Travelers Companies Inc ($TRV) Q1 2025 Earnings Call

Thank you, Abby. Good morning, everyone, and thank you for joining us today. We are pleased to report a substantial profit for the quarter despite the devastating January California wildfires. We delivered core income of $443 million or $1.91 per diluted share. As outstanding underlying results, strong net favorable prior year reserve development, and higher investment income more than offset catastrophe losses. Over the last four quarters, thanks to strong underlying fundamentals, we generated a core return on equity of 14 and a half percent. That demonstrates our ability to deliver healthy returns over time notwithstanding elevated industry-wide catastrophe losses. Underlying underwriting income of $1.6 billion pre-tax was up more than 30% over the prior year quarter. That was driven by strong net earned premiums of $10.7 billion and a consolidated underlying combined ratio that improved 2.9 points to an excellent 84.8%. All three segments contributed to these underlying results with strong and higher net earned premiums and excellent underlying profitability. The underlying combined ratio in business insurance improved to an excellent 88.2%. The underlying combined ratio in our bond and specialty business was a very strong 87.3% and the underlying combined ratio in personal insurance improved by more than six points to a terrific 79.9%. Consistent with the announcement we made in February, our catastrophe losses from the California wildfires were $1.7 billion pre-tax. I'm grateful to our claim team for their excellent work taking care of our customers and supporting the community's recovery. We've already paid out nearly 3/4 of a billion dollars, including substantial advance payments to our customers who suffered total losses. Even after that, operating cash flows for the quarter were a very strong 1.4 billion dollars.

Turning to investments, our high-quality investment portfolio continued to perform well. Our Travelers net investment income of 763 million dollars for the quarter was driven by strong and reliable returns from our growing fixed income portfolio and positive returns from our thoughtfully managed alternative investment portfolio. Our underwriting and investment results, together with our strong balance sheet, enabled us to return nearly 600 million dollars of excess capital to shareholders, including 358 million dollars of share repurchases. At the same time, we continue to make important investments in our business as we completed another quarter of successful execution on a number of important strategic initiatives. Even after this deployment of capital, adjusted book value per share increased by 11% as compared to a year ago. In recognition of our strong financial position and confidence in the outlook for our business, I'm pleased to share that our Board of Directors declared a 5% increase in our quarterly cash dividend to $1.10 per share, marking 21 consecutive years of dividend increases with a compound annual growth rate of 8% over that period.

Turning to production, excellent execution by our field organization drove our top line growth with all three of our segments contributing. During the quarter, we grew net written premiums to 10.5 billion dollars. In business insurance, we grew net written premiums by 2% to a record $5.7 billion after the ceded premium impact of the enhanced casualty reinsurance program that we announced last quarter. As we previewed with you, that reduced the segment's net written premium growth in the quarter by four percentage points as a full year's worth of ceded premium was booked in the first quarter. Renewal premium change in the segment was double digits or high single digits in every line other than workers comp. Even with strong pricing pretty much across the board, retention improved nearly two points from the fourth quarter to 86% and was higher in every line. That dynamic of strong pricing and retention speaks to continued discipline in the marketplace. New business for the segment was a record $735 million, a reflection of the fact that our customers and distribution partners value the products and services that we offer and the experiences that we provide. In bond and specialty insurance, we grew net written premiums by 6% to a billion dollars with excellent retention of 89% in our high-quality management liability business. In our industry-leading surety business, we grew net written premiums by 13%. Given the attractive returns, we are very pleased with the strong production results in both of our commercial business segments. In personal insurance, net written premiums grew 5% to $3.8 billion, driven by strong renewal premium change, particularly in our homeowners business. 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 how Travelers is positioned for what feels like an uncertain macroeconomic road ahead. In short, we are entering 2025 in a position of strength. We are a market leader in a diversified portfolio of businesses, each with a strong value proposition to offer to our customers and distribution partners. Our underlying margins are in great shape, and each segment they have attractive loss ratios and expense ratios that reflect years of strategic focus on optimizing operating leverage. Our cash flow is strong and resilient. Our investment portfolio is thoughtfully managed to deliver highly reliable returns, including through periods of market stress. And we have a fortress balance sheet featuring a strong capital base and almost no debt coming due in the next 8 years. On top of all that, we have the resources and financial strength to continue making strategic investments in our business without interruption. All of which is to say, just as we have successfully served our customers and distribution partners and created shareholder value over time, including through periods of economic disruption, we are very well positioned to continue doing so now. And with that, please turn the call over to Dan.

Sure, David. Good morning. Thanks for the question. You know, just in terms of background, and at a high level, I'd say as far as the direct impacts go, we think it's pretty manageable for us. It's just a fraction of auto and property losses that are physical damage related and only a fraction of those are for materials that would be impacted by the tariffs. The most significant impact for us is likely to be a one-time impact of physical damage repair costs. For us that most notably impacts private passenger auto. From there the impacts diminish pretty significantly. And just to give you a sense of the magnitude, David, assuming the tariffs as they've been announced remain in place and are largely passed through and I think there's a question about that. We'd expect, you know, somewhere around a mid-single-digit increase to PI auto severity. Again, that's a one-time impact, you know, not a slope impact. Having said that, we would actually expect the actual impact to be somewhat less. So, first, we think participants in the value chain will likely seek to mitigate the impact through some combination of advanced inventory build-up, substitution of goods, reorganization of supply chain, lower tariff pass-through rates, things like that. And second, the actual impacts could be mitigated by other factors, for example, extended lives of cars on the road. Also, just looking at our PI auto margins now, the auto margins, as you can see, are in a pretty place and if the recent favorable loss trends persist, and we'll see whether they do or not, but if recent favorable trends persist, we may be able to absorb whatever the impact is inside of loss. So, I would say for now, we're prepared to watch and react to the extent that we need to and however the loss trends evolve, we've got the tools and the capabilities to see it pretty quickly and we'll reflect it in our pricing models.

David, let me start and I'll turn over to you Greg. So as for starting point, we would definitely add back the four to get to a level. There's always other things in the quarter that are going to impact premium from one period to another. You know, there's the production booking for example, there's endorsements, cancellations, all those sorts of things. So that would have an impact. I would tell you to look at the strength of the production in the quarter. I mean, you can look at retention, price, it's all very strong levels.

Our strategic mix is much more favorable now, and we've done all that inside an expense ratio that we've reduced meaningfully over the period. So, you know, we think we're investing in the right things and doing it pretty effectively.

Good morning, Meyer. We're also looking at you. I'm not sure if you mean too early in the morning or too early in the uh... I do think it's too early for us to see that. And I also, as I really think about that question, I think it's too early to really know what it is we're all responding to. I mean, there's obviously a lot of change back and forth, so I'm not sure people really know what they're responding to yet.

Yeah, so, we really have the same philosophy of capital management first of all. So no change in the way we think about that. Remember we entered 2025 in a pretty strong capital position given how strong the finish to the 2024 year was. We talked about buyback activity in the first quarter. I'd say that was probably dialed back a little bit from what we might have otherwise done given the significance of the California wildfires and the fact that they occurred so early in the quarter. I feel like we're going to maintain a very healthy capital position. Our history is we're going to continue to generate more capital than we need to run the business and can deploy at attractive returns. So I'd expect us, not in any particular month or any particular quarter, but I'd expect us to continue to be doing buybacks. And we don't really try to sort of lean in or lean out depending on short-term fluctuations in the stock price. We're really just right-sizing capital over time.

Yeah, good morning. I would say that for now we see that as pretty negligible. I mean, you just look at the mix of the cost drivers in the liability lines, and just not a lot of it is subject to tariffs, and I don't mean to suggest that it's a zero impact, but we think the likely outcome is just pretty negligible.

Sure, maybe I'll just step back and give a little broader context in addition. So I would say that we are open for new business in most geographies across the country. And then within that, we have some very specific constraints. On the auto side, we're open for new business in virtually every state. Again, we have a more limited appetite in a couple of key geographies there, related to whether or not we think we have rate adequacy. But at this point, we're talking less than a handful of states where we have those challenges. The property answer is a little more complicated because in property we've really got three primary issues that we're working through in terms of managing and thoughtfully deploying our property capacity. The first is overall profitability, and as we've talked about, property is a little bit behind auto in terms of reaching target margins on a state-by-state basis, so we're managing that. Second is catastrophe exposure. And then the third is local market concentration of exposure. So predominantly in property, the places that we are not open for new business fall into those last two categories. We have some specific local geographies where we've got outsized market share that we're working to manage down, and then we've got our continued optimization of risk and reward as respects catastrophe losses. So that's the color behind it, but I would say the places that we're literally closed for new business are pretty limited. But more broadly, it's a matter of monitoring and thoughtfully deploying the property capacity in many of those markets.

Yeah, thanks for the question. I would say, to take that question and link it back to my response to the previous one. California certainly is a distinct example of where we're constraining property capacity, but it's not the only one. We have a number of states, particularly in the South and in the Midwest, where we're constraining property capacity for the reasons that I mentioned. And again, most of the time that's limiting growth. But in some of those cases, it's non-renewing business in areas where we've got too much concentration. That said, to your point, there are places where we're open for business in both property and auto. And I think that you see that contributing to the new business growth in auto this quarter, because we are seeing new business growth in those places. It is important to remember, when you think about our line of business growth and production, that we're essentially 50/50 property and auto. So we're different from most participants in the industry. Our actions in property, given that mix of business and given our tendency to package auto and property, does mean that our property actions are going to have an impact on our ability to grow auto. But really at the end of the day, we focus on each state individually, looking at the auto and property opportunities and the opportunity to best manage the portfolio, and we are working to take advantage of those places where we don't have the constraints to help support auto and overall portfolio growth.

Yeah. Well, I think your premise is right. I'm not going to quantify how much is in which bucket. I will say that anytime we're investing in a capability, we analyze whether there's a proprietary benefit to us developing it and owning it. And when there is a proprietary benefit, we do that. And if there's not a proprietary benefit, we're happy to source it from third parties. So I do think that trend you're describing is a fair one, and we'll continue to drive the favorable mix of our investment spending.

Thank you.