The Travelers Companies, Inc. earnings

Management highlights

### Overall Financial Results - Core income was $2.2 billion, or $10.04 per diluted share, with a quarterly core return on equity (ROE) of 24.9% and a trailing 12-month core ROE of 24.2%. - Pre-tax underwriting income hit $1.7 billion, and the overall combined ratio improved to 83.6% with an underlying combined ratio of 84.1%. - After-tax net investment income grew 14% year-over-year to $883 million, driven by higher yields on the growing fixed income portfolio. The $100+ billion investment portfolio is 95% fixed income, 99% of which is investment grade. - The company returned more than $1.5 billion in excess capital to shareholders in Q2, including $1.3 billion in share repurchases. Adjusted book value per share is 16% higher than one year ago, even after large capital returns. ### Earnings Engine Strategy - The company's durable earnings engine has four core components: underlying underwriting income, net investment income, catastrophe losses, and prior year reserve development. All four contributed to Q2 results. - Underlying after-tax underwriting income hit $1.3 billion, marking the eighth consecutive quarter of over $1 billion in underlying earnings. This growth is driven by a multi-year focused innovation strategy that expands competitive advantages while growing the top line and improving margins. - The company's share of industry property catastrophe losses over the past decade has been meaningfully lower than its market share, due to disciplined risk selection, pricing, and exposure management powered by advanced data and analytics. - The company has recorded net favorable prior year reserve development in 19 of the last 20 years, totaling $15 billion pre-tax, reflecting consistent disciplined reserving practices. Q2 2026 saw $578 million pre-tax net favorable development across all three segments. ### Capital Management - The company's long-standing capital strategy prioritizes reinvestment in organic and inorganic opportunities that generate attractive returns first. Any excess capital is returned to shareholders via consistent dividend increases and share repurchases. - The company has raised its dividend annually for over two decades at a compound annual growth rate of 8%, and has retired 70% of outstanding shares since launching its repurchase program in 2006, increasing proportional ownership for long-term shareholders. ### Innovation and Operational Investments - The company continues to invest over $1.5 billion annually in technology and innovation, including AI capabilities. AI is already driving benefits such as faster straight-through claims processing and seamless digital underwriting for small commercial policies. - New digital tools like the Travis platform for small commercial use AI to enable automatic data extraction, instant pre-filling of submission information, and real-time quote generation, improving speed and convenience for distribution partners. - Reinsurance updates for 2026 include increasing the size of the company's CAT bond from $575 million to $750 million, maintaining the $1 billion Northeast Property CAT XOL coverage, and allowing the personal lines CATXOL treaty to lapse in favor of the more efficient enterprise-wide all-perils CAT program put in place at the start of 2026.

Guidance

- Full year 2026 expense ratio guidance is maintained at approximately 28.5%, despite a higher Q2 expense ratio driven by profit-related variable costs (profit sharing and contingent commissions) that are a favorable trade-off for strong underwriting results. - Fixed income net investment income is expected to hit approximately $840 million in Q3 2026 and roughly $870 million in Q4 2026, consistent with prior guidance. Fixed income NII is expected to continue growing beyond 2026 as the portfolio expands and new money rates remain above the portfolio's embedded yield. - The company reaffirms its long-term target of mid-teens core ROE. Management does not plan to relax underwriting standards or cut pricing to accelerate growth, even though current ROE is above target. - Personal insurance continues targeting mid-teens returns; current profitability above target has driven intentional moderation of renewal premium changes to support profitable growth while maintaining target margin levels.

Segment performance

1. Business Insurance: Segment income hit a Q2 record of $1.2 billion. Net written premiums reached a new quarterly record of $6 billion, representing 5% year-over-year growth after adjusting for the sale of the Canadian business. This segment contributes 52.2% of total company net written premiums. Underlying combined ratio was a Q2 record 88.2%, driven by improved underlying loss ratios from investments in risk selection, predictive modeling and technology. Renewal premium change was 4.8% overall, 7.8% excluding the national property line. Retention held steady at 86%, and new business hit a quarterly record of $805 million, up 8% year-over-year. 2. Bond and Specialty Insurance: Segment income was $234 million, with an excellent combined ratio of 82.8%. Net written premiums grew 14% year-over-year to a record $1.2 billion, contributing 10.4% of total company net written premiums. Management liability retained 88% of customers with steady renewal premium change and 8% year-over-year new business growth. Surety net written premiums grew 40% year-over-year to a record level, driven by large projects including data center development. 3. Personal Insurance: Segment income was $827 million, with an overall combined ratio of 79.5% and an underlying combined ratio of 77.3%. Net written premiums were $4.3 billion, contributing 37.4% of total company net written premiums. For auto, the combined ratio was 82.8% with an underlying combined ratio of 85.8%, which improved 3 points year-over-year, driven by favorable loss experience. Retention was 82% with flat renewal premium change. For homeowners and other, the combined ratio was 76.7% with an underlying combined ratio of 70.1%, matching the strong prior year result. Retention was 85% with renewal premium change moderating to 6.6%, and new business grew year-over-year.

Risks & headwinds

- Softening pricing is most pronounced in large national property business, and management is maintaining strict underwriting discipline, declining to write business where pricing and terms do not align with risk estimates. - Large system conversions carry inherent risk of temporary disruption to customers and agents. A recent system information migration caused minor disruptions, though the underlying platform is functional, most issues have been resolved, and the company will continue working to resolve all remaining issues. - Rising technology and AI implementation costs are a potential headwind, but management reports it is laser-focused on cost management and remains confident that efficiency gains will offset higher implementation costs. - Workers' compensation severity is exposed to potential changes in recovery times tied to labor market conditions and AI-related unemployment shifts, though management has baked these potential risks into its long-term reserving assumptions. - Catastrophe weather volatility remains an ongoing industry risk, though the company's disciplined exposure management and lower-than-market share of catastrophe losses position it well to absorb volatility.

Analyst Q&A

• Q: With 24.2% trailing 12-month ROE far above the long-term mid-teens target, will management relax underwriting standards and cut pricing to grow faster, and when will ROE return to the mid-teens target? /

  A: Management stated that relaxing pricing to grow faster is a fool's errand in a competitive market, as it only reduces margins without delivering sustainable share gains. The company is happy to exceed its long-term target and will not change its disciplined strategy, focusing competition on franchise value rather than price.

• Q: What is driving higher sequential renewal price growth in the small commercial select business segment, bucking broader softening pricing trends in larger business insurance accounts? /

  A: Management explained that the sequential increase is not a strategic shift, but rather a function of quarterly fluctuations in state-by-state approved rate filings. Beyond national property, the broader business insurance pricing environment remains very stable overall, with no broad downward trend across non-property lines.

• Q: Given sustained high ROE is generating large amounts of excess capital, will there be any change to the company's capital management strategy, and what is the outlook for M&A? /

  A: Management reaffirmed that its long-standing capital strategy works across all market and earnings cycles: it reinvests in attractive organic and inorganic growth opportunities first, then returns all excess capital via dividends and share repurchases. The outlook for M&A has not changed; the company remains actively attuned to attractive opportunities and has ample capital to finance any compelling deals that arise.

• Q: In personal auto, what is the current trend for loss frequency and severity, and have higher gas prices changed driving behavior or loss trends? /

  A: Management reported that Q2 2026 saw favorable underlying loss experience across both frequency and severity for personal auto. There is no material evidence at this point that higher gas prices have driven a measurable change in driving behavior or frequency. The main drivers of improving loss trends are advancing vehicle safety technology that reduces accident frequency and severity.

• Q: What is driving the uptick in new business momentum for business insurance middle market, and how sustainable is this growth? /

  A: Management attributes the new business record to sustained investments in predictive analytics, underwriting precision, product development, technology, claims, and risk control capabilities, which are in high demand from distribution partners. Middle market new business can be lumpy quarter-to-quarter due to its transactional nature, but the underlying drivers of growth are durable. No material softening of pricing or terms has been seen in middle market property, with softening concentrated entirely in large national property accounts.