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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.
Dan will have more to say about both shortly.
Our underlying underwriting income of $572 million pre-tax was up $254 million over the prior-year quarter, benefiting from solid net earned premium and a 3.5 point improvement in the underlying combined ratio to a strong 91.4%.
The pandemic and related economic conditions had only a modest net impact on our underwriting results.
For us in the quarter, $114 million of direct losses and $63 million of audit premium adjustments were about offset by initial estimates of favorable loss activity, most of which is in short-tail lines.
Given the continued uncertainty, we've taken a cautious approach to recognizing the net impact of COVID-19 related loss activity.
Some industry observers have speculated about the aggregate level of insured and investment losses arising out of the pandemic.
We don't talk the losses will be significant but they won't be borne evenly across insurers.
Our manageable COVID related insurance losses so far this year are a reflection of our disciplined approach to risk selection as well terms of conditions.
And as we shared with you in some detail last quarter, we manage our investment portfolio with a similar regard to balancing risk and reward.
Last quarter, I commented on the potential future impacts the pandemic might have on each of our key lines of business.
I'll review that again with the quarter's worth of experience.
In personal auto, we've seen a meaningful drop off in auto frequency, although that is moderating as economic activity picks up.
The same time, we've taken into consideration, the potential for some offsetting impact in terms of auto severity due to factors such as collisions occurring at higher speeds and driver distraction.
In workers compensation, COVID related claims most of relate to health-care workers and first responders, which do not represent a significant part of our book of business.
Also, the frequency of those claims stabilized during the quarter, which might be attributed to an improved supply of PPE and the healthcare community having the benefit of more experience with managing COVID patients.
More probably beyond the healthcare sector, data from some of the state workers' comp systems suggest that the COVID related claim rate is low relative to the infection rate.
That's likely partly attributable to the fact that the population most seriously affected by COVID-19 skews older and is not the workforce.
Nonetheless, in developing our loss estimates, we've taken into consideration, the potential for the delayed reporting of claims and additional claim activity associated with the recent spikes in infection rates, as well as uncertainty related to the longer term implications from the disease.
As we anticipated, some states have effectively expanded the scope workers comp coverage by creating presumptions of compensability.
In most cases, states have taken a thoughtful approach protecting workers appropriately but not unreasonably burdening the workers' compensation system, where states have acted to expand compensability we've adjusted our loss estimates accordingly.
In terms of non-COVID workers' comp losses, we've seen the lower volume of workers' comp claims as workers have stayed home.
This will update as people get back to the workplace.
In addition to taking that into account, we have contemplated that severity could be adversely affected by injured workers' delaying treatment due to the stay-at-home work environment.
Having said all that, our experience is that there is a lower level of workers' comp claim activity associated with economic recessions.
During periods of elevated unemployment, workers tend to be more motivated the stay at their jobs and the workforce tends to be more seasoned.
In management liability, as we expected, we are seeing the elevated level of claim activity, typically associated with stock market volatility and workforce reductions.
The underlying combined ratio of this quarter of Bond & Specialty reflects that, as well as other loss activity.
And we expect the underlying combined ratio will continue to be elevated at this level or somewhat higher over the near term.
This is not like the experience we had in the aftermath of the financial crisis a decade ago.
Nonetheless, we expect to return from this segment will continue to be healthy.
Turning to the Surety business, we've been pleased to see that work is continuing on the vast majority of construction projects.
However, the depth and duration of stress in the economy continues to be risk factors of the surety business.
The line will also be impacted by other factors, such as the financial strength in the bonded firms.
As I shared last quarter, our high quality surety book was effectively stress tested in the 2008 financial crisis and performed well.
And our underwriting approaches remain disciplined since that time.
In that regard, so far, we haven't seen anything that has caused us to change our surety loss estimate.
In terms of business interruption coverages under commercial property policies, there is a fair amount of litigation challenging coverage.
As a reminder, our commercial property insurance policies that include business interruption, including as a result of similar authority require losses to be caused by direct physical damage to property from a covered cause of loss.
In addition, our standard policy forms specifically excludes loss or damage caused by or resulting from a virus.
If you quote decisions we've seen so far, one in New York and one in Michigan, have both upheld the physical damage requirement in the context of COVID-19.
On the legislative front, efforts to retroactively expand coverage for business interruptions seem to be diminishing.
Finally, with respect to liability coverages, as people shelter in place, we are seeing fewer commercial-auto accidents and slip and fall type claims.
Anecdotally, we are also seeing some movement by the plaintiff's bar to settle claims faster, but it's too soon to know how significant that benefit might be.
We are also encouraged by states that have adopted COVID related liability protection and similar efforts that are under way in other states and at the Federal level.
We shouldn't let frivolous lawsuits undermine the nation's recovery.
Nonetheless, we expect the plaintiffs' bar to continue to be active.
Turning to the quarter on the top line.
We're very pleased with our production results, excluding the other premium refunds we provided to our customers, net written premiums grew by 2% as the impact of COVID-19 on insurance exposures was more than offset by strong renewal rate change in all three segments.
In Business Insurance, we achieved renewal rate change of 7.4%, the highest level since 2013 and close to the record level we achieved that year.
Excluding workers' comp, renewal rate change was double-digits.
Importantly, retention levels remained strong.
In Bond & Specialty Insurance, net written premiums increased by 3%, as our domestic management liability business achieved a record renewal rate change while maintaining strong retention.
In Personal Insurance, excluding the auto premium refund, net written premiums increased by 6% driven by strong retention and new business in both Agency Auto and Agency Homeowners.
In our Agency Homeowners business, renewal premium change remained strong at 7.7% and we hit a record for new business.
Let me take a minute to comment on the commercial rate environment.
Before the pandemic struck, there were a number of industrywide factors putting upward pressure on prices, namely increased volatility of weather-related losses, interest rates at historical lows and a growing recognition of higher loss trend in the liability lines.
All of those conditions persist and now, at another quarter, with a very high level of weather-related losses, interest rates that are likely to be lower for longer and while it hasn't been a significant factor for us, but reinsurance market that has hardened.
And on top of that, the pandemic and related economic fallout, added sense of incremental uncertainty making this feel like one of those times, not unlike in the wake of 9/11 and Hurricane Katrina when the market recalibrates risk.
With that as the background, we'll continue to seek rate gains and manage other leverage of profitability to improve the outlook for return.
I'll close by saying that I couldn't be more grateful to my Travelers colleagues for their grit and commitment to taking care of our customers, our business partners, our communities and each other.
Also, the work they've done in recent years to advance our innovation agenda has equipped us with state-of-the-art digital tools and other capabilities that make all the difference in this environment.
We were well prepare and from here, we're well positioned.
Frequent financial and operational distractions will continue uninterrupted, managing our business and investing for long-term success.
In short, we're confident in our ability to continue to succeed in these uncertain times, and to benefit from the strength of our franchise as the economy recovers.
Our core loss for the second quarter was $50 million compared to core income of $537 million in the prior year quarter.
The change resulted primarily from a higher level of catastrophe losses and as expected, lower net investment income.
For the quarter, the net impact related to COVID-19 is included in our underlying results, not as part of our cat figure and was modest, more on that in a minute.
Our second quarter results include $854 million of pre-tax cat losses compared to only $367 million in last year second quarter.
This quarter's cat's includes severe storms in several regions of the United States as well as $91 million of losses related to civil unrest.
Regarding our property aggregate catastrophe XOL treaty for 2020, as of June 30th, we have accumulated about $1.4 billion of qualifying losses toward the aggregate retention of $1.55 billion.
The treaty provides aggregate coverage of $280 million out of $500 million of losses, above that $1.55 billion retention.
The underlying combined ratio was 91.4%, which excludes the impacts of cats and PYD improved by 3.5 points compared to 94.9% in last year's second quarter.
The underlying loss ratio improved by more than 4 points and benefited from a lower level of non-cat weather losses, favorable frequency in personal auto from the shelter-in-place environment, net of related premium refunds and the impact of earned pricing in excess of loss trend.
The expense ratio of 31% is 0.8 of a point higher than the prior year quarter and above our recent run rate.
This change was as expected due to the reduction in premiums associated with the pandemics impact on the economy, along with the premium refunds to our personal auto customers.
The net impact of COVID-19 and its related effects on the economy were modest in terms of our overall second quarter underwriting result.
Our top-line was resilient, excluding the premium refunds in Personal Insurance, net written premiums increased by 2% driven by strong renewal rate change in all three segments that more than offset lower insured exposures.
In terms of operating expenses, results were adversely impacted by modest increases in the allowance for bad debt and the accrual for supplemental commissions.
Those expense increases, however, were roughly offset by lower expenses in other categories, for example, travel costs were down, as our employees continue to work primarily from home.
The economic impacts related to COVID-19 also affected our underlying losses.
For example, losses directly related to COVID-19 totaled $114 million, primarily workers' comp in Business Insurance and management liability losses in our Bond & Specialty business.
On the other hand, we experienced significant reductions in auto claims as there were fewer cars on the road during the second quarter and to a lesser degree, recognized the benefit reflecting fewer traditional workers' comp claims as more people work from home.
As you heard from Alan, given the uncertainty in the current environment, we took a cautious approach in estimating the net impact of COVID-related losses.
We have recorded the estimated cost for all losses incurred through June 30th, including incurred losses for which claims have not yet been reported.
All losses have been recorded at our estimate of ultimate and the majority of the COVID-19 related insurance losses, we have both in the first and second quarters, are still sitting in our IBNR reserves.
We have not recognized losses or benefits from COVID-19 related insured events that we anticipate will occur subsequent to the end of the quarter.
Taking a step back, on a year-to-date basis, the impact on our results excluding net investment income from COVID-19 and its related effects is a net charge of about $50 million pre-tax.
Turning to prior year reserve development, in Personal Insurance, both auto and property losses came in better than expected for multiple accident years.
In Bond & Specialty Insurance, we saw larger losses than expected in management liability, resulting in prior year strengthening of $33 million, largely offsetting the favorable development in Personal Insurance.
In Business Insurance, there was no net prior year reserve development, as better-than-expected loss experienced in workers' comp and commercial property was largely offset by unfavorable results in our other casualty lines.
Each of the movements this quarter was relatively small compared to the reserve base.
As a reminder, third quarter PYD will also include the results of our annual asbestos review.
After-tax net investment income decreased by 54% from the prior year quarter to $251 million, somewhat better result than we had previewed in our call last quarter.
The decrease was driven by a non-fixed income returns, where results for our private equity, hedge fund and real estate partnerships are generally reported to us on a one quarter lag.
Accordingly, the impact of the disruption in global financial markets that occurred in the latter half of the first quarter impacted our second quarter results.
As the broader markets have recovered in the second quarter, that should, at least to some extent, benefit our non-fixed income results in the third quarter.
It's worth mentioning here that recoveries may not be reflected in the private equity and hedge fund results as quickly as the downturns were.
Given continued economic uncertainty, fund managers who report their results to us may take a more measured approach and not be as quick to write-back up the valuations they just marked down, particularly in light of what may be continued challenging prospects for the earnings and cash flows of the funds underlying investments.
Fixed income returns decreased by $24 million after tax as the benefit from higher levels of invested assets was more than offset by the decline in interest rates and the mix change, as we chose to maintain a somewhat higher level of liquidity and held more short-term investments than in prior quarters.
For the remainder of 2020, we expect that fixed income NII will decrease by approximately $35 million to $40 million after-tax per quarter compared to the corresponding periods of 2019.
Turning to capital management, Operating cash flows for the quarter of $1.7 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 slightly more than $2 billion, well above our target level.
Recall that in April, we pre-funded as we normally do, $500 million of debt coming due in November, with the new 30-year $500 million debt issuance at 2.55%.
So our holding company liquidity is temporarily elevated by that amount.
Investment yields decreased as credit spreads tightened during the second quarter and accordingly, our net unrealized investment gains increased from $1.8 billion after tax as of March 31st, to $3.6 billion after tax at June 30th.
Adjusted book value per share, which excludes net unrealized investment gains and losses was $92.01 at quarter end, down less than 1% from year-end and up 2% 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.
As we indicated in our first quarter earnings call, our capital management strategy remains unchanged.
With the ongoing economic uncertainty and with hurricane season upon us, it's still feels to us like holding on to a little more capital is preferable to holding on to a little less.
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.
The structure of our main cat reinsurance program is generally consistent with the prior year.
We renewed our Northeast Cat Treaty effective July 1st on 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 third year of its full-year term.
In the annual reset for the 2020 hurricane season the attachment point was adjusted from $1.79 billion to $1.87 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 through multiple occurrences is included in our 10-Q, which we filed earlier today and in our 2019 Form 10-K.
Lastly, let me take a minute to address thoughts on our top line going forward.
Looking at premium volume, we expect to experience the impacts of economic disruption.
How much of an impact we feel and for how long, will depend on the extent and duration of the negative economic impacts related to the pandemic.
Because earned premium typically lags written premium, we expect to feel the effects on an earned basis beyond the end of the year.
As Alan said last quarter, we do not intend to take disruptive -- expense actions in response to what may prove to be a short-term impact on premium volumes.
Accordingly, in coming quarters, the expense ratio will likely remain somewhat elevated compared to the corresponding periods of 2019 due to the expected impact on earned premiums.
Let me start by expressing my deep appreciation to all my Travelers' colleagues as well as our agent and broker partners for continuing to provide exceptional service to our customers during these unprecedented times.
As for the quarter's results, business Insurance had a loss for the quarter of $58 million due to lower net investment income and higher catastrophe losses, as both Alan and Dan discussed.
The combined ratio of 107.1% included more than 10 points of catastrophes, impacted by both weather related losses and civil unrest.
The underlying combined ratio of 97% improved by 0.4 points, reflecting a 0.2 point improvement in each of the underlying loss ratio and expense ratio.
The net impact of COVID-19 and related economic conditions was modest.
Turning to the top line, net written premiums were 3% lower than the prior-year quarter due to the impact of the economic disruption on insured exposures.
Turning to domestic production, we achieved strong renewal rate change of 7.4% while retention remained high at 83%.
The renewal rate change of 7.4% was up almost 4 points from the second quarter of last year and more than a point from the first quarter of this year, not withstanding the persistent downward pressure in workers' compensation pricing.
We continue to achieve higher rate levels broadly across our book as rate increases in all lines other than workers' compensation were meaningfully higher during the quarter as compared to the second quarter of last year.
We achieved positive rate at about 80% of our middle market accounts this quarter, which was up from about two-third in the second quarter of last year.
Importantly, we've achieved this progress in the highly segmented manner and with retention remaining strong.
At these rate levels, our rate change continues to exceed loss trend even after about a 0.5 point increase toward loss trend assumption.
New business of $473 million was down 10% from the prior-year quarter.
New business flow was down, which we attribute largely to disruptions caused by the pandemic.
New business was also impacted by our continued focus and disciplined risk selection, underwriting and pricing.
These production results reflect superior execution by our field organization in a very challenging environment.
As for the individual businesses, in Select, renewal rate change was up to 2.1% making the sixth consecutive quarter where renewal rate was higher than the corresponding prior-year quarter while retention was strong at 82%.
The headwind from workers' compensation pricing is most pronounced in the Select business.
New business was down significantly, driven by the economic disruption caused by the pandemic.
While the current environment is challenging, we are confident that we're well positioned and investing in the right strategic capabilities to profitably grow this business over time.
In Middle Market renewal rate change was up to 7.9% while retention remained strong at 86%.
The 7.9% was up almost 4.5 points from the second quarter of 2019 and 1.5 points from the first quarter of 2020.
New business of $255 million was down from the prior-year quarter, driven by both economic disruption and our continued focus on disciplined risk selection underwriting and pricing.
To sum up, we believe our meaningful competitive advantages, including our strong distribution relationships and our talent and expertise position us well to navigate through these uncertain times and continue to serve our customers and agent and broker partners.
Bond & Specialty delivered solid returns and growth in the quarter despite the impacts of COVID-19 and related economic conditions.
Segment income was $72 million, a decrease of $102 million from the prior-year quarter.
As Dan mentioned, the combined ratio of 93.8% reflects unfavorable prior-year reserve development in the quarter as compared to favorable PYD in the prior-year quarter and a higher underlying combined ratios.
The underlying combined ratio of 88.1% increased 7.1 points from the prior-year quarter, primarily driven by the impacts of higher loss estimates for management liability coverages, about half of which was due to COVID-19 and related economic conditions.
Remaining half of the increase is due to a few smaller drivers such as elevated claim activity under employment practices liability coverages and ransomware losses under cyber policies.
Turning to the top line, net written premiums grew 3% for the quarter, reflecting strong growth in our management liability and international businesses, partially offset by lower surety production.
In our domestic management liability business, we are pleased that renewal premium change increased to 7.8%.
This marks the seventh consecutive quarter where RPC is higher than the corresponding prior-year quarter.
As Alan noted, renewal rate change was a record for the quarter, while retention remained at a historically high 89%.
Similar to business insurance, RPC in the quarter was also impacted by lower insured exposures.
These production results demonstrate the effective of 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 $13 million reflecting a disruption associated with COVID-19 and our thoughtful underwriting in this elevated risk environment.
Domestic surety net premium, net written premium was down $24 million in the quarter, reflecting the impact of COVID-19, which slowed public project procurement and related bond demand.
International BSI posted strong growth in the quarter, with record rate in our U.K. management liability businesses.
So Bond & Specialty results remain resilient despite the challenges brought on by COVID-19.
These results reflect the excellent work of our agents, brokers and employees who have adapted to operating in new ways to continue to provide leading products and services to our customers.
We feel confident about our ability to navigate through this challenging environment and continue to deliver strong returns over time.
Personal Insurance segment income for the second quarter of 2020 was $10 million down from $88 million in the prior year quarter, driven by a higher level of catastrophe losses and lower net investment income.
These impacts were partially offset by an improvement in the underlying underwriting gain.
Our combined ratio for the quarter was 101.3%, an increase of 1.1 points, and a 12.5 point increase in catastrophe losses was largely offset by a 10.6 point improvement in the underlying combined ratio.
The underlying combined ratio benefited from lower non-catastrophe weather-related losses and lower automobile losses net of premium refunds.
The increase of 2.6 points on the underwriting expense ratio was primarily driven by the reduction in net earned premiums resulting from the auto premium refunds.
Turning to the top-line.
Excluding the impact of premium refunds of $216 million, net written premiums grew 6%.
Agency homeowners and other net written premiums were up an impressive 13% and agency automobile net written premiums were up 3% excluding premium refunds.
Agency automobile delivered strong results with a combined ratio of 85.7% for the quarter.
The loss ratio improved over 12 points while the underwriting expense ratio increased by about 4 points.
The increase in the underwriting expense ratio was primarily driven by the impact of the premium refunds I described earlier.
The underlying combined ratio of 84.2% improved 9.6 points relative to the prior year quarter, continuing to reflect improvements in frequency, primarily due to fewer miles driven as a result of the pandemic.
Data from our IntelliDrive auto telematics program indicate miles driven were down significantly from pre-COVID-19 levels during the second quarter, reaching a weekly low point in early April and partially rebounding as the economy has started to reopen.
In response to our improved auto loss experience, we implemented a stay-at-home auto premium credit program for personal automobile customers.
In the U.S., the program provided a 15% premium refund on April, May and June premiums.
In agency homeowners and other, the second quarter combined ratio was 113.9%, 9.4 points higher than the prior year quarter due primarily to higher catastrophes, partially offset by a lower underlying combined ratio.
Historically, the second quarter is our highest catastrophe quarter.
This quarter, we experienced significant storm activity, resulting in 34 points of catastrophe losses, an increase of 21 points compared to the prior year quarter where catastrophes were relatively low.
The underlying combined ratio for the quarter was 81.4%, down over 11 points from the prior year quarter, driven primarily by lower non-catastrophe weather-related losses.
The majority of the improvement is due to elevated non-cat weather in the prior year quarter.
Non-catastrophe weather-related losses this quarter were also better than our assumptions.
Turning to quarterly production.
Our domestic agency results were solid, despite the challenging environment resulting from COVID-19 and its related economic impacts.
Our retentions remained strong, closed and new business were up versus the prior year quarter, and we remain pleased with our policies in force growth.
Agency automobile retention was 85% and new business increased 7% from the prior year quarter.
Renewal premium change was 1.5% as we continue to moderate pricing given the improved performance in our book over the past few years.
Agency homeowners and other delivered another very strong quarter, with retention of 87%, renewal premium change of 7.7% and a 17% increase in new business as we continue to seek to improve returns while growing the business.
Higher new business levels again benefited from the successful roll out of our Quantum Home 2.0 product, now available in over 40 markets.
During the quarter, we continued to deliver new capabilities and products to our customers and distribution partners.
We introduced Quantum Home 2.0 in four new states including California.
In addition, we launched IntelliDrive 2.0 which add distracted driving monitoring to our auto telematics product and delivers significant improvements to the user experience.
And after reaching our goal of planting one million trees for customer enrollment in paperless billing, we extended our partnership with American Forests to plant another 500,000 trees by Earth Day 2021.
To recap, Personal Insurance is off to a strong start in the first half of the year, particularly in light of a challenging environment.
I'm proud of our team's efforts to continue to work together to meet the needs of those we're privileged to serve while investing in the business for the future.
Before we begin Q&A, there's one topic that we expect might be on people's mind.
So we thought we would kick off Q&A by addressing it.
There's been some discussion by industry observers about the timing of the recognition of COVID-related losses.
So, let me reiterate, that our reserves reflect our best estimate of ultimate losses incurred as of the balance sheet date.
And applying accounting principles, we would not record a reserve for a loss that has not yet occurred as of the balance sheet date.
Using auto claims as an example.
At the beginning of the year, we have an assumption as for the volume of claims, we will see over the course of the year and what the average cost of those claims will be.
Those would be fourth quarter events and accordingly, they will be recognized in our fourth quarter results.
This same principle applies when we consider losses related to COVID-19.
While only some losses have been reported to us so far, the losses we booked in both the first and second quarter reflect our estimates of the ultimate amounts that we'll pay for all losses and related costs that have been incurred as of June 30th, including those for which we have not yet received a claim.
In fact, as I said earlier, the majority of the COVID-related insurance losses we have booked through June 30th are still sitting in our IBNR reserves.
That said, the pandemic is clearly not over and tens of thousands of new infections are being confirmed in the United States each day.
It is foreseeable that a healthcare worker, for example, who to this point, has not contracted COVID-19 will become ill from COVID-19 as a result of their job duties in December, but again, that loss activity will be included in our fourth quarter results.
We similarly would not advance the recognition of any continued favorability from lower frequency in non-COVID workers' comp claims.
Finally, I'll remind you that on a year-to-date basis, setting aside net investment income, the impact on our results from COVID-19 and its related effects is a net charge of about $50 million pre-tax.
And with that, operator, we're ready to take questions.

user
travelers companies - qtrly catastrophe losses of $854 million pre-tax versus $367 million pre-tax in prior year quarter.
travelers companies - qtrly net written premiums of $7.35 billion, down 1%.
travelers companies - as of june 30, 2020 book value per share $106.42 versus $101.55 as of dec, 31, 2019.
travelers companies - qtrly underlying combined ratio 91.4% versus 94.9%.
travelers companies - covid-19 & related economic conditions had a modest net impact on the underwriting result in quarter.

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