The Travelers Companies, Inc.

The conference is now in presentation mode. Your line is muted.

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 January 24th, 2023. 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 fourth 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 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 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. We're pleased to report this morning a solid bottom line for the quarter. Exceptional results in our commercial businesses with higher full-year core income and another quarter of attractive margins and strong growth. Continued progress addressing the industry-wide loss pressures impacting the personal insurance business. Very strong production in all three of our business segments, resulting in consolidated net written premium growth of 10% for the quarter. and another quarter of successful execution on a number of important strategic initiatives. Core income for the quarter was $810 million, or $3.40 per diluted share, generating core return on equity of 12.3%. These results include $362 million of after-tax catastrophe losses. Core income benefited from record net earned premiums of $8.8 billion, up 10% compared to the prior year period. Our solid underlying combined ratio of 91.4% reflects very strong performance in both of our commercial segments. Looking at the two commercial segments together, the aggregate BI-BSI underlying combined ratio was an excellent 88.3% for the quarter. You'll hear from Michael shortly about the progress we're making in personal insurance and the roadmap to improve profitability. For the full year, core income of $3 billion, or $12.42 per diluted share, benefited from higher core income in our commercial segments. That was driven by record net earned premiums and strong profitability, including our best ever underlying combined ratio in business insurance. Our underwriting and investment results, together with our strong balance sheet, enabled us to return nearly $3 billion of excess capital to shareholders, including more than $2 billion of share repurchases. At the same time, we grew adjusted book value per share and made important investments in our business. Turning to the top line, thanks once again 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 $8.8 billion, with all three segments contributing. In business insurance, net written premiums grew by 11% to $4.4 billion. Renewal premium change remained very strong at an historically high 10.1%. In the property line, which has received a lot of attention post-Ian, renewal premium change accelerated month by month in the quarter. Even with continued strong pricing across the board, retention in BI reached a record high 88%. As you've heard us say before, strong retention is a sign of a stable and rational pricing environment. New business in the segment of $558 million increased 10% from the prior year period. Given the attractive returns in the segment, we're pleased with the very strong retention of our high-quality book of business and the strong level of new business. In bond and specialty insurance, net written premiums increased by 5% on a constant currency basis, driven by excellent production in our market-leading surety business, where net written premiums were up 18%. Production was also strong in our management liability business, with renewal premium change of 6.3%, retention of 90%, and new business up 23% from a year ago. In personal insurance, top-line growth was driven by higher pricing. Renewal premium change was meaningfully higher both year-over-year and sequentially as we continued to address the industry-wide loss pressure. no premium change alone contributed more than a billion dollars of written premium to our portfolio over the past year with another quarter of impressive production in each of our segments we feel very well positioned for the new year you'll hear more shortly from greg jeff and michael about our segment results our 2022 results cap off a decade of strong and consistent performance we posted the double digit return on equity in every year over the last decade with the exception of 2017, a difficult cat year for the industry in which we posted a 9% ROE. In every one of those years, we comfortably covered our cost of equity. And over the last six years, we have significantly increased our rate of top-line growth. We've accomplished all of this with industry-low volatility. Successfully investing in differentiating capabilities has been a significant focus for us and an important contributor to our success. As you can see on slide 24, over the past five years, we have meaningfully increased our overall technology spend. At the same time, through our strategic focus on productivity and efficiency, we have significantly reduced our expense ratio. In addition, we have improved the mix of our technology spend, increasing our spending on strategic initiatives by nearly 70% while holding routine but necessary expenditures about flat. The consistency of our results also benefits from the diversification of our business across our three segments. If we look back at the combined ratio over the last 10 years, in five of those years, personal insurance outperformed business insurance. In the other five years, business insurance outperformed personal insurance. And our bond and specialty business delivered spectacular results in every one of those years. The depth and breadth of our diversified businesses is a key advantage. and would be very difficult to replicate. Speaking of our business profile, given the economic instability and geopolitical risk around the world, we feel very good about our concentration in North America, the largest, most advanced, and most stable economy in the world, where we have the pole position and plenty of room to grow. With uncertain economic conditions ahead, I'll also note we have a strong track record of performance through a variety of challenging environments over many years. We've got the experience, the know-how, and the capabilities, along with an efficient operating model and a rock-solid balance sheet to manage through whatever comes our way. To sum things up, I'm grateful to my more than 30,000 colleagues for all they've accomplished this year and over time. Given our strong foundation, our track record of successful innovation, and our ambitious roadmap, we are very confident in the outlook for travelers. With that, I'm pleased to turn the call over to Dan.

Thank you, Alan. Core income for the fourth quarter was $810 million, a very strong result considering the significant impact of Cat 73, the winter storm that occurred in late December. Core income for the full year was $3 billion. For the quarter, core return on equity was 12.3%, including the 5.9 percentage point adverse impact of Cat 73. For the full year, core ROE was 11.3%. As you heard from Alan, our consistently strong performance has delivered double-digit core ROE in nine of the past 10 years, averaging 12.6% over that timeframe. And our adjusted book value per share has nearly doubled over the past decade. For the quarter, underlying underwriting income of $723 million pre-tax reflected higher levels of earned premium in all three segments and a consolidated underlying combined ratio of 91.4%. Terrific underlying combined ratios in both business insurance and bond and specialty were offset by results in personal insurance. Results in all three segments reflected the benefit of earned price that exceeds loss trend. One additional comment on underlying underwriting income. Prior to 2020, the highest level of full-year underlying underwriting income we had ever reported was $1.5 billion after tax. Despite the significant adverse impact of elevated inflation on profitability and personal insurance, 2022 marks the third consecutive year with underlying underwriting income above $2 billion after tax. Simply put, Our increased premium volumes and diversified portfolio of businesses are generating underwriting profit dollars at a completely different level than where we were just a few years ago. The fourth quarter expense ratio of 27.9% brings the full year expense ratio of 28.5%, our lowest full year expense ratio ever. As we've discussed previously, The improvement in the expense ratio has not been achieved through cutting corners or artificially managing expenses for the short term. Rather, we have made and continue to make significant investments in technology and other strategic initiatives that we believe will drive our continued success. Our ongoing focus on productivity and efficiency has improved our operating leverage. Looking ahead to 2023, were very comfortable with an expected full year expense ratio in the range of 28.5% to 29%. Our fourth quarter CAT losses were $459 million pre-tax. Activity in the quarter was driven by $512 million from the large winter storm in late December, which impacted most of the US as well as Canada. While our losses from this event were significant, were not outsized relative to our modeled estimates for a storm of this size and intensity. Turning to prior year reserve development, we had net favorable development of $185 million pre-tax on a consolidated basis. In business insurance, net favorable PYD of $127 million was driven by better-than-expected loss experience in workers' comp across multiple accident years, partially offset by increased loss estimates for general liability coverages, primarily umbrella, where year-over-year inflation has resulted in more losses reaching excess layers of coverage. The bond and specialty segment saw a net favorable development of $51 million, while in personal insurance we recorded net favorable PYD of $7 million. After-tax net investment income of $531 million reflected another quarter of improving returns and higher invested assets in the fixed income portfolio and modest returns in the alternative portfolio, which we expected given the downturn in the broader equity markets that occurred during the third quarter. Looking forward to 2023, we expect after-tax fixed income NII, including earnings from short-term securities, to average about $535 million per quarter, with an estimated $515 million in Q1, growing to an estimated $560 million in Q4. Page 21 of the webcast presentation provides information about our January 1 CAT treaty renewals. Our longstanding corporate CAT XOL treaty continues to provide coverage for both single CAT events and the aggregation of losses from multiple CAT events. Consistent with the increase in our annual net written premium volume for property, we increased our retention level to $3.5 billion from the prior $3 billion level. The treaty provides 100% coverage for the $2 billion layer above the $3.5 billion retention. The per-occurrence loss deductible remains unchanged at $100 million. We did not renew the underlying property aggregate catastrophe XOL treaty, which was only 45% placed in 2022. As we've said previously, we believe that a hardening reinsurance market provides a relative advantage for travelers. Our consistently strong underwriting results give us an advantage in terms of reinsurance pricing and capacity. That, combined with the fact that we buy less reinsurance than most of our peers, gives us a cost of goods sold advantage. We can let that fall to the bottom line or reflect it in pricing without compromising our return objectives, making us more competitive for attractive new business opportunities. Overall, while property reinsurance pricing was higher, when we consider the level of price increase as well as changes in terms and conditions we are obtaining on our direct written business, we do not expect a noticeable impact on our net underlying loss ratio for property. also related to the overall reinsurance market, as well as the E&S market. You'll recall that in 2021, we took a minority ownership stake in Fidelis. Effective January 1st, 2023, we have separately entered into an agreement with Fidelis whereby travelers will take a 20% quarter share on policies issued by Fidelis with effective dates in 2023. The market for Fidelis products is probably as favorable as it has been in 20 years or so, and the market was impacted by 9-11, dot-com collapse, and Hurricane Katrina. This quarter share arrangement allows us to participate in the hard market while also accelerating our understanding of this marketplace. While strategically valuable and expected to be accreted to earnings, the quarter share deal is not expected to have a significant impact on our consolidated financial results. Our portion of net written premiums from Fidelis is expected to be around $550 to $600 million for the full year, and those premiums will be reflected within the international results of business insurance. Detailed terms of the quarter share have not been disclosed, but we can share that there is a loss ratio cap to ensure that even a worst-case underwriting scenario is boxed to a very manageable impact on travelers. Turning to capital management, Operating cash flow for the quarter of $1.3 billion was again very strong. All our capital ratios were at or better than target levels, and we ended the quarter withholding company liquidity of approximately $1.5 billion. For the full year, operating cash flow was once again very strong at $6.5 billion, reflecting the benefit of continued increases in premium volume, strong profitability, paid losses that for the full year were once again less than 90 percent of incurred losses as we've said previously we are assuming that this lower level of payment activity is ultimately a timing issue when establishing our reserves and pricing our products we assume that elevated severity related to social inflation has not abated at all our substantial cash flows give us the flexibility to continue to make important investments in our business return excess capital to our shareholders, and grow our investment portfolio, which increased to $86.7 billion, excluding net unrealized losses at year end. Interest rates increased slightly during the fourth quarter, but spreads narrowed, and accordingly, our net unrealized investment loss decreased from $6.3 billion after tax as of September 30th to $4.9 billion after tax at year end. Adjusted book value per share, which excludes unrealized investment gains and losses, was $114 at year end, up 4% from a year ago. We returned $721 million of capital to our shareholders this quarter, comprising dividends of $220 million and share repurchases of $501 million. For the year, we returned $2.9 billion of capital to shareholders, including $2.1 billion of share repurchases. Overall, we had another very good year with strong top line growth in all three business segments, excellent and improved margins in our commercial businesses, our best ever expense ratio, and a very strong balance sheet that has us well positioned for whatever economic conditions the future may bring. Now, I'll turn the call over to Greg for discussion of business insurance.

Thanks, Dan. Business insurance had another strong quarter, rounding on a terrific year in terms of financial results, execution in the marketplace, and progress in our strategic initiatives. We're firing on all cylinders. Segment income for the quarter was $725 million, with an all-in combined ratio of 89.5%, both great results. We're once again particularly pleased with our exceptional underlying combined ratio. which was also 89.5%, an all-time best fourth quarter result. The underlying loss ratio increased by a little more than a half point as the benefit of earned pricing was more than offset by the comparison to the prior year quarter, which benefited from both a particularly low level of property losses and the favorable impact associated with the pandemic. 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 for the quarter were up 11% from the prior year quarter to a fourth quarter record of $4.4 billion, benefiting from strong renewal premium change, high retention, and an increase in new business levels. Turning to domestic production for the quarter, Renewal premium change was once again, historically high at 10.1% with renewal rate change of 4.5% and record growth and exposure retention reached an all time high at 88% new business of $558 million was the strongest fourth quarter we've ever produced at the product level. In addition to what you heard from Allen about pricing in the property line, Terms and conditions in the line tightened over the course of the quarter, further improving the price per unit of risk. While not reflected in our production metrics, this improvement in the price per unit of risk will contribute to our profitability over time. In workers' comp, renewal rate change was a little more negative than we've seen in recent quarters, which is a reflection of the strong profitability in the line and the benefit of continued strong exposure growth. Overall, workers' comp renewal premium change was positive in the mid-single-digit range and actually a little higher year over 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, together with improvements in terms and conditions, we're thrilled to continue to achieve these historically strong retention levels. The pricing gains we achieved in the quarter reflect our deliberate execution, which balanced the persistent headwinds and uncertainty in the current environment with the improvement in profitability across our portfolio after several years of strong pricing. As always, we will 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 both renewal premium change of 10.8% and retention of 83% were strong. New business was up 6% from the prior year quarter, driven primarily by the continued success of our BOP 2.0 product, as well as growth in other lines. We're pleased with the progress we've made in improving the profitability of this business over the last couple of years, while continuing to invest for future growth. In middle market, renewal premium change remained historically strong at 8.8%, while retention of 91% reached an all-time best. New business was up 13% from the prior year quarter. As for full year results, segment income of more than $2.5 billion was exceptional, benefiting from record earned premium, in our best-ever underlying combined ratio. In addition, the top line of $17.6 billion in full-year retention were both record highs, while new business premiums were near an all-time high. These results were driven by the successful execution of our thoughtful and deliberate strategies. And while delivering these financial and production results, we've also continued to invest in strategic capabilities that will enhance our many competitive advantages designed to enable us to continue delivering profitable growth over time. For example, during the year we advanced our already state-of-the-art product and service capabilities by continuing to roll out our BOP 2.0 product, which is now live in 46 states, as well as launching our new commercial auto product in a handful of states. Both products contain industry-leading segmentation. In addition, we continue to make progress on developing industry-leading user experience capabilities to make it easier and more efficient for our distribution partners and customers to do business with us. In particular, in our middle market business, we advanced our capabilities around digitizing the underwriting transaction for our agents and brokers. And in our small commercial segment, We launched our new front-end rate quote and issue interface platform to make it faster and easier for our agents to write business with us, all while maintaining the underwriting discipline and specialization behind the scenes. And finally, we continued to improve our operating leverage through our relentless focus on productivity and efficiency, as I referenced earlier. I'll note that our full-year expense ratio of 29.7% is down more than two and a half points from the 2016 level. We're proud of these results and the team that produced them. With that, I'll turn the call over to Jeff. Thanks, Greg.

Bonded Specialty ended a terrific 2022 with another great quarter on both the top and bottom lines. Segment income was $221 million, up 30% from the prior year quarter, driven by strong and higher earned premiums. and an exceptionally strong combined ratio which benefited from a higher level of net favorable prior year reserve development. The underlying combined ratio was also strong and improved about a point and a half from the prior year quarter to a terrific 81.7% driven by the benefit of earned pricing. Turning to the top line, net written premiums grew 5% excluding the impact of changes in foreign exchange rates. Domestic surety grew an outstanding 18% in the quarter, driven by an increase in the number of bonds issued and higher average bond premiums. In domestic management liability, given the strong returns, we're very pleased that we increased retention a point from last quarter to a near record 90%. That's a four-point improvement from the prior year quarter. Renewal premium change was solid at 6.3%. We're also pleased that we increased new business 23% from the prior year quarter. Excluding FX, net written premium in our international business contracted modestly from the exceptionally strong fourth quarter of 2021, primarily due to the impact of the significant decline in merger and acquisition activity on our transactional liability book of business. For the full year, Bond and specialty produced record earned premiums and an outstanding combined ratio of 75.3%, driving segment income above $900 million for the first time ever. So for both the quarter and year, our results were terrific, driven by excellent execution, returns from our ongoing strategic investments and our competitive advantages, and the market leading value proposition that we offer our customers and distribution partners. And now I'll turn the call over to Michael.

Thanks, Jeff, and good morning, everyone. In personal insurance, the fourth quarter loss of $61 million and the combined ratio of 105.3% were negatively impacted by the weather event in late December, as well as elevated underlying loss activity in both automobile and homeowners and other. While our results aren't meeting our target returns, we are encouraged by our strong marketplace execution as we continue to respond to the loss environment with both increased pricing and non-rate actions. Net written premiums for the quarter grew 13%, driven by double digit renewal premium change in both domestic automobile and homeowners, reflecting our focus on improving profitability. In automobile, the fourth quarter combined ratio was 111.4%. As a reminder, while there is some seasonality in auto every quarter, The fourth quarter typically has an elevated loss ratio driven by things like holiday driving and northeast winter weather. Over the last 10 years, the fourth quarter underlying loss ratio has been approximately six to seven points above the average for the first three quarters. Seasonality aside, the underlying combined ratio of 110.5% increased 6.7 points from the fourth quarter of 2021. primarily related to the continued inflationary impact on vehicle replacement and repair costs, as well as increased claim frequency, which returned to pre-pandemic levels in the quarter, and higher bodily injury severity. These loss impacts were partially offset by the growing benefit of earned pricing and a one-point reduction in the expense ratio. Separately, the current quarter result included a modest impact for the re-estimation of prior quarters. We continue to factor our latest view of loss experience into our pricing actions going forward. In homeowners and other, the fourth quarter combined ratio was 99.4%. This was 21.6 points higher relative to the prior year quarter, driven by catastrophe losses that were 13.2 points higher than the prior year period and a higher underlying combined ratio. The underlying combined ratio of 82.2% increased 8.8 points. This increase was primarily driven by higher loss severity related to continued labor and material price increases, as well as higher non-catastrophe weather losses. This loss pressure was partially offset by the current quarter benefit of earned pricing. Turning to production, quarterly results reflect our rate and non-rate actions as we seek to manage growth and improve profitability. In domestic automobile, retention moderated this quarter as renewal premium change increased three points from the third quarter to 11.4%. New business written premiums declined 3% compared to the prior year, and policies enforced were essentially flat with last quarter as our additional rate and non-rate actions are taking effect. In domestic homeowners and other, we achieved renewal premium change of 14.5% in the fourth quarter, Retention made strong at 84%. Slide 17 provides a graphical representation of renewal premium change in domestic automobile and homeowners and other. We added this view to highlight our progress with respect to renewal premium change over the last several quarters. The magnitude and speed of our pricing actions simultaneously across both lines of business is significant. As Alan mentioned, we have added over $1 billion of written premium to our portfolio in 2022, as a result of the high levels of renewal premium change. The benefits of this increased pricing will continue to earn into our results over time. Looking ahead to 2023, renewal premium change in both lines of business will increase above these already very strong levels as we continue to take action to improve profitability. Consistent with our comments last quarter, we expect written pricing and auto to be adequate in states representing the majority of our business by mid-year 2023. In 2022, our team met a challenging environment head on and took action to address rising costs. We are confident that the actions we have taken and will continue to take will drive improved profitability as we move through 2023 and beyond. Now I'll turn the call back over to Abby.

Thanks very much and we're happy to open up for your questions now.

At this time, I would like to remind everyone to ask a question, press star and then the number one on your telephone keypad. Our first question comes from Rick Peters with Raymond James.

Good morning, everyone. It's Greg Peters. I guess I'll start with the first question on business insurance and the growth. You know, you produced some outstanding results, you know, in all of your segments and for 22. And there's a bunch of, factors that we're considering as we think about the outlook for 23 and 24. We're watching, obviously, as you are, the renewal premium change. We're also watching, you know, the rate change on renewals. And I'm curious when you look about, when you think about 23, what are some of the factors that you think might influence your top line results in business insurance?

Yeah, Greg, good morning, and thank you for the question. You know, let me just go back to basics and just talk about how we approach this business, because we don't approach it with a grower shrink mentality. We approach it with an overall approach to the marketplace. So we look at our business, and we want to keep our best business, and you can see our retention this quarter was off the charts, which is a reflection of how we feel about that book of business. We want to improve the returns on the business that need it, and so we want to execute at a very granular, very thoughtful, very strategic level in terms of price and rate and RPC. And then by investing in franchise value and through a lot of hustle in the marketplace, we want to make sure that we're generating attractive new business opportunities and We did that in 22 and the results have been fantastic. We're going to do it again in 23 and we're very confident about that. Let me spend just a second on the pricing environment because that seemed like it was part of your question and I've seen a number of you write about it this morning. I think it's hard to characterize this pricing environment as anything other than very strong. At 10.1%, that RPC is spot on an eight-quarter average, so incredibly stable and near record levels. Small movements between pure rate and exposure, but I would emphasize small movements between rate and exposure. The breadth of the pricing gains across our book is very strong and very consistent. I don't think you can assess the pricing environment without looking at retention, and given where that is, literally record levels, and given the profitability, very strong. The pricing gains that we achieved were broad-based, led by property, auto, umbrella, and CMP. And then you take all that against the margins that we printed, and we just, we feel fantastic about the pricing and the overall execution this year. And again, we're going to go out and do it again in 23.

Just a point, you know, in your answer, you mentioned the renewal premium change. Can you talk about your perspective on what's going on with the renewal rate change, which seems to be trending down?

Yeah. Again, we're executing at a very granular level, looking at what it is we need to do by account. And you look at that 10.1 overall renewal premium change, very strong, near record levels. And the fact that there's a little bit of movement back and forth between rate and exposure you know, to us almost inconsequential. So, you know, you could look at that half point of change in isolation and try to make something out of it. We look at the overall production picture, and it just looks fantastic. So, and again, you know, Greg made a really important comment in his remarks, which is the execution you see is balancing a bunch of things going on. On the one hand, there's headwinds and some uncertainty. We've got Inflation in the marketplace, supply chain hasn't returned to pre-pandemic levels. We've got weather volatility. We've got reinsurance. We've got social inflation we've talked about over the years. So on the one hand, that continues to be a headwind for us, and we take that into account. But on the other hand, we've got a bunch of years of very strong pricing, and look at where the margins are today. So the rate change of 4.5 in the overall RPC doesn't happen to us. That's That's a very deliberate execution on our part, taking into account everything that we see in front of us.

Great. Just the last clarification point. You know, you talked about the inflation factors, and I think in the comments you mentioned, you know, there's some issues in umbrella, minor issues. What's your view on inflation trends as it might affect the reserve levels for 23 relative to what your assumptions may have been last year. That's it.

Hey, Greg. It's Dan. You know, so I don't think anything terribly surprising, and I guess I'd step back and look at reserve development over the course of 2022 and say full year number $650 million of favorable reserve development. Of course, there are some lines that are going to develop a little better and some that are going to develop a little worse, but $650 million over the course of the year, favorable development in all three segments of the business. Umbrella, you know, not really different than our overall thesis, but sort of the degree to which severity moved was a little more than we expected. So as we usually do, we're trying to look at the data as quickly as possible and react as quickly as possible and all that's inside of a net favorable PYD. So we're feeling very good about where the balance sheet is.

Our next question comes from Ryan Tunis with Autonomous Research.

Hey, thanks. First question, just around the excess capital position. Historically, the company's been able to, you know, easily return operating earnings and in some years even more than that to shareholders. We've never seen this level of, first of all, exposure grow and also just seeing the growth the retention go up on the property cat treaty. Are we at a point yet where I guess the growth in the risk of the business could start to impact capital return decisions?

Hey, Ryan. Good morning. It's Dan. Yeah, look, I think we've talked, you know, even a couple of years ago about the fact that, you know, we were seeing an increase in the level of top line growth. We knew we were going to need to hold more capital to reflect both a bigger top line book of business, which brings with it a higher level of reserves on the balance sheet. And so we said at that time, look, don't expect us to continue to be able to return nearly 100% in terms of operating earnings between buybacks and dividends. I think what you see in 2022 in particular is the fact that we had you know, we had a good strong capital position coming out of 2021. Remember, earnings in the fourth quarter of last year were tremendously strong. So we probably exited last year with, you know, a little more capital than we might have forecasted we were going to end the year. So what we're doing in 2022 with capital management and as we go into 23 is considering all the things that you just said, the continued outlook for top line growth, where the balance sheet is from a reserve perspective, what our reinsurance programs are and what our property exposures look like. And we were very comfortable, you know, returning what we just did in the in the fourth quarter.

Got it. And then follow up from Michael, just thinking about the the rate you're taking on the home side, is there a way to kind of compartmentalize that in terms of, you know, how much of the rate is toward attritional type losses versus how much is budgeting for higher caps? I'm not sure if there is, but I'd be curious if you had any perspective on that.

Sure, Ryan. Thanks for the question. I would say, broadly speaking, it's sort of hard to compartmentalize because the majority of the rate we're taking is base rate. Now, again, the numbers that we give you are renewal premium change. So just to clarify, right, renewal premium change is rate and values and we've talked about the fact that um the rpc numbers uh that you see certainly include both and our outlook for uh 2023 uh where we indicate that renewal premium change is going to go north from here is driven by further increases in both rate and values but in terms of you know attritional loss versus cat loss again it's It's fairly broad base rate across the book, so there's not really a significant differentiation there.

Thank you.

Our next question comes from David Montadam with Evercore ISI.

Thanks. Good morning. Michael, or actually, no, Dan, sorry about that. Dan, could you just elaborate a little bit more on the financial impact of non-renewing the aggregate reinsurance outside of a higher potential catastrophe load. I think when you put it on, there was a 50 basis point headwind to the underlying combined ratio, which obviously was offset by lower cat load. But that was back in 2019, so I'm sure it's changed. It doesn't sound like you expect a noticeable impact on the property loss ratio or the total company expense ratio. Just wondering if you could just sort of talk through the puts and takes of non-renewing that aggregate.

Sure, David. So a couple of things. In 2022, we did not attach the treaty. So we didn't hit the underlying, so it didn't have any beneficial impact in 2022's results. You're right that when we first entered into the treaty, which was at the beginning of 2019, we said at the time that the impact of the incremental seeded premium from that treaty was going to have about a half a point adverse impact on underlying results because of the impact on the denominator. In 2019, we told you that we placed the same $500 million layer in all four years. In 2019, we told you that we placed 85% of the layer. In 2022, we only placed 45% of the layer. in sort of broad sweeping terms, you could expect that, you know, the absence, the impact in 2022 on the underlying would have been about half as much as it was in 2019. And so that's what, you know, the year over year comparison will look like in, in 2023. So maybe somewhere around a quarter of a point.

Got it. And then just following up on that, is that something, you know, and, and, You also mentioned just the relative cost of goods sold advantage from buying less reinsurance. Is that benefit something you are looking to price or just allow to flow through in pricing as opposed to falling to the bottom line just based on your commentary? Sounds like that might be the case, but maybe elaborate on that as well.

Yeah, I don't think it's really big enough to impact the way we think about the pricing on the property book overall. I mean, so again, we placed... 45% of a $500 million layer. We didn't attach it. If you look across the business, we've got $8 or $9 billion worth of property premium. It goes into our consideration of how do we think about pricing and our underwriting appetite. But we said sort of from the first day we bought that treaty, we sort of would have been happy if we bought it or almost as happy if we didn't buy it. It was sort of on the margin. So the absence of it is not really going to have any impact on the way we view pricing adequacy and property.

Got you. Thank you. And then coming back to Michael, just wondering, I think in the past, I've heard you guys talk about a mid-90s combined ratio in auto. and you said you thought you could get to written rate adequacy still by 23. Maybe just one, is that still the right combined ratio to think about you guys are targeting and then any sort of view on timing of when you think you can get there?

Sure, David. I think in terms of the target, obviously it's impacted by a lot of things. I think we've said, you know, mid-90s or even a range on the upper end of the mid-90s is actually, I think, what we've talked about historically. Certainly, investment yields are better than they were when we talked about that, but I think broadly speaking, you can think of that range as where we're trying to get to. And again, as I described last quarter and reiterated this quarter, we think that written pricing will get to adequacy on the majority of the business by mid-year. So again, that's a leading indicator of what you're going to see in gap results, right? So I've also talked about, you know, the price we're taking will burn its way into our results over time. This morning I said you'll see the benefit, you know, sort of throughout 23 and beyond. I think what's important to note is The comment we made this morning about the growing impact of earned rate on the auto results this quarter, that impact will grow through 2023. As we've taken, you see more and more written RPC in the book of business as the year goes forward. This year, we've talked about higher levels of written RPC in 2023. That paves the way for increased earned rate. impacting the book of business quarter over quarter over quarter as you go into 2023. So I think those are the breadcrumbs we're trying to give you in terms of how to lay out your expectations for next year. Obviously the, you know, million dollar question for everybody in 23 is what happens to loss experience and where does, where do loss trends go from here? And that's the, you know, if you sort of lay out your own view of the earned rate versus what's going to happen to loss trend, that'll, sort of help you figure where you think the lines are gonna cross. Great, thank you.

Our next question comes from Elise Greenspan with Wells Fargo.

Hi, thanks, good morning. Michael, maybe picking up on your last comment, I mean, you say that you guys are gonna reach within rate adequacy in personal auto. So what are you guys assuming for frequency and severity from here when you make that comment?

Yeah, at least I think we're not going to get into specifics on frequency and severity assumptions for next year. I think what we have talked about pretty consistently is, you know, we have been booking to the loss experience that we've seen. Those booked trends remain double digit as we talk, as we sit here today talking about the fourth quarter and Again, we've pretty consistently talked about observing double-digit severity trends in the book. Frankly, that's a property comment and an auto comment, and is the severity and loss pressure that we are contending with. And we've also said that we have been factoring those increased costs into our expectations, both in terms of the actual experience and our outlook. But I don't think we're going to put a number on you know, the forecast severity and frequency trends beyond that.

Then on the reinsurance program, can you give us a sense of, you know, an absolute sense of how much your reinsurance cost went up? And then on the capital side, you guys have added more volatility, right, by retaining additional CAT losses in 23. How could that affect your capital allocation? What should we expect? lower buyback in the second and third quarter? And could this even impact, you know, the excess capital that you would have for new business growth?

So a couple of things, Elise. It's Dan. We're not going to go into the details of reinsurance pricing. What I was trying to communicate in my comments was when we consider the pricing that we're getting on the direct business that we're writing in our management of terms and conditions, we don't expect the higher pricing for reinsurance to have much of an impact on our margins. And again, the change in the overall treaty, I don't think it's going to have a significant impact on our capital position. I really think of it as sort of business as usual. You know, we made the comment that the attachment point increase sort of in line with our increase in property premiums. So the attachment point went up 16 or 17%. Our premium volume in 2022 compared to 2021 was up 15% or 16% or 17% in both business insurance and personal insurance. I don't think it's going to have a dramatic impact on... It does not have a significant impact on our view of capital adequacy now, and I don't think it's going to have a significant impact on the way you see us behave from a capital perspective in 2023. Thank you.

This is the conference operator. Please ask one question and a follow-up question at this time. Our next question comes from Mayor Shields from ABW. Thanks.

Good morning, all. A quick question on, I guess, the quota share arrangement. Can you talk about, and I'm putting this as binary, and it's probably not, but can you talk about why Travelers is going through sort of quota share arrangements to capitalize on the hard property market as opposed to your own excess and surplus lines paper?

Yeah, Meyer. We've got all the flexibility in our property business and in our other businesses with ENS paper and otherwise to do whatever it is we want to do. This was an opportunity for us to work a little bit more closely with Fidelis. We think they're interesting in what they do and wanted to understand it a little bit better. And they're in some businesses that we just haven't historically been in. And so, you know, in cases like that, it's not the only place we've done it, but in cases like that, we look to leverage the capabilities of other talented underwriters, and this is just one of those opportunities.

Okay. No, that makes sense. And then a quick question for Michael. You talked a little bit about, I think, unquantified, the impact of accident year 22 loss peak increases in the fourth quarter. Did that change have a meaningful impact on the indicated rate need?

Sure, Meyer. Again, I would say every quarter of additional experience where we see double-digit loss increased experience impacts our rate needed, impacts our loss experience. The good news is it factors into the evidence we have to go to regulators to ask for rate increases. So certainly the additional quarter of sort of double digit severity did put additional upward uh pressure on our rate indications and that's what we're factoring into the indications were taken to the department in early 2023. okay perfect thank you our next question comes from alex scott with goldman sachs hi uh good morning i had one follow-up on the the personal auto um you know we

I saw a peer of yours that's had severity sort of picking up maybe faster than they even were expecting earlier in the year, as well as bodily injury that's sort of being settled at this point. I just wanted to see, is that something you've looked at harder in your book? How confident are you that you're fully capturing the severity in the way you're reserving on the auto? Do you feel comfortable with where that is in the 2023 in the starting point here?

Sure. This is Michael. Maybe I'll start and Dan can speak to the reserving element of it. You know, certainly as I talked about the prior period comparison in auto, we're seeing severity across auto physical damage coverages and bodily injury coverages. We've talked about both auto physical damage and bodily injury in either prepared remarks or Q&A sort of throughout the year. We've certainly spent more time talking about auto physical damage. But bodily injury severity trends have been elevated throughout the year. I think we've talked about them being elevated but consistent with our expectations. They were a little worse in Q4, which is why we call them out. But we've booked to that in our Q4 results. They were also an element of the prior period, current year prior quarter development that I called out in the prepared remarks as well. So they're in the loss estimates that we booked for the quarter and the full year.

Alex and Stan, just in terms of the balance sheet, I think we made this comment last quarter as well. We were pretty consistent in 2020 and 2021 in saying that We felt we were being appropriately cautious and allowing for the elevated level of uncertainty in the environment at that time when we were making. Our loss picks, including in in personal insurance, and I think that's, you know, continued to proven to hold up. As Michael said, our expectation was always that. Bodily injury severity not only was elevated, but that the trend slope was was upward moving on that. And so I think when you, take into consideration the fact that we were sort of intentionally reflecting an elevated level of uncertainty in 20 and 21 and trying to continuously react to the most recent data as it comes in. To this point, all the way through the end of 2022, our reserves for prior years have held up just fine.

That's really helpful. Thank you. And my follow-up is on workers' comp, actually. You know, we were just looking at some of the NCCI stuff out there. I mean, it looks like in 23, maybe there's a bit more pressure on workers' comp pricing than even in, you know, the recent years. You know, I appreciate, though, that there's also, you know, an improving starting point for ultimate loss ratios just based on the way that development has been trending. So when I think about all those things, I mean, can you help me think through what that means for accidental loss ratios in 23 just at a high level and whether we should be thinking about that as a pressure point?

Yeah, Alex, let me start and I'll look at Greg if I missed something here. So renewal price change was mid-single digits positive, as you heard from Greg. Given the durations of the liability, we take a pretty cautious view on how we think about, you know, loss trend and the outlook for that. And so you'd say, you know, pricing is a little bit positive. You'd say loss trend's negative. And the net of those two things would probably be a little bit negative as we, you know, think about next year. I think the question is going to be what's loss trend going to do because it has, you know, over the last few years or more than that, surprised us to the benign side. And so, you know, we'll just have to see where the losses come in and then take a look at the calendar year results. But, again, I would just say workers' comp has been a fantastic line for us, and we think the outlook for it is fantastic. positive as well.

Thank you.

Our next question comes from Yarin Kinnar with Jefferies.

Good morning, everybody. First question, just going back to the cat load, so I think We're seeing a non-renewal of the property ad cover, a shift up in XOL retention, maybe some additional CAT coming in from Fidelis, the quota share as well. How should we think about that in aggregate as we think about 2023? Does that essentially mean that we should think about maybe a lower aggregate loss ratio, but maybe some additional volatility?

I don't think that's where I would go, Your Honor.

Tell me what you would look at that would lead you to look for a lower aggregate loss ratio.

Well, I would think that more cat-exposed business would have a lower attritional loss ratio coming with it. Retention rates would have a lower attritional loss ratio as well.

Yeah, I think you're really talking on the margins. I don't think we're significantly changing the mix of the property book we write in terms of what its cat-exposed profile is. Fidelis, again, at those levels, and a portion of what they write is going to be cat-exposed, but at that level, that's going to have a very small impact on our overall base of premiums. We look at, you know, the CAT results over the last few years, and I think, like everyone, sort of continually update our view of... And for us, it's importantly, you know, it's weather losses, not just what falls into the catastrophe bucket, right, because we've got sort of a more restrictive definition of what CAT is than most other folks. But it's really not a significant change. So we don't see a significant change in the relative percentage of the book that's CAT-exposed. We don't see a significant change, you know, despite some changes in reinsurance. I would describe those changes in reinsurance relative to the property book as a whole as pretty modest. So I don't think it dramatically changes our CAD profile. So I don't really think it's going to have a significant impact on the way we think about the property book going forward.

Okay. That's very helpful. And then maybe shifting to Michael's world, were there any intra-year catch-ups in personal auto this quarter?

Yes, it's Michael. I think to your question, we did have a modest impact from re-estimation of prior quarters. And I talked about, you know, the auto physical damage, the frequency and the bodily injury As the drivers of the period-to-period change, there was really some, you know, prior year re-estimation sort of across a number of factors in the book, but again, it was modest.

And is it something you can quantify or not at this time?

Yeah, I mean, it was, I'd say about a point, a point or two kind of, and again, it varied a little bit by coverage. But call it around a point or so. Thank you very much.

That concludes the Q&A session. I now turn the call over to Ms.