The Travelers Companies, Inc. 2026 Q3 Earnings Call

Thank you. Good morning, and welcome to Travelers' discussion of our third quarter 2026 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 Frey, CFO, and our three segment Presidents, Greg Toczydlowski of Business Insurance, Jeff Klenk of Bond & 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 10-Q and 10-K 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 Investors section on our website. 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 excellent third quarter results. It was another in a run of successful quarters with very strong underwriting performance across all three segments and a record result from our investment portfolio. We also continue to make steady progress on important strategic initiatives that will continue to set us apart. For the quarter, we earned core income of $1.95 billion, or $9.18 per diluted share, generating core return on equity of 22.1%. Over the trailing four quarters, we generated core return on equity of 24.1%. Underwriting income of $1.4 billion pre-tax was driven by strong levels of underlying underwriting income and net favorable prior year reserve development. Profitability was excellent on both a reported and underlying basis.

The combined ratio improved to 86.8%, and the underlying combined ratio remained very strong at 84.1%, with all three segments posting strong contributions. Turning to investments, our high-quality investment portfolio continued its trajectory of delivering higher levels of net investment income. After-tax net investment income increased by 7% to $908 million, benefiting from strong and reliable returns from our growing fixed income portfolio and a strong result from our non-fixed income portfolio. Our underwriting and investment results, together with our strong balance sheet, enabled us to return $1.8 billion of excess capital to shareholders during the quarter, including $1.5 billion of share repurchases. Just since the beginning of 2025, we have returned $8 billion in capital through share repurchases, retiring 12% of the shares then outstanding in the process.

Even after the return of capital and having made substantial investments in the business, adjusted book value per share at the end of the third quarter was 24% higher than at the beginning of 2025 and 15% higher than a year ago. Turning to the top line, we generated net written premiums of $11.5 billion in the quarter. In Business Insurance, we grew in every line other than property, generating net written premiums of $5.9 billion. That is 4% higher than the prior year quarter, adjusting for the sale of our Canadian business. Across the board, the triad of renewal premium change, retention, and returns reflects outstanding and deliberate execution. Renewal premium change in the segment was 4.1%, including renewal premium change of 5.4% in our core middle market business and 7.8% in our small commercial Select business. Excluding the property line, renewal premium change in the segment was 7%.

Retention, which as you have heard us say before is an important indicator of marketplace stability, remained very strong at 86% and was higher or stable in every line. New business of $699 million was up 4% over the prior year quarter. To be growing 4% ex Canada at such strong returns is a terrific achievement. In Bond & Specialty Insurance, we also delivered terrific growth and strong returns. We grew net written premiums by 12% to $1.2 billion. In our management liability business, renewal premium change improved sequentially to 3.8%, while retention remained steady at an excellent 89%. New business was up 18% over the prior year quarter. In our leading surety business, we grew net written premiums by 21%, reflecting continued strong production across the portfolio.

In Personal Insurance, we generated net written premiums of $4.4 billion, with solid retention in both auto and homeowners and higher new business and homeowners. You will hear more shortly from Greg, Jeff, and Michael about our segment results. Before I turn the call over to Dan, I would like to spend a few minutes on an important focus of our innovation work, defending our customers against legal system abuse. Lawsuit abuse raises costs for everyone, from the businesses and families we insure to every corner of the broader economy. Liability across GL, umbrella, auto, and CMP is a significant share of our loss costs. While conditions have been generally consistent with our expectations, the drivers remain active and continue to put upward pressure on liability losses. Our approach is straightforward, resolve legitimate claims fairly and promptly by paying what we owe.

We were early to recognize the change in the litigation loss environment at the end of 2018, and that gave us a head start in investing in technology and developing innovative claim strategies. We believe that gives us a meaningful early mover advantage, and our innovation efforts are now giving us tools we have never had before. Let me share a few examples. For unrepresented claimants, we have developed a digital tool to help resolve claims promptly and fairly. It is grounded in our simple philosophy of empathy, education, and empowerment, which we have built directly into the experience. In a pilot, more than 80% of the claimants to whom we have offered the tool have engaged with it, and overall results are very encouraging. When a claimant has an attorney, we are using AI to sharpen our responses to their demands. It starts with the file.

AI gives our claim professionals a faster, deeper command of claim files that can run hundreds of pages. It surfaces key facts and issues and helps shapes arguments. That makes our people both more effective and more efficient. Consistent with our longtime practice of maintaining a tight feedback loop between claim and underwriting, which is how we were so early to recognize social inflation in the first place, the technology also feeds granular loss information back to our underwriters. A more accurate view of loss information drives better risk selection, pricing, and claim strategies. We pay what's fair, and when we can't resolve a claim at what we believe is a fair outcome, we're prepared to defend our customers in litigation. We choose our matters carefully, and the outcomes demonstrate that we're effective when we do.

Beyond the direct financial impact of our success in litigation, our approach helps set realistic expectations from the start, and that's part of the value proposition we bring to our customers. These are just a few illustrations of a broader proprietary effort that leverages talent, technology, behavioral science, and more. What we're doing now isn't about doing what we've always done a little better. We've developed new and growing capabilities that let us do what simply couldn't be done before. We believe our expertise, capabilities, and approach will help us bend the loss cost curve. As we continue to invest, we expect this to deliver growing value for our customers and shareholders, building on the benefits we've already seen from some of our initiatives.

To wrap it up, our excellent underwriting and investment results through the first nine months of the year reflect our unmatched competitive advantages and the strength of the value proposition we offer to our customers and distribution partners. We are well-positioned to close out an outstanding year. That momentum, the advances we are making on our innovation agenda, and the best talent in the industry give us tremendous confidence heading into 2027 and beyond. With that, pleased to turn the call over to Dan.

Thank you, Alan. In the third quarter, we once again delivered excellent financial results on a consolidated basis, and in each of our three segments. Core income for the quarter of $1.95 billion marked our sixth consecutive quarter with earnings of more than $1 billion and brings our trailing 12-month core return on equity to 24.1%. Both the quarter and the trailing 12 months reflect excellent underwriting results, coupled with strong investment income. We generated slightly higher net written premiums despite the absence of the Canadian businesses we sold at the beginning of 2026, while delivering excellent combined ratios on both a reported and underlying basis. At 84.1%, the underlying combined ratio marked its ninth consecutive quarter below 86%. The combination of strong earned premiums and the excellent underlying combined ratio led to after-tax underlying underwriting income of $1.4 billion, continuing our run of historically strong underlying underwriting results.

Our year-to-date after-tax underlying underwriting income of $3.9 billion is virtually identical to last year's record level despite moderating pricing and the sale of our Canadian business, demonstrating the durability of our underlying underwriting earnings power. The expense ratio for the third quarter was 28.9%, bringing the year-to-date expense ratio to 29%. Regarding the expense ratio outlook, the continued strength of our consolidated underwriting performance I just described results in variable expenses like profit sharing and contingent commissions coming in higher than planned. That's a trade we're very willing to make, and it results in an uptick for our expected full-year expense ratio, which we now expect to come in a little below 29% for 2026 and about the same for 2027. Catastrophe losses in the quarter were $538 million pre-tax, consisting mainly of tornado hail events in the central U.S.

Turning to prior year reserve development, we had total net favorable development of $234 million pre-tax, with favorability in all three segments. In Business Insurance, the annual asbestos review resulted in a charge of $295 million. Excluding asbestos, Business Insurance had net favorable PYD of $336 million with favorability in every line. In Bond & Specialty, net favorable PYD was $95 million pre-tax, with favorability in fidelity and surety as well as management liability. Personal Insurance had net favorable PYD of $98 million pre-tax, with favorability in both home and auto. Turning to investment income. For the first time ever, after-tax net investment income surpassed $900 million for the quarter, up 7% from the prior year quarter. Fixed maturity NII was again the driver of the increase, reflecting both the benefit of higher invested assets and higher average yields.