The Travelers Companies, Inc.

Good morning, ladies and gentlemen. Welcome to the first quarter results teleconference for travelers. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on April 21st, 2020. At this time, I would like to turn the conference over to Ms. Abby Goldstein, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Travelers' discussion of our first quarter 2020 results. Given the current circumstances, we hope you and your loved ones are safe and healthy. We released our press release, financial supplement, and webcast presentation earlier this morning. All of those materials can be found on our website at travelers.com under the investor section. Speaking today will be Alan Schnitzer, Chairman and CEO, Dan Fry, Chief Financial Officer, and our three-segment presidents, Greg Taslowski of Business Insurance, Tom Kunkel 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 they will take questions. Then we will take questions. Before I turn the call over to Alan, I would like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statement due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10Q and 10K filed with the FCC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the investor 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. The events of the last few months have been challenging for all of us and our hearts go out to all those affected by the global crisis. Before I get to the impacts of the pandemic on our business and comment on our first core results, I'd like to acknowledge some acts of courage. First, I want to express our appreciation for the thoughtful actions taken by our leaders in government at all levels to keep us safe and support the well-being of individuals and businesses. Their actions remind us that a society-wide pandemic requires a society-wide response. We would also like to extend our deep gratitude for the courageous efforts of healthcare professionals and first responders, their selfless commitment to protecting and saving lives, and for all the essential workers who are putting others first as they continue to fill prescriptions, stock shelves, deliver goods, and provide the other key services we all depend upon. Literally and figuratively, they are keeping the lights on, and we're grateful. In addition, I want to acknowledge and thank all of my 30,000 colleagues, many of whom are listening this morning, for their exceptional response to this crisis. Employees across Travelers have stepped up in amazing ways to ensure that we can continue to deliver the risk management products and services that our customers need to live their lives and run their businesses, as well as the outstanding uninterrupted service that our customers and agent and broker partners have come to expect. Thanks to the commitment and resourcefulness of Traveler's employees and the tremendous efforts of our technology and operations teams, we transitioned our workforce practically overnight to safely and effectively work from home. A few months ago, it would have been hard to envision that we would have more than 29,000 people simultaneously logging in remotely and that we would be hosting more than 80,000 virtual meetings on a daily basis. But we are doing just that. As we've discussed over the last few years, we've been making investments in talent and technology, and those investments are paying off in terms of our ability to keep our employees safe and take care of our customers and business partners. As a company, we are also grateful to be in a position to support those impacted by COVID-19, including through customer billing relief, our stay at home auto premium credit program, our distribution support plan accelerating the payment of more than $100 million of commissions for agents and brokers, and a direct $5 million pledge to assist hard-hit families and communities. This pandemic has created a tremendous amount of uncertainty for all of us. Nonetheless, let me turn to highlighting some of the potential impacts of COVID-19 and the macroeconomic environment on our business. I'll start with the top line. As you've heard us say, as a property and casualty insurer, we're a GDP-based business. We insure the output of the economy. As a result, we in the industry will be impacted by lower premium levels as the economy contracts. How much and for how long will depend on the extent and duration of the negative economic impacts related to the pandemic. We have always been very attentive to our expense base, and we continue to be thoughtful in that regard. In the context of the current environment, we will make adjustments to our expenses where it makes sense, but we do not plan to make significant adjustments to our fixed expense base in response to short-term fluctuations in business volumes. Accordingly, as a consequence of pressure on the top line, we expect an increase in our expense ratio in the near term. In terms of our investment portfolio, the economic fallout from the pandemic will impact our net investment income. Dan will have more to say about that shortly. Turning to loss costs, there will be COVID-19-related loss activity. But generally, as exposures decline, there will, to one degree or another, be some corresponding decline in losses. What that will mean in terms of profitability will depend on the relationship between the declined and earned premium and the decline in losses. In other words, loss ratios could improve or deteriorate, and that will vary by line. Short-term impacts could also be different than longer-term impacts. Turning to some of our key lines of business. In personal auto, in recent weeks, we have seen a meaningful drop-off in auto frequency. As a result, we announced our stay-at-home auto premium credit program, offering a premium credit to our customers for April and May. At the same time, there may be some offsetting impact in terms of auto severity. For example, severity could be impacted as lower levels of traffic result in collisions occurring at higher speeds. Turning to our commercial businesses, in workers' compensation, while it varies by state, generally claims for injury or disease are compensable when the employee demonstrates that the injury or illness arose both out of and in the course of their employment. With respect to COVID-19, these claims will most likely be applicable in the case of healthcare workers and other first responders, which does not represent a significant part of our book of business. Some states have taken steps to effectively expand the scope of workers' comp coverage by creating presumptions of compensability. Other states are considering doing the same. There are a few dynamics to this that argue for policymakers and regulators to take a careful approach. First, from a marketplace perspective, shifting the exposure to the workers' comp system will increase loss costs. That will be reflected in rate-making, increasing the cost of workers' comp insurance going forward. Also, those states that have workers' compensation funds would presumably bear their proportionate share of the cost. In any event, we're watching this closely. In management liability, there is potential for elevated frequency. For example, under public company D&O policies, we generally associate stock market volatility with a higher frequency of claims related to securities class actions. However, given the breadth of the market decline, Causation may be harder for plaintiffs to prove in those cases. Also by way of example, under employment practices liability coverage, we expect additional claim activity related to the increase in furloughs and layoffs of employees. Surety loss activity for the industry and for us could be elevated depending on the duration of the economic shutdown and the depth and duration of stress in the economy. While projects have been impacted by shelter-in-place orders, our sense is that the vast majority of projects have been permitted to proceed and contractors are currently still working. We believe that force majeure or other provisions included in many construction contracts would, as a general matter, provide relief to contractors for late completion due to COVID-19. Surety loss experience will also be impacted by other factors. For example, the financial strength of the bonded firms, the types of bonds written, and security arrangements. Our high-quality surety book was effectively stress-tested in the 2008 financial crisis and performed well, and our underwriting approach has remained disciplined since that time. I'll take a minute and comment on business interruption coverages under commercial property policies. Let me begin by saying that for every claim, without exception, we start by looking at the facts of the claim and the terms of the policy to determine whether the claim is covered or not. That said, our commercial property insurance policies that include business interruption, including as a result of civil authority, require losses to be caused by direct physical damage to property from a covered cause of loss. In addition, our standard policy form specifically excludes loss or damage caused by or resulting from a virus. More broadly, the issue of retroactively expanding coverage beyond the original intent of a policy is important for the industry. so let me make a few additional observations. Insurers don't collect premiums to cover losses that policies weren't written to cover. Requiring those losses to be covered retroactively on any broad scale would overwhelm the industry's plain staying ability for legitimate claims, unfairly leading many individuals and businesses exposed. To that point, the industry's financial strength is especially important in a time of increased natural catastrophes. The spring tornado season is already active Hurricane season is fast approaching, and wildfires represent an ongoing threat. On top of all of that, contract certainty is a core underpinning of the U.S. free market system, and any effort to undermine that has the potential to set a dangerous precedent. Finally, with respect to liability coverages, in the near term, as people shelter in place, we are seeing fewer commercial auto accidents and slip-and-fall type claims. In addition, we are seeing some movement by the plaintiff's bar to settle claims faster. On the other hand, we expect that the plaintiff's bar will seek to generate COVID-related litigation. Let me take a minute to address a related and important policy issue. The trial bar is already actively soliciting plaintiffs for cases related to the pandemic. A number of lawsuits have already been filed, including related to the manufacture and distribution of hand sanitizer, and efforts to develop a COVID-19 vaccine. Those aren't our insurance, so I don't have a view on the merits of those cases. But we should all be concerned that many frivolous lawsuits will be brought and will undermine the nation's recovery, including by delaying and adding expense to R&D related to the development and distribution of COVID-19 tests and therapeutics, deterring employers from responsibly bringing employees back to work, and retail businesses from responsibly opening to customers. and targeting highly vulnerable businesses like those in the healthcare and travel industries that can't afford the distraction or the expense. On top of these specific concerns, as I'm sure you're aware, the United States has the highest tort tax in the world. According to a recent study by the Institute for Legal Reform, tort costs amount to more than $3,300 per U.S. household and much more than that in some states. Americans shouldn't have to endure that, and they can't afford to at the moment. In other words, our recovery from this crisis would benefit considerably from common sense tort reform, as well as legal liability protection for our healthcare heroes, firms involved in recovery efforts, and all businesses seeking to reopen. I'll now turn to our first quarter results. This morning, we reported core income of $676 million and core return on equity of 11.5%. As compared to the prior year, the results for the quarter were adversely impacted by a higher level of catastrophe losses and charges related to the pandemic, both of which Dan will address shortly. Our underlying underwriting income in the quarter was higher than the prior year, benefiting from record first quarter net earned premium of $7.2 billion and an underlying combined ratio which improved to 91.3%, despite $86 million of pre-tax COVID-19-related charges. Our high-quality investment portfolio performed well, generating net investment income of $519 million after tax. Turning to production, we executed successfully on our marketplace strategies and grew net written premiums by 4% to more than $7.3 billion. Given the timing of the pandemic, the impact of COVID-19 on production generally wasn't significant for the quarter. Net written premiums in business insurance increased 1%. Domestic renewal premium change was strong at 7.8%, including renewal rate change of 6.2%. Renewal rate change was up again both sequentially and year over year, while retention remained very strong. In bond and specialty insurance, net written premiums increased by 13%, with strong growth in both our management liability and surety businesses. Renewal premium change in our domestic management liability business was 7.5%, up more than three points over the prior year quarter, while retention remains historically high at 89%. In personal insurance, net written premiums increased by 8%, with agency homeowners up 18% and agency auto up 3%, with both lines benefiting from strong production. Across all three of our segments, we are pleased with our production results, and we will continue to execute to meet our target returns. You'll hear more shortly from Greg, Tom, and Michael about our segment results. I'll close by saying that in this moment of uncertainty, our stakeholders can count on us to continue to operate consistent with our long-term financial strategy, as we have for many years and through other challenging periods of uncertainty. We have the talent, technology, risk management processes and procedures, and importantly, the financial strength to manage through these extraordinary times and to continue to deliver meaningful shareholder value over time. And with that, I'll turn the call over to Dan.