The Travelers Companies, Inc.

Good morning, ladies and gentlemen. Welcome to the third quarter results teleconference for travelers. We ask that you hold all questions until the completion of formal remarks, at which time you will be given instructions for the question and answer session. As a reminder, this conference is being recorded on October 19th, 2022. At this time, I would like to turn the conference over to Ms. Abby Goldstein, Senior Vice President of Investor Relations. Ms. Goldstein, you may begin.

Thank you. Good morning and welcome to Travelers' discussion of our third quarter 2022 results. We released our press release, financial supplement, and webcast presentation earlier this morning. All of these materials can be found on our website at travelers.com under the Investors section. Speaking today will be Alan Schnitzer, Chairman and CEO, Dan Fry, Chief Financial Officer, and our three-segment presidents, Greg Teslowski of Business Insurance, Jeff Clank of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take your questions. Before I turn the call over to Alan, I'd like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward-looking statements. The company cautions investors that any forward-looking 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 statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10Q and 10K filed with the SEC. 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. I'd like to start by acknowledging the devastation and loss of life caused by Hurricanes Ian and Fiona. We're thinking of all those who have been impacted and are supporting the Red Cross's disaster relief efforts. In addition, as always after events like these, we're focused on taking care of our customers. We're on track to meet our objective of resolving 90% of our property claims arising out of the storms within 30 days. My thanks to all our claim colleagues who are working hard to make that happen. Moving to our results, we're pleased to report this morning A solid bottom line for the quarter, particularly in light of the significant industry-wide catastrophe losses. Strong and improved underwriting profitability in our commercial business segments. Progress addressing the environmental headwinds facing the personal insurance industry. A meaningful contribution from net investment income, including positive returns from our alternative investment portfolio, notwithstanding the challenging equity markets. very strong production in all three of our business segments, resulting in strong growth in net written premiums, and another quarter of successful execution on a number of important strategic initiatives. Core income for the quarter was $526 million, or $2.20 per diluted share, generating core return on equity of 7.9%. These results benefited from record net earned premiums of $8.6 billion, up 10% over the prior year quarter, and a solid underlying combined ratio of 92.5%. In the nine months, core return on equity was 10.9%. Given the challenging environmental issues impacting the personal insurance industry, these consolidated results once again demonstrate the benefit of our diversified portfolio of businesses. We're particularly pleased with the continued strong underlying results in our commercial businesses. Looking at the two commercial segments together, The aggregate BI-BSI underlying combined ratio was an excellent 88% for the quarter. As expected, results in personal insurance were impacted by elevated severity in both auto and home. As you'll hear from Michael, we're continuing to make progress addressing the environmental loss cost issues. In terms of catastrophe losses, as I've described before, Strategic efforts we have undertaken in recent years have enabled us to more effectively manage our exposure to catastrophes and more efficiently mobilize our claim response. And while there is always the potential for us to have outsized exposure to an event, those efforts contributed to losses for us from Hurricane Ian that, based on current estimates, are favorable relative to our corresponding market share. That's consistent with our experience over the past five years. Our share of the industry's property cat losses over that period has been meaningfully lower than our corresponding market share. Our capabilities position us well for a trend of increasing frequency and severity of losses from natural catastrophes. Turning to investments, our high-quality investment portfolio generated net investment income of $505 million after tax for the quarter, reflecting higher returns from our fixed income portfolio and positive returns in our non-fixed income portfolio. Our strong operating results over the past few quarters together with our solid balance sheet enabled us to grow adjusted book value per share by 7% over the past year after making important investments in our business and continuing to return excess capital to shareholders. During the quarter, we returned $722 million of excess capital to our shareholders, including $501 million of share repurchases. Turning to the top line, thanks to excellent execution by our colleagues in the field, and the strong franchise value we offer to our customers and distribution partners, we grew net written premiums by 10% this quarter to a record $9.2 billion. In business insurance, net written premiums grew by 9%. Renewal premium change was very strong at a historically high 10.2%, while pure renewal rate change of 5% was higher than in the first half of the year. Retention remained very strong at 86%, and new business increased 9% from the prior year period. Underneath the headline numbers, execution in terms of rate and retention at a segmented level continued to be exceptional. In bond and specialty insurance, net written premiums increased by 8%, driven by excellent production in both our surety and management liability businesses. Surety net written premiums were up 18%. Management liability premiums were up 4%, driven by renewal premium change of 9%, retention that increased to 89%, and 20% growth in new business. In personal insurance, renewal premium change was meaningfully higher, both year over year and sequentially, as we continue to address the environmental headwinds. You'll hear more shortly from Greg, Jeff, and Michael about our segment results. Before I turn the call over to Dan, I'd like to comment on a public policy issue. Hurricane Ian puts a spotlight on the troubled condition of the Florida insurance market. Other states may be headed for similar challenges. As policymakers consider how best to address the availability and affordability of insurance, we would urge them to consider the impacts of the unhealthy tort environment, fraud and abuse by a few that impact too many, and regulatory practices that undermine free market principles. I believe those factors are at least as consequential as the weather itself to the industry's ability to provide our communities with effective and efficient ways to manage risk. We're looking forward to being a participant in constructive conversations about solutions in the days ahead. To sum things up, building on our strong results so far this year, we're confident about our outlook. Our commercial lines businesses are generating terrific results. We're achieving meaningful price increases in personal lines. And our high-quality investment portfolio is poised to generate meaningfully higher levels of fixed income NII going forward. When we combine that and the success we've had with our Perform and Transform call to action, we're very confident in our ability to continue to create shareholder value over time. And with that, I'm pleased to turn the call over to Dan.

Thank you, Alan. Core income for the third quarter was $526 million, and core return on equity was 7.9%. On a year-to-date basis, core ROE is a healthy 10.9%. Our after-tax underlying underwriting gain of $478 million was once again very strong. We generated record earned premium and reported an underlying combined ratio of 92.5%. In both business insurance and bond and specialty, the underlying combined ratios were particularly good and improved from the prior year quarter. While in personal insurance, the underlying combined ratio was elevated. Greg, Jeff, and Michael will provide more detail on each segment's results in a few minutes. The expense ratio for the quarter of 28.1% was our best ever quarterly result, having improved 1.3 points from last year's third quarter. As a reminder, the expense ratio has improved even as we continue to increase our significant investment in strategic initiatives. with the improvement driven by our focus on productivity and efficiency, coupled with strong top line growth. In our earnings call last quarter, we told you that we expected the expense ratio to be around 29% for the full year. And with the year-to-date expense ratio at 28.7%, it looks like we'll do a little better than 29. Our third quarter results include $512 million of pre-tax catastrophe losses, with $326 million related to Hurricane Ian. We hold ourselves accountable for managing our CAT exposures over time, and Ian is another illustration of our industry-leading expertise. As you heard from Alan, based on available industry estimates for Ian, Traveler's share of losses looks to be well below our weighted average market share in the affected states. The investments we've made in talent, technology, and sophisticated peril-by-peril modeling are paying off in terms of risk selection, pricing segmentation, risk mitigation, and our industry-leading claim response capabilities. Regarding CAT losses and reinsurance, on a year-to-date basis through September 30th, we've accumulated $1.4 billion of qualifying losses toward the aggregate retention of $2 billion on our property aggregate catastrophe XOL treaty. A couple of additional comments on reinsurance. Based on what we're hearing from the reinsurance community, it sounds like the market is in for higher pricing and capacity constraints. In terms of primary carriers, that's going to impact some much more than others. For two reasons, we would expect to be less impacted than others. First, as a disciplined gross line underwriter, we just don't buy that much reinsurance compared to many others. Second, we have a long track record of strong underwriting performance, consistently outperforming the industry. The upshot of those factors is that we generally expect to be able to obtain the reinsurance coverage we need at acceptable prices. Also, because we're less reliant on reinsurance, we should be less affected by price increases and capacity constraints. With less of an impact on our cost structure, we should have the option to expand our margin advantage or to reflect that cost advantage in our pricing, making us more competitive for attractive new business opportunities. Turning to prior year reserve development, we had total net favorable development of $20 million pre-tax in the third quarter. In business insurance, net unfavorable PYD of $61 million was driven by a $212 million charge related to our annual asbestos review, largely offset by better than expected loss experience in workers' comp across a number of accident years, as well as favorable development in property. In bond and specialty, net favorable PYD of $63 million was driven by better than expected results in fidelity and surety, as well as the management liability book. Personal insurance had $18 million of net favorable PYD, with modest movements in both auto and home. One additional comment on asbestos. Loss activity and the level of deaths related to mesothelioma did moderate somewhat in the most recent data available for review, but not to the degree we had projected. Nonetheless, the long-term trend is that mesothelioma mortality rates are declining. After-tax net investment income decreased by 22% from the prior year quarter to $505 million. As expected, returns in our non-fixed income portfolio were below last year's excellent results, although we were pleased that the alternative portfolio generated positive income despite the significant downturn in the broader equity markets. Fixed maturity NII was higher than in the prior year quarter, reflecting both the higher level of invested assets and the impact of higher yields. With interest rates having moved higher during the third quarter, we are again raising our outlook for fixed income NII, including earnings from short term securities to approximately $500 million after tax in the fourth quarter and approximately $540 million on average per quarter in 2023. with an estimated $515 million in the first quarter, growing to an estimated $570 million in the fourth quarter. New money rates as of September 30th were about 150 basis points higher than what is embedded in the portfolio, and with rates having moved up again in October, that difference is now around 200 basis points. As it relates to our non-fixed income investments, let me take this opportunity to remind you that results for our private equities Real estate partnerships and hedge funds are generally reported to us on a one-quarter lag. Since our non-fixed income returns tend to directionally follow the broader equity markets, we expect the downturn experienced by the broader market in the third quarter to impact our fourth quarter results. Turning to capital management, operating cash flows for the quarter of $2.5 billion were again very strong. All our capital ratios were at or better than our target levels, and we ended the quarter withholding company liquidity of more than $1.4 billion. Interest rates increased and spreads continued to widen during the quarter, and as a result, our net unrealized investment loss increased from $3.8 billion after tax at June 30th to $6.3 billion after tax at September 30th. As we've discussed in prior quarters, The changes in unrealized investment gains and losses generally do not impact how we manage our investment portfolio. We regularly hold fixed income investments to maturity. The quality of our fixed income portfolio is, as always, very high. And changes in unrealized gains and losses have little impact on the expected cash flow from those investments, our statutory surplus, or regulatory capital requirements. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $111.90 at quarter end, up 2% from year end and up 7% from a year ago. We returned $722 million of capital to our shareholders this quarter, comprising share repurchases of $501 million and dividends of $221 million. We have approximately $2.5 billion of capacity remaining under the most recent share repurchase authorization from our board of directors. To sum it all up, we had another very good quarter in light of the impact from Ian, with strong premium growth in all three segments, terrific underlying underwriting profitability in our commercial businesses, and further improvement to our outlook for fixed income NII. All of that combined with another quarter of progress on important strategic initiatives, has us well positioned to continue to grow at attractive returns. And with that, I'll turn the call over to Greg for a discussion of business insurance.

Thanks, Dan. Business insurance had an excellent quarter, with segment income of $471 million. We're particularly pleased with our exceptional underlying combined ratio, which improved to 90% for the quarter. This result is a testament to our execution and focus on achieving our target returns. The underlying loss ratio increased by about a point as the benefit of earned pricing was more than offset by the comparison to both the low level of property losses and the favorable impact associated with the pandemic in the prior year quarter. The increase in the underlying loss ratio was more than offset by a lower expense ratio that benefited from our ongoing strategic focus on productivity and efficiency. Net written premiums of $4.4 billion were up 9% over the prior year quarter, with growth in all domestic markets and lines of business. Premiums benefited from strong renewal premium change and retention, both of which were once again historically high, as well as higher levels of new business. Turning to domestic production for the quarter, renewal premium change of 10.2% was once again exceptionally strong. RPC included renewal rate change of 5%, a tick up from the second quarter, and strong exposure growth. Retention remained very strong at 86%, and new business premium was more than $500 million, up 9% over the prior year. We're pleased with these strong production results and the excellent execution by our colleagues in the field. Given our high-quality book, as well as several years of segmented rate increases and improvements in terms and conditions, we're thrilled to continue to produce historically strong retention levels. The rate gains we achieved in the quarter reflect our deliberate execution, which balanced the persistent headwinds and, uncertainly in the current environment, with the improvement in profitability across our portfolio after several years of strong pricing. As always, we'll continue to execute our granular pricing, careful management of deductibles, attachment points, limits, sublimits, and exclusions to maintain profitable growth. As for the individual businesses, in select, renewal premium change remains healthy at 10.6%, while retention of 83% was up two points from the prior year quarter. New business was up 8% from the prior year quarter, driven by the continued success of our BOP 2.0 product. In middle market, renewal premium change remained very strong at over 9%, while retention was higher year over year and sequentially at an excellent 89%. New business premium of $271 million was up 5% over the prior year. To sum up, business insurance had another terrific quarter. We're pleased with our execution in driving strong financial results while continuing to invest in the business for long-term profitable growth. With that, I'll turn the call over to Jeff.

Thanks, Greg. Bond & Specialty had an outstanding quarter on both the top and bottom lines. Segment income was $242 million, up 39% from the prior year quarter, driven by record underlying underwriting income and a higher level of net favorable prior year reserve development. The underlying combined ratio was a terrific 78.4%, an improvement of five points from the prior year quarter, reflecting both the benefit of earned pricing and about a two-point impact from the favorable re-estimation of losses for the first two quarters of 2022. Turning to the top line, net written premiums grew 8% in the quarter to a record high with contributions from all our businesses. Domestic surety grew an outstanding 18% in the quarter, driven by larger average bond premiums. In domestic management liability, renewal premium change remained strong at 9%, while we improved retention by a point to a terrific 89%. We're also pleased that we increased new business 20% from the prior year quarter as we leverage the investments we've made and continue to make in our competitive advantages to grow these profitable businesses. So both top and bottom line results for Bond and Specialty were again terrific this quarter, reflecting continued excellent execution across our business and the value of our market leading products and services to our customers and distribution partners. And now I'll turn the call over to Michael.

Thanks Jeff, and good morning everyone. For the third quarter, personal insurance reported a combined ratio of 107.2%, up approximately 2.5 points compared to the prior year quarter, primarily driven by a higher underlying combined ratio. The four-point increase in the underlying combined ratio reflects the continuing environmental challenge of elevated loss severity in both automobile and homeowners. The loss impacts were partially offset by a two-point reduction in the expense ratio. For the quarter, catastrophe losses were $285 million and included losses from Hurricane Ian, most of which are Florida automobile losses. Catastrophes were two points lower than the prior year quarter, which included Hurricane Ida. Net written premiums for the quarter grew 13%, primarily driven by very strong price increases in both domestic automobile and homeowners and other. In automobile, the third quarter combined ratio was 112.2%, including nearly eight points of catastrophe losses. The underlying combined ratio was 103.9%, an increase of 6.9 points relative to the prior year quarter. The increase reflects another quarter of elevated vehicle replacement and repair costs and, to a lesser extent, the continued return toward pre-pandemic driving and claim frequency levels. Our primary response to these environmental challenges is higher pricing. We are pleased with our progress this quarter, building on our actions to increase rates over the past few quarters. While pricing continues to gain momentum, it will still take some time for rate actions to fully earn into our results. In homeowners and other, the third quarter combined ratio went up 102.3%, an improvement relative to the third quarter of 2021, as catastrophe losses in property were lower. The underlying combined ratio of 94.9% increased about a point and a half from the prior year quarter. We continued to experience higher loss severity related to a combination of labor and material price increases in the quarter, but that loss pressure was largely offset by the current quarter benefit of earned pricing, lower non-catastrophe weather losses, and a lower expense ratio. Turning to quarterly production, we continue to make excellent progress in achieving pricing increases. I'll discuss homeowners and other production first this morning before spending a bit more time on automobile. For domestic homeowners and other, renewal premium change increased to 14.1% and retention decreased slightly to 83%, both consistent with our expectations. We expect renewal premium change to continue at these levels for the remainder of 2022. Looking ahead to 2023, we expect renewal premium change to increase above these already very strong levels as we implement additional insured value increases. For domestic automobile, renewal premium change increased to 8.1%, while retention was 83%, also consistent with our expectations. During the quarter, we implemented price increases in 26 states at an average of about 8.5%. We expect that domestic automobile renewal premium change will get into double digits in the fourth quarter and be in the mid-teens throughout 2023. Written pricing should reach adequacy in most states representing the majority of our business between now and mid 2023, and that pricing will earn into our results over time. In addition to increased pricing, we're also implementing additional non-rate actions, including further tightening underwriting criteria, restricting binding authority for certain agents in certain states, and removing our auto product from comparative raters in California and Florida. These actions will help us manage growth and improve profitability. Personal insurance has a strong track record of financial performance, demonstrated by our over 40% net written premium growth and 97% combined ratio for the five-year period from 2017 to 2021. While we and the industry continue to face near-term environmental headwinds, we remain confident in our ability to deliver attractive returns over time while continuing to build the business for the future. Now I'll turn the call back over to Abby.

Thank you, and we are ready to open up for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Greg Peters from Raymond James. Yours open.

Good morning, everyone. Thanks for taking my questions. I guess I'm going to start out with the expense ratio improvement. Dan, you talked about it being a combination of top line productivity and efficiency, and now the target is a little bit below 29 for the year. Maybe you could give us a breakdown of where the improvements are coming from. And more importantly, it seems like the trend of improvement should continue beyond just this year. Maybe you can comment a little bit on that.

Sure, Greg. You know, it's pretty broad-based, and it's sort of the continuation of the theme that we've seen really now for the past three or four or even five years of making important investments in strategic initiatives at the same time we focus on productivity and efficiency and grow the top line in all three segments. So what you see is just a consistent pattern of expense increases at a rate that's well below the rate that we're growing the top line. In terms of whether we expect that continue or providing outlook going forward, we'd said probably a year and a half ago or so that we'd gotten down to 30 and we were pretty comfortable at that level. Then we said we got down to 29 and we were going to be pretty comfortable at that level. You know, at 28.7 on a year-to-date basis, I'd still put that in the around 29 bucket. You know, as Alan's talked about many times, what we like about our focus on productivity and efficiency and expenses is it gives us optionality. We can continue to make important investments, which we will. We could let it drop to the bottom line. We could reflect it in more competitive pricing, and there's no reason for us, and we're not going to declare at this point what we think that's going to look like next year or year or two out. So suffice it to say that in the 29 neighborhood is a number that we're still pretty comfortable with. And 28.7 through the first nine months feels really good.

Thanks for the answer. I guess the second question will be just on reinsurance. And I know you're pretty upfront in your record of being a gross line underwriter stands by itself. So I guess when I think about the treaties you do have in place, like the aggregate XOL treaty and whatever excess loss property cover you have in place, you mentioned that pricing is probably going to change for the market next year. What are you hearing about how those particular programs for the travelers might evolve. And I guess what I'm getting at is, should we expect increased retentions for the travelers in 23 and 24 as a result?

I think, Greg, too early to say. We'll talk about the 1-1 renewals when we know how things turned out, which we'll do probably in the fourth quarter call. I think the point of the comments today were really to just reinforce for folks that, one, we're not a big user of reinsurance, especially relative to some other parts of the market. And two, our track record and our long tenure with a lot of our trading partners has us pretty confident that we're going to be able to place what we want to place at appropriate prices. You know, the CAD aggregate XOL treaty specifically, you know, we've said, I think we've said every year we had it. we'd either buy it or not, depending on what we thought the pricing level was relative to our own appetite. And you've seen us place anywhere from 55% of that treaty to 85% of that treaty, depending on the pricing environment. And if there's a year where we decide to not place any of it, we'll be perfectly fine with that. But That's a decision we'll make as we go through the renewal process.

Great, Alan. I would just add to that, to Dan's point, whether retentions go up or they don't go up, who knows. But I think the important point is, given the strategic way we think about reinsurance and given the strength of our underwriting, we're going to have the flexibility to make the right decision for our business.

Makes sense. Thanks, Alan. Thank you.

Your next question comes from the line of Elise Greenspan from Wells Fargo. Your line is open.

Hi, thanks. Good morning. My first question, so Hurricane Ian, right, seems like it's going to be a pretty large event. I know you guys talked about below market share, but no insured losses, probably $50 to $60 billion, which I think really has the impact to move pricing. So I was hoping to get your view there, Alan, and then If you can tie that back, you guys did make a comment about, right, being a little less reliant on what's happening in the reinsurance market so you can be more competitive on the pricing front. So how do you think price plays out, you know, given this large event and the reinsurance dynamic as well?

Good morning, Elise, and thank you. You know, just to start with basics, pricing is a function of rate adequacy. And given, you know, what we all expect to happen to reinsurance, there's going to be a rate need. On top of that, you know, certainly as it relates to property, there's going to be capacity constraints that will be significant, I suspect, across the market. And I think on top of those things, which are probably largely quantifiable, it was just a big storm, maybe rivaling Katrina. And that's just going to impact the way that the market thinks about risk. So we would expect that constellation of factors to put certainly upward pressure on property pricing and potentially extend into other aspects of the market as well. We'll see. But certainly as it relates to property, we would expect there to be upward pressure on pricing.

Thanks. And then my second question, you guys called out the impact of the favorable accident year adjustment within management liability. Could you give us more details on what drove that, the specific lines, and was that better frequency or severity driven?

Yeah, Lisa, it's Dan. I don't think we're going to parse it out finer than that. We have a loss pick at the start of the year. We'll look at it as we get to the midpoint of the year and then each of the back couple of quarters of the year. The short answer is things have just come in a little better than we would have expected based on the plan. And so that's what we're reflecting in this quarter's results.

Thank you. Thanks, Liz.

Your next question comes from the line of Ryan Tunis from Autonomous Research. Your line is open.

Hey, thanks. Just a couple from me. So, Dan, you were talking about the NII guidance and how rates have moved since 930. Is that guide trued up for where we are today in terms of rates, or is that just as of where new money was in 930?

You're getting a little fine there, Ryan, in terms of whether we're going to change it every two weeks. We've seen rates move up and down a little bit. It's been fairly volatile in the last 30 days. I would say, generally speaking... It's reflective of the current environment, and I wouldn't put a specific date on it.

Okay. And then the cat number in auto was higher than we've seen. How much of that 133 million auto cats is from Ian? And I guess I'm just curious – How certain is that estimate at this point? Is that pretty much a ground-up loss? Or is a lot of that IBNR kind of based off of like an industry view? Does that make sense?

Sure. So it's Dan. I'll start, and Michael can chime in if you want. I think we feel pretty good about that number. You know, we watched it very closely and very carefully, as you would imagine. given the unfortunate timing, not only the unfortunate event itself, but the unfortunate timing for those of us who are accountants and actuaries trying to come up with an estimate at the end of the quarter. But we watched it all the way through the first week of October, made our best estimate. At this point, a lot of it's unpaid. We look at the data, the way it continued to develop all the way through, frankly, the time we were getting ready to push the button on reporting earnings, and what came in was pretty... consistent with what we'd expected before. But to be clear, we're doing it based on what we think our exposure is in the footprint of the event and the way claims have actually come in, you know, in a couple of weeks since then. It's not the blunt instrument of just taking an industry estimate and our expected market share.

Yeah, and Ryan, it's Michael. I would just add I would just add part of the question might be the number relative to some of the external estimates that have been floating around for auto. Frankly, given our footprint inside Florida, we weren't surprised. Strategically, We, for a while, have been avoiding southern Florida, so that means you're going to push your market share to a higher level than your statewide average in the places that you're still writing. So in the context of that and our local market share and our strategy in Florida, the number is not surprising.

Your next question comes from the line of David Motomaden from Evercore ISI. Your line is open.

Hi, thanks. Good morning. I wanted to focus on the business insurance underlying loss ratio, and there was definitely some noise in last year's quarter. So it's just wondering if you could clarify, if we look at the underlying loss ratio in business insurance, how much of a benefit earned pricing was during the quarter and then maybe just talk about your view of that going forward. I know, Alan, you mentioned some uncertainty in the environment. So maybe just some high-level comments around that as well.

Sure, David. It's Dan. I'll start. So, you know, as Greg gave you in his script, you know, last year there was some good news from non-CAT property losses and a little bit of what we felt was favorable impact related to the COVID environment. So we don't have that in this year. We do have some benefit of price versus trend. As you've seen over the last year or so, in rate number come down, that number's trended down. It's now something less than a point. We're not really going to put an outlook projection on it, but you can see what rates done and exposure have done in the last few quarters, and that's been pretty steady. The only other comment I'd make related to that is While there was noise in last year's quarter, we don't think there's a lot of noise in this year's quarter. So that's why Greg didn't really call anything out as unusual in terms of what's in this year's underlying loss ratio.

Got it.

Thanks. And then maybe if you could just talk about... alan and maybe maybe greg just talk about how your view of the rate environment in bi has changed over the last three months and i know you guys don't typically do this but i'm wondering um if you could just give some color around rate movement by by line sort of high level i know alan you just spoke about on the property side um but maybe just wondering some of the other lines and sort of how you're thinking about that going forward do you think we continue to see an acceleration here

David, let me start, and then I'll look to Greg to add anything you'd like to add. I would describe the pricing environment as strong. Overall commercial pricing is near record levels. The breadth of the pricing gains are very good. We always look at retention to give us a sign on the strength of pricing. Retention really hasn't budged. It's hanging in there at very high numbers. The strong pricing led by property, auto, umbrella, primary GL, so you know, it's broad-based and at overall pricing levels that we would say are near records. You know, you heard me say that from here we would expect there to be some upward pressure on pricing and property. You know, at the other end of the spectrum, you know, you've got workers' comp where we'd expect, you know, more of the same. And the other lines will fall in between those two, reflecting, you know, the two factors that Greg mentioned. On the one hand, We continue to have headwinds from inflation and supply chain disruption and weather, social inflation, reinsurance, et cetera. And on the other hand, we've had pretty good pricing for a number of years that has improved the overall returns of the portfolio. So I would say those other lines in between will reflect the balance of those two dynamics.

Got it. Thank you.

Thank you.

Your next question comes from the line of Mike Zaremski from BMO. Your line is open.

Hey, great. Good morning. First question regarding capital management. If I look at kind of year-to-date dividend and repurchases, it looks like you've given back kind of 100%-ish of operating income despite very strong top-line growth. I feel like I recall... maybe it was a year ago or more, you talked about kind of making us kind of take into account that, you know, you needed to support that strong top line growth, which has continued to accelerate. So any thoughts there on whether you can continue to buy back at such a high ratio?

Mike, it's Dan. Thank you very much for listening to me two years ago. Appreciate it. That's still the theme, I think, that, you know, that we'll follow here. We're going to be We're going to be very strongly capitalized. Nonetheless, you know, the business does continue to generate excess capital. We'll look to deploy that excess capital if we can in a way that generates attractive returns. And when we think we've exhausted all those opportunities, we're going to do what we've done for the last 15 years and continue to give it back to shareholders. It is hard to look at, you know, any one year or in this case, you know, less than a year and do the ratio of, you know, buybacks and dividends relative to core income and draw a conclusion. We have said historically, and I would repeat here, it will not and cannot be 100% going forward. We are going to need to hold on to some capital to support the business growth. What we've done this year is partly a function of where we ended 2021. with really strong performance, especially in the third and fourth quarters of 2021 that put us in the position that we started the year with, probably a very robust capital position.

Okay. That's helpful. My last question is kind of back to David's question and your remarks on just the overall kind of competitive environment. How does Travelers think about the dynamic of meaningfully improved new money rates on investment income i mean does does does that kind of allow you to travelers or you do you feel like maybe the industry to allow to kind of let off the gas on on pricing or is it just kind of rates have been so volatile over the last many including today that you know it's tough to kind of bake in um the expectation that that rates stay stay so high say at current levels any thoughts there thanks

Sure. So the rate levels do impact our view of the outlook for net investment income, which you hear from Dan. And there is some judgment involved in how much of that we put into our pricing model. But there's two things you've got to keep in mind in terms of the impact of interest rates on pricing. One is that earns in over time into the investment portfolio because you've got such a small portion of it turning over in any one year. And two, while we've got mid-teens return on equity objective over time, when we think about the near term, it's really we think about it as a margin over the risk-free rate. And so as those interest rates go up, certainly as a function of the risk-free rate, we're also increasing our return objectives. And so it's just not as simple as looking at it saying, gee, investment income is going up, pricing is coming down, it's a little bit more of a complicated assessment. And I would say the takeaway is, you know, certainly in the short term, you know, we wouldn't expect a very significant impact.

Thank you.

Your next question comes from the line of Brian Meredith from UBS. Your line is open.

Yeah, thanks. A couple of them here first. Michael, I'm just curious, in your comments you talked about It sounds like reducing kind of your appetite on the personal auto line of business by getting off of some comparative raters, et cetera, et cetera. Is that kind of where you're alluding to? Because I look at your PIF growth continued to grow in personal auto. Should that kind of, you think, reverse trend here as you really focus on getting profitability back in that area, that line?

Sure, Brian. Thanks for the question. I think what I would say is, again, we're really focused on improving profitability in We're working to manage growth as we do that. That said, in the majority of jurisdictions, we have a pretty good line of sight to rate adequacy. And so in those jurisdictions, while we're renewing accounts and writing new business, for the most part, we're comfortable with what's going on. The couple jurisdictions that I did spike out are a little bit challenging in that regard. You know, in Florida, there's currently a moratorium on file and use for price increases, which is a change in their regulatory approach to rate filings. And in California, the Department of Insurance is still not considering auto rate increases. And so in those two states in particular, that really was what drove our decision to come off the comparative raters. Other than that, most of those actions are things that we do in the normal course that we're – being a bit more aggressive on in places where profitability is challenged. But again, in most jurisdictions, we're comfortable. We're either getting or going to get the rate we think we need and focused on that and letting the growth come through. So that's really what I was trying to reflect there, if that makes sense.

Gotcha. Yeah, that makes sense. And then, Alan, a bigger picture question. I may have asked this before, but just maybe remind us. Travel is obviously a phenomenal standard commercial lines carrier. But just looking at what happened with Hurricane Ian and the complexities of risk that continue to emerge, give us your thoughts on whether travelers need to be more active or in the excess and surplus lines market if there's opportunities for you all there to maybe grow or do something.

Yeah, thanks for that, Brian. So two different questions. Do we need to be? No, I think we've got, you know, all the tools in the toolkit to be successful. So there's something we need to do there. Is it an opportunity? Sure, it could be. And I would just start by saying we already have meaningful ENS capabilities. So we've got our Northfield business. We've got a Lloyd's franchise. We've got ENS capabilities in our core business. We probably write a quarter of our national property business on ENS paper. You know, we're doing a lot in our management liability business through ENS. So we've got a lot of ENS capability and the ability to be creative inside many of our admitted products too. And so we've got a lot of flexibility to do what we want to do. So, you know, often if we lose an opportunity to the ENS market, it's often because we don't like the risk-reward equation, not because we can't do it. Having said that, over time, could there be opportunities for us to strategically expand in E&S? Sure, there could be. It's not anything that we feel like we can't be successful in creating shorter value. We've got a terrific business model, and we're very comfortable with it. But sure, there could be more opportunities.

Thanks. Thank you.

Your next question comes from the line of Josh Shanker from Bank of America. Your line is open.

Yeah, changing gears a little bit, maybe a question for David and Daniel. Is there any thoughts about crystallizing some investment losses for an opportunity of redeploying the capital at a higher yield? Is there any penalty for doing that? How do you think about redeployment prematurely selling a bond at this point in time?

Josh, it's Dan. I'll start, and I think Dave Rowland is on the line, and Dave can jump in as well. Other than really selectively selling individual securities that we think are at a position where it would make sense to sell them and we could redeploy the money in a new preferable instrument, that's not really been part of our strategy. We're taking a long-term view of how we manage a very high-quality asset portfolio. Again, the unrealized losses It doesn't cause us any concern. If we think there was significant economic value available, that's where you're going to see us make some trades. But for us, that's a very small percentage of the portfolio. I would simply say don't expect to see us make a wholesale turnover of the portfolio to realize a bunch of losses and then take higher yields on the money going forward. I think economically that's sort of a wash. and we're looking at what's best for the company from an economic perspective.

All right. And another easy question. Historically, you guys have done a wonderful job of being fairly conservative about your catastrophe picks early on, and they've generally matured favorably as time has gone on. When you have prior year favorable reserve development on a catastrophe pick, Does that show up in your P&L as a negative CAT or as prior year development?

It shows as prior year reserve development.

Okay. That's it. Thank you very much. Thanks, Josh.

Thanks, Josh.

Your next question comes from the line of Mayor Shields from KBW. Your line is open.

Great, thanks. Good morning. First question, I think, is for Michael, where you've talked about states where you're either at adequacy or you have line of sight. When you talk about anticipating double-digit premium increases in 2023, and we combine that with the policy-enforced growth that we've seen so far this year, can we infer that you'll underwrite business that's not adequately priced now if there is line of sight to adequate pricing?

Yeah, thanks, Mayor. Good question.

I mean, I think the way I would just describe it, let me parse it out, right? So you're looking at RPC numbers in the production highlights that reflect the written impact of the rate that we've taken on the renewal book as the policies renew. And so the first point I'd make is when you're looking at those numbers, they're a bit of a lagging indicator of the price that we've actually gotten filed and approved with the departments of insurance. And so when I describe the outlook that says that we believe we're going to be adequate in most states that reflect the majority of our business by mid-year next year, I'm talking about that written price level at the point in time we get that rate approval. And again, what I would say is if we're confident that we're going to get the rates to where we want them to be, then yes, we'll renew business in the ordinary course and we'll continue to be open for new business. Again, in most jurisdictions where we have that confidence. And by the way, in most jurisdictions, that next rate increase is a single digit number. So it's not that we're talking about a significant number of places where we're double-digit rate away from adequacy. In fact, the 8.5% increase in the 26 states, that average increase across 26 states that I talked about this quarter, most of those states are additional increases on top of increases we've already gotten. So hopefully that gives you a little bit of a flavor for both our philosophy, but also in places where we aren't necessarily adequate, sort of how far away we think we are.

No, that was very thorough, very helpful. Thank you. And then question for Alan. I know it's early in the process of Florida getting its act together. Is there any receptivity to having the legislative reforms that you've talked about?

Receptivity in the state of Florida? Yeah, among the legislature.

I'm probably not the right person to speak on behalf of the Florida legislature. You know, I do think that there's, you know, recognition that there's an issue there. And, you know, in recent months, they have made some progress. I think probably not enough. But I suspect they're getting to a point where something's got to give. But I certainly shouldn't speak on behalf of them.

Okay, no, it's asking from your perspective, but I understand. Thank you. The answer is I hope so. Okay, I share that. Thanks, Matt.

Your next question comes from a line of Tracy Bengigi from Barclays. Your line is open.

Thank you. Good morning. Dan, following up on your comments about reinsurance pricing and capacity constraints, so on a student perspective, when you were choosing reinsurance partners, I assume you're looking at balance sheet strengths. In doing so, are you excluding unrealized losses on investments or are you looking through that as you determine who participates on your panel and also to determine their related participation?

I would say, Tracy, we're looking at the long-term economic viability of our trading partners and the likelihood and confidence that we're going to get collected. So to the degree that if someone else is in an unrealized loss position for a similar reason that we're in an unrealized loss position, meaning it is not credit driven, it is not investment portfolio quality driven, it is nothing other than a function of the change in interest rates, which will definitively will reverse itself over time, then from an economic value perspective, I think for the most part, we're going to look through that. Very helpful.

You know, when I first heard of your objective of closing 90% of your property claims within 30 days, I was thinking, gee, that could really contain loss creep. But is there anything on the litigation side or regulatory side in Florida, given, Alan, your public policy announcement, that could impede your ability to meet that objective as it relates to Ian specifically?

I think right now, Tracy, we feel pretty good about our ability to get to that level. And, in fact, we've had that objective in place for several years, and we're routinely successful in meeting that objective. And there's always litigation of one sort or another. So I would expect that we'll get there. We're not there yet, so who knows, but I would expect we'll get there.

Thank you. Thank you.

Your next question comes from a line of Paul Newsome from Piper Sandler. Your line is open.

Good morning. Thanks for taking my call, my questions. I guess a little color on the bonded specialty outlook would be wonderful. Is there any reason why either business mix change or anything that's changing that business that the underwriting performance shouldn't somewhat track sort of economic and credit quality. I think of that as a credit business, but maybe things have changed.

Yeah, this is Jeff.

Paul, thanks for the question. We don't give a lot of outlook relative to the bond and specialty business, but I would reemphasize what you said. It is a credit business. We feel really good about the underlying profitability of both the surety and the management liability components of that business. and we continue to invest for growth. So I'd probably leave it at that, and thanks for the question.

I guess, Paul, the other thing I would add is you could go back to the 2008 financial crisis. You could go back to the pandemic. I mean, this portfolio has been challenged in other difficult credit environments, and it's performed extraordinarily well. And it's the same underwriting philosophy. It's the same tools. It's the same, you know, et cetera. And so, you know, we don't look at this, you know, if you're thinking – We could be in for bumpy economic times ahead. We agree with that, but we're confident in this business and the way we manage it.

I agree. It's an extraordinary track record. I'm just wondering, any profitability that is unique even for what travelers have seen in the past. So I'm not actually suggesting that it could be a horrible quarter. I'm just thinking whether or not the current sustained extraordinary profitability is sustainable. But the second question, I wanted to ask about the just cat exposures in general. I was kind of looking back over many years and it looks like there was, it looks like there might have been a reduction in kind of your general view of exposures of cats and what you want to take on relative to your business in total. But there's been so much noise in the last three years that it's hard to tell if that's really the case. And obviously, we have to have sort of an expectation of a normalized cat load. But are you essentially not changing this stuff, your sort of appetite for cat exposure? And I really want to talk not just next quarter, but over years. Has the appetite changed at all for the travelers?

Not really, Paul. You know, when we think about our, I mean, we write plenty of cat exposed business, and there hasn't been a really significant overall portfolio level shift. I mean, certainly, you know, we found some geographies more attractive than others, and we've moved capital around from that perspective. But we haven't, in a meaningful wholesale way, withdrawn from cat exposure, nor do we feel the need to do that going forward. We've been, I think, going back probably five years, taking a very thoughtful approach to taking a step back, and we've put dedicated teams in place for every peril, and our objective was to be the leader in understanding the science behind that peril and the underwriting around that peril, and also to develop extraordinarily claim-handling capabilities for those events. And I think that's really what's paid off for us. I don't think it's been a meaningful withdrawal from the exposure.

Great. Thanks, guys. Congrats on the quarter.

Thanks, Paul.

Your next question comes from a line of Michael Phillips from Morgan Stanley. Your line is open.

Thanks. Good morning. Thanks for fitting in. So I guess this question, given all the comments that Dan made in the opening comments about PropertyCat and reinsurance pricing, maybe answers here would be more of an industry level, what you think the industry does. But if you want to put in what you do, that's fine too. But theoretically, if we're paying more for PropertyCat reinsurance, will that translate into us charging more for our BI casualty business? Is it no because, you know, look, there's separate businesses, and yes, it's cost of doing business, or is there kind of some threshold that maybe we kind of – that spills over into our casualty primary book that we'll probably charge there? I mean, again, I know you downplayed the impact on property category insurance for you guys, but maybe your own views there or what you think the industry might do there.

I'm looking at Greg. I do think, you know, that every – every product and exposure sort of stands on its own. But at the same time, I think there's an overall psyche in the market and a reaction to the overall level of risk that we perceive in the marketplace. And so, you know, is there some of that that carries over? And, you know, to what extent that, you know, the reinsurance pricing carries over, you know, we'll find out. But, you know, it may be that that's a contributor to casualty pricing, moving up a little bit. But I think on the whole, I would expect these lines to stand on their own, Greg.

Yeah, I think that's the case also, Alan. And that really will be reinsurer by reinsurer if they think about account pricing or individual line. But to Alan's point, I think most are so disciplined, they're going to be looking at the line. And just as a reminder, casualty has its own headwinds with social inflation. And the reinsurers certainly have been addressing some of that incremental risk as we have on the growth side also. That's a good point, Greg.

Okay. Yep. Thanks. That makes sense. And second, I guess there's been so much talk, obviously, on the headlines from personal auto. But I guess, could you say what you're seeing on the commercial side for auto in terms of just lost trends there and kind of where rate adequacy is today?

Yeah, sure. Michael, we're making good progress overall on the auto. And in terms of your question relative to personal auto, we're certainly not immune from some of the severity challenges Michael and his team are experiencing. And you can think of two cohorts of vehicles on commercial, private passenger-like vehicles, think light trucks, vans, and that sort, and then you have the heavy vehicles. And so we're seeing a little more of that severity pressure on that first cohort that has some of the same supply and demand dynamics that Michael's feeling. But we're continuing to make good progress on pricing and underwriting, and as I shared at the beginning, recent investor day, we're bringing out a new auto product that we think is going to be really segmented and help us with our prospects even more.

Okay, great. Thank you.

Your next question comes from a line of Alex Scott from Goldman Sachs. Your line is open.

Hey, thanks for putting me in here. First one I had for you is just a high-level question on lost costs. And I was just interested in your updated views on what we're seeing in CPI inflation and how that translates to actual insurance claims inflation for the business insurance business. And just as that's evolving, things like medical cost inflation, not running away from this or something, but beginning to take up a little more You know, are you having to evolve your view of those things in a bigger way, or do you still view that as, you know, CPI prints getting worse, you know, not really fully translating to insurance claims costs?

Yeah, Alex, we are always evaluating that, you know, practically on a daily basis. And we did increase our severity trend assumptions back in the first quarter. And when we did that, we did that with a degree of caution, knowing that there was a fair amount of uncertainty out there. And what we've seen subsequent to that in the second quarter and again this quarter was consistent with those expectations. So it's not that we're not seeing or feeling that severity coming through. We are, but it's within the expectations that we established back in the first quarter. Now, as it relates to medical inflation, you can't really focus on the medical CPI because workers' comp is different, right? We're treating workplace injuries. We're not treating chronic diseases. So the components of medical inflation that impact workers' comp are probably inflating at a lower rate than the overall medical CPI. And my comment on overall workers' comp loss trend is that it continues to be benign.

Got it. That's helpful. And the follow-up question I had is on the unit exposure increases. You know, I'd imagine that the sort of real unit exposure increases the economy's strength and maybe help you a little more than, you know, just the insured value and inflation sort of impact. You know, as I think through price, you know, rate acting or the unit exposure acting is rate. I mean, can you help me think, as we approach periods of time where you're lapping pretty strong economic growth, I mean, do the benefits that you get from unit exposure increases begin to erode? And is that still far enough out in the future that it's not a concern for now as we head into next year? Is that something we need to think harder about as we get to sort of 1Q, 2Q next year?

So I'm not sure that I exactly get the question, Alex, but I'll make a few comments. And if I don't get to the answer that you're looking for, let me know. But, you know, as we shared many times over more than a decade, exposure growth does contribute to margins. And there's two types of exposure growth. There's true unit growth, and then there's inflation. And in particular, the inflation side of exposure is a more meaningful contributor to margin than true unit growth because that unit growth does come with some risk content. I do think the unit growth also contributes to margins, by the way, but not at the same level that inflation does. And so to the extent that continues to come in and we'll see what happens with the economy and we'll see what happens to exposure over time, But to the extent that does come in, it will continue to contribute to margins. Is that helpful?

Yeah, that does clarify it. Thank you for entertaining the question. Appreciate it. Thank you.

And your final question comes from a line of Michael Ward from Citi. Your line is open.

Hey, guys. Thanks. Just last one on workers' comp. Growth tailed off a bit in 3Q. Just wondering if there was anything to read into there from a macro perspective. And I guess wondering along those lines, to what extent did, would you say, mix contributed to your rate acceleration in 3Q? Thanks.

Michael Gregg, yeah, there wasn't really any material change in workers' comp for this quarter across business insurances. As Alan said, it has continued to be the laggard in terms of pricing, but again, driven based on industry and certainly travelers' profitability of that line. So no real material change there. Obviously, we're getting some strong exposure growth, and that's why you're getting an overall lift in written premium there. So nothing to look into other than where the run rate has been.

And on your last question, the overall mix was not a contributor in any meaningful way to the overall rate number. It was broad-based.

Thank you, guys. Thank you.

And this brings us to the end of our question and answer session. I will now turn the call back over to Abby Goldstein for some final closing remarks.

Thank you all very much. We appreciate your time this morning. And as always, if there's any follow-up, please reach out directly to Investor Relations. Have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.