THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2022 Second Quarter Consolidated Results of Operations
•Net income of$551 million , or$2.29 per share basic and$2.27 per share diluted •Net earned premiums of$8.32 billion •Catastrophe losses of$746 million ($587 million after-tax) •Net favorable prior year reserve development of$291 million ($229 million after-tax) •Combined ratio of 98.3% •Net investment income of$707 million ($595 million after-tax) •Net realized investment losses of$95 million ($74 million after-tax) •Operating cash flows of$1.38 billion
2022 Second Quarter Consolidated Financial Condition
•Total investments of$80.46 billion ; fixed maturities and short-term securities comprised 93% of total investments •Total assets of$116.59 billion •Total debt of$7.29 billion , resulting in a debt-to-total capital ratio of 24.2% (21.5% excluding net unrealized investment gains, net of tax) •Total capital returned to shareholders of$725 million , comprising$500 million of share repurchases and$225 million of dividends •Shareholders' equity of$22.87 billion •Net unrealized investment losses of$4.82 billion ($3.79 billion after-tax) •Book value per common share of$96.39 •Holding company liquidity of$1.56 billion 32 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except ratio and per share amounts) 2022 2021 2022 2021
Revenues
Premiums $ 8,317 $ 7,616 $ 16,331 $ 15,002
Net investment income 707 818 1,344 1,519
Fee income 100 104 203 205
Net realized investment gains (losses) (95) 61 (118) 105
Other revenues 107 88 185 169
Total revenues 9,136 8,687 17,945 17,000
Claims and expenses
Claims and claim adjustment expenses 5,803 5,045 10,842 10,015
Amortization of deferred acquisition costs 1,365 1,254 2,675
2,461
General and administrative expenses 1,223 1,174 2,414 2,337 Interest expense 88 83 175 165 Total claims and expenses 8,479 7,556 16,106 14,978 Income before income taxes 657 1,131 1,839 2,022 Income tax expense 106 197 270 355 Net income$ 551 $ 934 $ 1,569 $ 1,667 Net income per share Basic$ 2.29 $ 3.70 $ 6.50 $ 6.58 Diluted$ 2.27 $ 3.66 $ 6.43 $ 6.53 Combined ratio Loss and loss adjustment expense ratio 69.3 % 65.6 % 65.8 % 66.1 % Underwriting expense ratio 29.0 29.7 29.0 29.8 Combined ratio 98.3 % 95.3 % 94.8 % 95.9 % The following discussions of the Company's net income and segment income (loss) are presented on an after-tax basis. Discussions of the components of net income and segment income (loss) are presented on a pre-tax basis, unless otherwise noted. Discussions of net income per common share are presented on a diluted basis. Overview Diluted net income per share of$2.27 in the second quarter of 2022 decreased by 38% from diluted net income per share of$3.66 in the same period of 2021. Net income of$551 million in the second quarter of 2022 decreased by 41% from net income of$934 million in the same period of 2021. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in income before income taxes in the second quarter of 2022 primarily reflected the pre-tax impacts of (i) higher catastrophe losses, (ii) net realized investment losses compared to net realized investment gains in the same period of 2021, (iii) lower net investment income and (iv) lower underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), partially offset by (v) higher net favorable prior year reserve development. Catastrophe losses in the second quarters of 2022 and 2021 were$746 million and$475 million , respectively. Net favorable prior year reserve development in the second quarters of 2022 and 2021 was$291 million and$182 million , respectively. The lower underlying underwriting margins in the second quarter of 2022 were driven byPersonal Insurance , partially offset byBusiness Insurance andBond & Specialty Insurance . Underlying underwriting margins in the second quarter of 2021 included a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the second quarter of 2022 was lower than in the same period of 2021, primarily reflecting the impact of the decrease in income before income taxes. 33 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Diluted net income per share of$6.43 in the first six months of 2022 decreased by 2% from diluted net income per share of$6.53 in the same period of 2021. Net income of$1.57 billion in the first six months of 2022 decreased by 6% from net income of$1.67 billion in the same period of 2021. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in income before income taxes primarily reflected the pre-tax impacts of (i) net realized investment losses compared to net realized investment gains in the same period of 2021, (ii) lower net investment income, (iii) lower underlying underwriting margins and (iv) lower net favorable prior year reserve development, partially offset by (v) lower catastrophe losses. Net favorable prior year reserve development in the first six months of 2022 and 2021 was$444 million and$499 million , respectively. Catastrophe losses in the first six months of 2022 and 2021 were$906 million and$1.31 billion , respectively. The lower underlying underwriting margins in the first six months of 2022 were driven byPersonal Insurance , partially offset byBusiness Insurance andBond & Specialty Insurance . Underlying underwriting margins in the first six months of 2021 reflected a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the first six months of 2022 was lower than in the same period of 2021, primarily reflecting a$47 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters and the impact of the decrease in income before income taxes. The Company has insurance operations inCanada , theUnited Kingdom , theRepublic of Ireland and throughout other parts of the world as a corporate member of Lloyd's, as well as inBrazil andColombia through joint ventures. Because these operations are conducted in local currencies other than theU.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the three and six months endedJune 30, 2022 and 2021, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company's net income or segment income (loss) for the periods reported.
Revenues
Earned Premiums Earned premiums in the second quarter of 2022 were$8.32 billion ,$701 million or 9% higher than in the same period of 2021. Earned premiums in the first six months of 2022 were$16.33 billion ,$1.33 billion or 9% higher than in the same period of 2021. InBusiness Insurance , earned premiums in the second quarter and first six months of 2022 increased by 9% and 8%, respectively, over the same periods of 2021. Earned premiums inBusiness Insurance in both periods of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case impacted by COVID-19 and related economic conditions. InBond & Specialty Insurance , earned premiums in the second quarter and first six months of 2022 both increased by 10% over the same periods of 2021. In Personal Insurance, earned premiums in the second quarter and first six months of 2022 both increased by 10% over the same periods of 2021. Earned premiums in Bond &Specialty Insurance andPersonal Insurance in both the second quarter and first six months of 2021 were not materially impacted by COVID-19 and related economic conditions. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow. Net Investment Income The following table sets forth information regarding the Company's investments. Three Months Ended Six Months Ended June 30, June 30, (dollars in millions) 2022 2021 2022 2021 Average investments (1)$ 86,660 $ 82,594 $ 86,519 $ 81,954 Pre-tax net investment income 707 818 1,344
1,519
After-tax net investment income 595 682 1,134 1,272 Average pre-tax yield (2) 3.3 % 4.0 % 3.1 % 3.7 % Average after-tax yield (2) 2.7 % 3.3 % 2.6 % 3.1 %
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(1)Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income. (2)Excludes net realized and net unrealized investment gains and losses. Net investment income in the second quarter of 2022 was$707 million ,$111 million or 14% lower than in the same period of 2021. Net investment income in the first six months of 2022 was$1.34 billion ,$175 million or 12% lower than in the same period of 2021. Net investment income from fixed maturity investments in the second quarter and first six months of 2022 was$512 million and$1.02 billion , respectively,$19 million and$33 million higher, respectively, than in the same periods of 2021. 34 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued The increases primarily resulted from a higher average level of fixed maturity investments, partially offset by lower long-term average yields. Net investment income from short-term securities in the second quarter and first six months of 2022 was$9 million and$11 million , respectively,$8 million and$7 million higher, respectively, than in the same periods of 2021. The increases in both periods of 2022 primarily resulted from higher short-term average yields, partially offset by a lower level of short-term investments. The Company's remaining investment portfolios had net investment income of$197 million and$339 million in the second quarter and first six months of 2022, respectively,$138 million and$214 million lower, respectively, than in the same periods of 2021. The decline in net investment income from these portfolios in the second quarter and first six months of 2022 compared with the same periods of 2021 primarily reflected the impact of lower returns from private equity partnerships as compared to strong returns in the same periods of 2021. Included in other investments are private equity, hedge fund and real estate partnerships that are accounted for under the equity method of accounting and typically report their financial statement information to the Company one month to three months following the end of the reporting period. Accordingly, net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. Fee Income Fee income in the second quarter of 2022 was$100 million ,$4 million lower than in the same period of 2021. Fee income in the first six months of 2022 was$203 million ,$2 million lower than in the same period of 2021. The National Accounts market inBusiness Insurance is the primary source of the Company's fee-based business and is discussed in theBusiness Insurance segment discussion that follows. Net Realized Investment Gains (Losses) The following table sets forth information regarding the Company's net realized investment gains (losses). Three Months Ended Six Months Ended June 30, June 30, (in millions) 2022 2021 2022 2021 Impairment gains (losses): Fixed maturities$ (20) $ -$ (21) $ - Net realized investment gains (losses) on equity securities still held (71) 28 (85) 51 Other net realized investment gains (losses), including from sales (4) 33 (12) 54 Total$ (95) $ 61 $ (118) $ 105 Net realized investment losses on equity securities still held of$71 million and$85 million in the second quarter and first six months of 2022, respectively, were driven by the impact of changes in fair value attributable to unfavorable equity markets. Net realized investment gains on equity securities still held of$28 million and$51 million in the second quarter and first six months of 2021, respectively, were driven by the impact of changes in fair value attributable to favorable equity markets. Other Revenues Other revenues in the second quarter of 2022 were$107 million ,$19 million higher than in the same period of 2021. Other revenues in the first six months of 2022 were$185 million ,$16 million higher than in the same period of 2021. The increases in both periods primarily reflected the receipt of a surplus distribution from a state workers' compensation reinsurance fund. Other revenues also included revenues from Simply Business, installment premium charges and other policyholder service charges.
Claims and Expenses
Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the second quarter of 2022 were$5.80 billion ,$758 million or 15% higher than in the same period of 2021, primarily reflecting the impacts of (i) higher business volumes, (ii) higher catastrophe losses, (iii) loss cost trends, including elevated severity in the current quarter in both the automobile and homeowners and other product lines inPersonal Insurance , (iv) higher non-catastrophe property losses inBusiness Insurance and (v) a comparison to a low level of loss activity in the prior year quarter in the automobile product line inPersonal Insurance , partially offset by (vi) higher net favorable prior year reserve development. Catastrophe losses in the second quarter of 2022 primarily resulted from severe wind and hail storms in several regions ofthe United States . Catastrophe losses in the second quarter of 2021 primarily resulted from severe storms in several regions ofthe United States . The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses in the second quarter of 2021 are discussed in more detail in the segment discussions that follow. 35 --------------------------------------------------------------------------------
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Claims and claim adjustment expenses in the first six months of 2022 were$10.84 billion ,$827 million or 8% higher than in the same period of 2021, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, including elevated severity in the current year in both the automobile and homeowners and other product lines inPersonal Insurance , (iii) a comparison to a low level of loss activity in the prior year period in the automobile product line inPersonal Insurance , (iv) higher non-catastrophe property losses inBusiness Insurance and (v) lower net favorable prior year reserve development, partially offset by (vi) lower catastrophe losses. Catastrophe losses in the first six months of 2022 included the second quarter events described above, as well as wind storms in multiple states in the first quarter of 2022. Catastrophe losses in the first six months of 2021 included the second quarter events described above, as well as winter storms and wind storms in several regions ofthe United States in the first quarter of 2021. The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses in the first six months of 2021 are discussed in more detail in the segment discussions that follow.
Factors contributing to net favorable prior year reserve development during the second quarters and first six months of 2022 and 2021 are discussed in more detail in note 7 of the notes to the unaudited consolidated financial statements.
Significant Catastrophe Losses The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in the three months and six months endedJune 30, 2022 and 2021, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and six months endedJune 30, 2022 and 2021 for significant catastrophes that occurred in 2021 and 2020, and the estimate of ultimate losses for those catastrophes atJune 30, 2022 andDecember 31, 2021 . For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be$100 million or more after reinsurance and before taxes. The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for 2022 ranged from$20 million to$30 million of losses before reinsurance and taxes. For the Company's definition of a catastrophe, refer to "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations- Consolidated Overview" in the Company's 2021 Annual Report. 36
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