jeff Klenk, currently a member of Tom's leadership team and head of our management liability business, will succeed Tom.
Jeff has been at Travelers for more than 20 years.
He's a proven leader and the perfect candidate to take the reins from Tom.
You'll hear from Jeff in October on our third quarter earnings call.
Tom, we're all going to miss you personally and professionally.

user
compname reports ‍​qtrly core earnings per share $3.45.
july 20 (reuters) - travelers companies inc: :‍​qtrly core earnings per share $3.45 ; qtrly earnings per share $3.66.
qtrly catastrophe losses, net of reinsurance, $475 million pre-tax versus loss of $854 million pre-tax.
qtrly net written premiums $8.14 billion, up 11%.
higher underwriting income, net favorable prior year reserve development, lower level of catastrophe losses, led to higher core income in quarter.

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