THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations for the years endedDecember 31, 2022 and 2021, including year-to-year comparisons between 2022 and 2021. Year-to-year comparisons between 2021 and 2020 have been omitted from this Form 10-K, but may be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 .
FINANCIAL HIGHLIGHTS
2022 Consolidated Results of Operations
•Net income of
•Net earned premiums of
•Catastrophe losses of
•Net favorable prior year reserve development of
•Combined ratio of 95.6%
•Net investment income of
•Operating cash flows of
2022 Consolidated Financial Condition
•Total investments of
•Total assets of
•Total debt of$7.29 billion , resulting in a debt-to-total capital ratio of 25.3% (21.6% excluding net unrealized investment losses, net of tax, included in shareholders' equity)
•Total capital returned to shareholders of
•Shareholders' equity of
•Net unrealized investment losses of
•Book value per common share of
•Holding company liquidity of
59
--------------------------------------------------------------------------------CONSOLIDATED OVERVIEW
Consolidated Results of Operations (for the year ended December 31, in millions except per share amounts) 2022 2021 2020 Revenues Premiums$ 33,763 $ 30,855 $ 29,044 Net investment income 2,562 3,033 2,227 Fee income 412 402 429 Net realized investment gains (losses) (204) 171 2 Other revenues 351 355 279 Total revenues 36,884 34,816 31,981 Claims and expenses Claims and claim adjustment expenses 22,854 20,298 19,123 Amortization of deferred acquisition costs 5,515 5,043 4,773 General and administrative expenses 4,810 4,677 4,509 Interest expense 351 340 339 Total claims and expenses 33,530 30,358 28,744 Income before income taxes 3,354 4,458 3,237 Income tax expense 512 796 540 Net income$ 2,842 $ 3,662 $ 2,697 Net income per share Basic$ 11.91 $ 14.63 $ 10.56 Diluted$ 11.77 $ 14.49 $ 10.52 Combined ratio Loss and loss adjustment expense ratio 67.1 % 65.1 % 65.1 % Underwriting expense ratio 28.5 29.4 29.9 Combined ratio 95.6 % 94.5 % 95.0 % 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 earnings per common share are presented on a diluted basis. Overview Diluted net income per share of$11.77 in 2022 decreased by 19% from diluted net income per share of$14.49 in 2021. Net income of$2.84 billion in 2022 decreased by 22% from net income of$3.66 billion in 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) lower net investment income, (ii) net realized investment losses compared to net realized investment gains in 2021 and (iii) lower underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), partially offset by (iv) higher net favorable prior year reserve development. Net favorable prior year reserve development in 2022 and 2021 was$649 million and$538 million , respectively. Catastrophe losses in 2022 and 2021 were$1.88 billion and$1.85 billion , respectively. The lower underlying underwriting margins in 2022 were driven byPersonal Insurance , partially offset byBusiness Insurance andBond & Specialty Insurance . Underlying underwriting margins in 2021 reflected a net favorable impact associated with the pandemic. Income tax expense in 2022 was lower than in 2021, primarily reflecting the impact of the decrease in income before income taxes and 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. The Company has insurance operations inCanada , theUnited Kingdom , theRepublic of Ireland and throughout other parts of the world as a corporate member ofLloyd's , as well as inBrazil andColombia , primarily 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 years endedDecember 31, 2022 and 2021, changes in foreign currency exchange rates had the impact of lowering the 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 for the periods reported. 60 --------------------------------------------------------------------------------
Revenues
Earned Premiums
Earned premiums in 2022 were$33.76 billion ,$2.91 billion or 9% higher than in 2021. InBusiness Insurance , earned premiums in 2022 increased by 9% over 2021. Earned premiums inBusiness Insurance in 2021 were negatively impacted by lower net written premiums primarily in the latter half of 2020 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 2022 increased by 9% over 2021. InPersonal Insurance , earned premiums in 2022 increased by 11% over 2021. Earned premiums inBond & Specialty Insurance andPersonal Insurance in 2021 were not materially impacted by COVID-19 and related economic conditions. Factors contributing to the change in earned premiums in each segment in 2022 as compared with 2021 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.
(for the year ended
2021 2020
Average investments(1) $ 87,191 $ 83,574 $ 78,070
Pre-tax net investment income 2,562 3,033 2,227
After-tax net investment income 2,170 $ 2,541 1,908
Average pre-tax yield(2) 2.9 % 3.6 % 2.9 %
Average after-tax yield(2) 2.5 % 3.0 % 2.4 %
___________________________________________
(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 2022 was$2.56 billion ,$471 million or 16% lower than in 2021. Net investment income from fixed maturity investments in 2022 was$2.11 billion ,$124 million higher than in 2021. The increase primarily resulted from a higher average level of fixed maturity investments and higher average yields. Net investment income from short-term securities in 2022 was$73 million ,$66 million higher than in 2021. The increase 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$419 million in 2022,$658 million lower than in 2021, primarily reflecting the impact of lower returns from private equity partnerships as compared to very strong returns in 2021. Included in other investments are private equity, hedge fund and real estate partnerships that are accounted for under the equity method of accounting and typically report their financial statement information to the Company one month to three months following the end of the reporting period. Accordingly, net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. Fee Income
Fee income in 2022 was
61
--------------------------------------------------------------------------------Net Realized Investment Gains (Losses)
The following table sets forth information regarding the Company's net pre-tax realized investment gains (losses).
(for the year ended December 31, in millions) 2022 2021 2020 Impairment gains (losses): Fixed maturities$ (26) $ (2) $ (15) Real estate investments (12) - - Other investments - - (40)
Net realized investment gains (losses) on equity securities still held
(61) 78 27
Other net realized investment gains (losses), including from sales
(105) 95 30
Total $ (204) $ 171 $ 2
Net realized investment losses on equity securities still held of $61 million in
2022 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 $78 million in 2021 were driven by the impact of changes in fair
value attributable to favorable equity markets.
Other net realized investment losses in 2022 included $72 million of net
realized investment losses related to fixed maturity investments, $8 million of
net realized investment losses related to equity securities sold and $25 million
of net realized investment losses related to other investments. Other net
realized investment gains in 2021 included $69 million of net realized
investment gains related to fixed maturity investments, $17 million of net
realized investment gains related to equity securities sold and $9 million of
net realized investment gains related to other investments.
Other Revenues
Other revenues in 2022 were$351 million ,$4 million lower than 2021. Other revenues include revenues from Simply Business, installment premium charges and other policyholder service charges. Other revenues from Simply Business were negatively impacted by changes in foreign currency exchange rates. Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in 2022 were$22.85 billion ,$2.56 billion or 13% higher than 2021, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, including elevated losses in both the automobile and homeowners and other product lines inPersonal Insurance and (iii) favorable loss activity associated with the pandemic in 2021 inBusiness Insurance , partially offset by (iv) higher net favorable prior year reserve development. Catastrophes in 2022 primarily resulted from a significant winter storm that impacted most of theU.S. and parts ofCanada and Hurricanes Ian and Fiona, as well as severe wind and hail storms in several regions ofthe United States . Catastrophes in 2021 primarily resulted from winter storms, Hurricane Ida, tornado activity inKentucky and severe wind and hail storms in several regions ofthe United States , as well as a wildfire inColorado . Catastrophe and non-catastrophe weather-related losses in 2021 were reduced by the full$350 million of recoveries available under the Company's 2021 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty. Factors contributing to net favorable prior year reserve development during the years endedDecember 31, 2022 , 2021 and 2020 are discussed in more detail in note 8 of the notes to the consolidated financial statements.
Significant Catastrophe Losses
The Company defines a "catastrophe" as an event:
•that is designated a catastrophe by internationally recognized organizations that track and report on insured losses resulting from catastrophic events, such as Property Claim Services (PCS) for events inthe United States andCanada ; and
•for which the Company's estimates of its ultimate losses before reinsurance and taxes exceed a pre-established dollar threshold.
62
--------------------------------------------------------------------------------
The Company's threshold for disclosing catastrophes is primarily determined at
the reportable segment level. If a threshold for one segment or a combination
thereof is exceeded and the other segments have losses from the same event,
losses from the event are identified as catastrophe losses in the segment
results and for the consolidated results of the Company. Additionally, an
aggregate threshold is applied for International business across all reportable
segments. The threshold for 2022 ranged from approximately $20 million to $30
million of losses before reinsurance and taxes.
The following table presents the amount of losses recorded by the Company for
significant catastrophes that occurred in 2022, 2021 and 2020, the amount of net
unfavorable (favorable) prior year reserve development recognized in 2022 and
2021 for catastrophes that occurred in 2021 and 2020, and the estimate of
ultimate losses for those catastrophes at December 31, 2022 , 2021 and 2020. 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.
Losses Incurred / Unfavorable (Favorable) Estimated Ultimate Losses at
Prior Year Reserve Development for the Year Ended December 31 , December 31 ,
(in millions, pre-tax and net of reinsurance)(1) 2022 2021 2020 2022 2021 2020
2020
PCS Serial Number:
16 - Tennessee tornado activity 3 (9) 151 145 142 151
19 - Severe storms (2) (9) 134 123 125 134
20 - Severe storms 6 (25) 165 146 140 165
33 - Civil unrest (7) (7) 100 86 93 100
44 - Tropical Storm Isaias 3 (22) 140 121 118 140
46 - Midwest derecho 3 (10) 212 205 202 212
68 - California wildfire - Glass fire (2) (19) (9) 145 117 136 145
2021
PCS Serial Number:
15 - Winter storm (13) 228 n/a 215 228 n/a
17 - Winter storm (25) 508 n/a 483 508 n/a
29 - Severe wind storms (12) 105 n/a 93 105 n/a
60 - Hurricane Ida (81) 417 n/a 336 417 n/a
76 - Tornado outbreak (18) 131 n/a 113 131 n/a
2022
PCS Serial Number:
33 - Severe wind and hail storms 137 n/a n/a 137 n/a n/a
35 - Severe wind and hail storms 184 n/a n/a 184 n/a n/a
43 - Severe wind and hail storms 122 n/a n/a 122 n/a n/a
61 - Hurricane Ian 227 n/a n/a 227 n/a n/a
73 - Winter storm 512 n/a n/a 512 n/a n/a
___________________________________________
(1) Amounts are reported pre-tax and net of recoveries under all applicable reinsurance treaties, except for the Company's 2022, 2021 and 2020 Underlying Property Aggregate Catastrophe Excess-of-Loss Treaties. Those treaties covered the accumulation of certain property losses arising from one or multiple occurrences (both catastrophe and non-catastrophe events) for the periodJanuary 1, 2022 through and includingDecember 31, 2022 , the periodJanuary 1, 2021 through and includingDecember 31, 2021 and the periodJanuary 1, 2020 through and includingDecember 31, 2020 , respectively. As a result, the benefit from the 2021 and 2020 treaties are not included in the table as the allocation of the treaties' benefit to each identified catastrophe changes each time there are additional events or changes in estimated losses from any covered event. (2) In addition to the Glass fire, there were 16 other PCS-designated wildfires in 2020. While none of the 16 wildfires were individually large enough to meet the Company's threshold for disclosure as a significant catastrophe in this table, total losses in 2020 from those wildfires were$169 million , of which two wildfires totaling$73 million met the Company's threshold for disclosure as catastrophes. n/a: not applicable. 63
--------------------------------------------------------------------------------
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in 2022 was$5.52 billion ,$472 million or 9% higher than in 2021. The increase in 2022 was generally consistent with the increase in earned premiums. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow. General and Administrative Expenses General and administrative expenses in 2022 were$4.81 billion ,$133 million or 3% higher than in 2021, primarily reflecting the impact of costs associated with higher business volumes. General and administrative expenses in 2021 included the benefit of lower net expenses related to COVID-19 and related economic conditions. General and administrative expenses are discussed in more detail in the segment discussions that follow.
Interest Expense
Interest expense in 2022 and 2021 was
Income Tax Expense
Income tax expense in 2022 was$512 million ,$284 million or 36% lower than in 2021, primarily reflecting the impact of the$1.10 billion decrease in income before income taxes in 2022 and the$47 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters. The Company's effective tax rate was 15% and 18% in 2022 and 2021, respectively. The effective tax rates in both years were lower than the statutory rate of 21%, primarily due to the impact of tax-exempt investment income on the calculation of the Company's income tax provision. In addition, the effective tax rate for 2022 was reduced by the impact of the resolution of prior year tax matters discussed above.
Combined Ratio
The combined ratio of 95.6% in 2022 was 1.1 points higher than the combined
ratio of 94.5% in 2021. The loss and loss adjustment expense ratio of 67.1% in
2022 was 2.0 points higher than the loss and loss adjustment expense ratio of
65.1% in 2021. The underwriting expense ratio of 28.5% in 2022 was 0.9 points
lower than the underwriting expense ratio of 29.4% in 2021.
Catastrophe losses in 2022 and 2021 accounted for 5.5 points and 6.0 points,
respectively, of the combined ratio. Net favorable prior year reserve
development in 2022 and 2021 provided 1.9 points and 1.8 points of benefit,
respectively, to the combined ratio. The combined ratio excluding prior year
reserve development and catastrophe losses ("underlying combined ratio") in 2022
was 1.7 points higher than the 2021 ratio on the same basis, primarily
reflecting the impacts of (i) elevated losses in both the automobile and
homeowners and other product lines in Personal Insurance and (ii) a favorable
impact associated with the pandemic in 2021 in Business Insurance , partially
offset by (iii) the benefit of earned pricing in Business Insurance and Bond &
Specialty Insurance and (iv) a lower expense ratio.
The combined ratio continues to be impacted by the tort environment, including more aggressive attorney involvement in insurance claims.
64
--------------------------------------------------------------------------------Written Premiums
Consolidated gross and net written premiums were as follows:
Gross Written Premiums
(for the year ended
2020 Business Insurance$ 19,521 $ 17,829 $ 17,060 Bond & Specialty Insurance 4,082 3,725 3,184 Personal Insurance 14,273 12,690 11,519 Total$ 37,876 $ 34,244 $ 31,763 Net Written Premiums
(for the year ended
2020 Business Insurance$ 17,635 $ 16,092 $ 15,431 Bond & Specialty Insurance 3,732 3,376 2,951 Personal Insurance 14,047 12,491 11,350 Total$ 35,414 $ 31,959 $ 29,732 Gross and net written premiums in 2022 both increased by 11% over 2021. Factors contributing to the changes in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.
RESULTS OF OPERATIONS BY SEGMENT
Results ofBusiness Insurance were as follows: (for the year ended December 31, in millions) 2022 2021 2020 Revenues Earned premiums$ 17,095 $ 15,734 $ 15,294 Net investment income 1,864 2,265 1,633 Fee income 382 375 405 Other revenues 248 235 176 Total revenues 19,589 18,609 17,508 Total claims and expenses 16,522 15,725 15,986 Segment income before income taxes 3,067 2,884 1,522 Income tax expense 536 499 213 Segment income$ 2,531 $ 2,385 $ 1,309 Loss and loss adjustment expense ratio 62.8 % 65.0 % 69.4 % Underwriting expense ratio 29.7 30.7 30.9 Combined ratio 92.5 % 95.7 % 100.3 % 65
--------------------------------------------------------------------------------
Overview
Segment income in 2022 was$2.53 billion ,$146 million or 6% higher than segment income of$2.39 billion in 2021. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins, (ii) higher net favorable prior year reserve development and (iii) lower catastrophe losses, partially offset by (iv) lower net investment income. Net favorable prior year reserve development in 2022 and 2021 was$381 million and$173 million , respectively. Catastrophe losses in 2022 and 2021 were$654 million and$793 million , respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) higher business volumes and (ii) the benefit of earned pricing, partially offset by (iii) a favorable impact associated with the pandemic in 2021. Income tax expense in 2022 was higher than in 2021, primarily reflecting the impact of the increase in segment income before income taxes.
Revenues
Earned Premiums
Earned premiums in 2022 were$17.10 billion ,$1.36 billion or 9% higher than in 2021, primarily reflecting the increase in net written premiums over the preceding twelve months. Earned premiums in 2021 were negatively impacted by lower net written premiums primarily in the latter half of 2020 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.
Net Investment Income
Net investment income in 2022 was$1.86 billion ,$401 million or 18% lower than in 2021. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion for a description of the factors contributing to the decrease in the Company's consolidated net investment income in 2022 compared with 2021. In addition, refer to note 2 of the notes to the consolidated financial statements for a discussion of the Company's net investment income allocation methodology.
Fee Income
National Accounts is the primary source of fee income due to revenue from its large deductible policies and service businesses, which include risk management, claims administration, loss control and risk management information services provided to third parties, as well as policy issuance and claims management services to workers' compensation residual market pools. Fee income in 2022 was$382 million ,$7 million or 2% higher than in 2021, primarily reflecting higher serviced premium volume from the workers' compensation residual market pool, partially offset by lower claim volume under administration associated with large deductible policies.
Other Revenues
Other revenues in 2022 were$248 million ,$13 million or 6% higher than in 2021, and include the receipt of a surplus distribution from a state workers' compensation fund. Other revenues also included revenues from Simply Business, installment premium charges and other policyholder service charges. Other revenues from Simply Business were negatively impacted by changes in foreign currency exchange rates. Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in 2022 were$10.91 billion ,$509 million or 5% higher than in 2021, primarily reflecting the impacts of (i) loss cost trends, (ii) higher business volumes and (iii) favorable loss activity associated with the pandemic in 2021, partially offset by (iv) higher net favorable prior year reserve development and (v) lower catastrophe losses. Catastrophe losses and non-catastrophe weather-related losses in 2021 were reduced by recoveries under the Company's 2021 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty.
Factors contributing to net prior year reserve development during the years
ended
66
--------------------------------------------------------------------------------Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in 2022 was
General and Administrative Expenses
General and administrative expenses in 2022 were$2.83 billion ,$81 million or 3% higher than in 2021, primarily reflecting the impact of higher business volumes. General and administrative expenses in 2021 included the benefit of lower travel-related expenses attributable to COVID-19 and related economic conditions.
Income Tax Expense
Income tax expense in 2022 was$536 million ,$37 million or 7% higher than in 2021, primarily reflecting the impact of the$183 million increase in segment income before income taxes in 2022. Income tax expense in 2022 was reduced by$3 million as a result of the resolution of prior year tax matters.
Combined Ratio
The combined ratio of 92.5% in 2022 was 3.2 points lower than the combined ratio of 95.7% in 2021. The loss and loss adjustment expense ratio of 62.8% in 2022 was 2.2 points lower than the loss and loss adjustment expense ratio of 65.0% in 2021. The underwriting expense ratio of 29.7% in 2022 was 1.0 points lower than the underwriting expense ratio of 30.7% in 2021. Catastrophe losses in 2022 and 2021 accounted for 3.8 points and 5.1 points, respectively, of the combined ratio. Net favorable prior year reserve development in 2022 and 2021 provided 2.2 points and 1.1 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2022 was 0.8 points lower than the 2021 ratio on the same basis, primarily reflecting the impacts of (i) a lower expense ratio and (ii) the benefit of earned pricing, partially offset by (iii) a favorable impact associated with the pandemic in 2021. Written Premiums
Gross Written Premiums
(for the year ended
2020
Domestic:
Select Accounts $ 3,126 $ 2,860 $ 2,848
Middle Market 10,532 9,487 9,017
National Accounts 1,642 1,517 1,540
National Property and Other 2,942 2,701 2,460
Total Domestic 18,242 16,565 15,865
International 1,279 1,264 1,195
Total Business Insurance $ 19,521 $ 17,829 $ 17,060
67
--------------------------------------------------------------------------------
Net Written Premiums
(for the year ended
2020
Domestic:
Select Accounts $ 3,099 $ 2,833 $ 2,821
Middle Market 9,923 8,933 8,511
National Accounts 1,085 987 996
National Property and Other 2,467 2,265 2,086
Total Domestic 16,574 15,018 14,414
International 1,061 1,074 1,017
Total Business Insurance $ 17,635 $ 16,092 $ 15,431 Gross and net written premiums in 2022 increased by 9% and 10%, respectively, over 2021.
Select Accounts. Net written premiums of$3.10 billion in 2022 increased by 9% over 2021. Retention rates remained strong in 2022 and increased over 2021. Renewal premium changes in 2022 remained positive and were lower than in 2021. New business premiums in 2022 increased over 2021. Middle Market. Net written premiums of$9.92 billion in 2022 increased by 11% over 2021. Retention rates remained strong in 2022 and increased over 2021. Renewal premium changes in 2022 remained positive and were lower than in 2021. New business premiums in 2022 increased over 2021. National Accounts. Net written premiums of$1.09 billion in 2022 increased by 10% over 2021. Retention rates remained strong in 2022 and increased over 2021. Renewal premium changes in 2022 remained positive and were higher than in 2021. New business premiums in 2022 decreased from 2021. National Property and Other. Net written premiums of$2.47 billion in 2022 increased by 9% over 2021. Retention rates remained strong in 2022 and increased over 2021. Renewal premium changes in 2022 remained positive and were higher than in 2021. New business premiums in 2022 increased over 2021.
International. Net written premiums of
Results of
2020
Revenues
Earned premiums $ 3,418 $ 3,138 $ 2,823
Net investment income 258 247 213
Other revenues 20 23 27
Total revenues 3,696 3,408 3,063
Total claims and expenses 2,593 2,575 2,483
Segment income before income taxes 1,103 833 580
Income tax expense 195 165 107
Segment income $ 908 $ 668 $ 473
Loss and loss adjustment expense ratio 39.9 % 46.6 % 51.5 %
Underwriting expense ratio 35.4 34.9 35.9
Combined ratio 75.3 % 81.5 % 87.4 %
68--------------------------------------------------------------------------------
Overview
Segment income in 2022 was$908 million ,$240 million or 36% higher than segment income of$668 million in 2021. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins and (ii) higher net favorable prior year reserve development. Net favorable prior year reserve development in 2022 and 2021 was$222 million and$105 million , respectively. Catastrophe losses in 2022 and 2021 were$25 million and$40 million , respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) higher business volumes and (ii) the benefit of earned pricing, partially offset by (iii) higher general and administrative expenses. Income tax expense in 2022 was higher than in 2021, primarily reflecting the impact of the increase in segment income before income taxes, partially offset by a$24 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters. Revenues Earned Premiums
Earned premiums in 2022 were
Net Investment Income
Net investment income in 2022 was$258 million ,$11 million or 4% higher than in 2021. Included inBond & Specialty Insurance are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion for a description of the factors contributing to the decrease in the Company's consolidated net investment income in 2022 as compared with 2021. In addition, refer to note 2 of the notes to the consolidated financial statements for a discussion of the Company's net investment income allocation methodology.
Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in 2022 were
Factors contributing to net prior year reserve development during the years
ended
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in 2022 was$625 million ,$55 million or 10% higher than in 2021, generally consistent with the increase in earned premiums.
General and Administrative Expenses
General and administrative expenses in 2022 were
Income Tax Expense
Income tax expense in 2022 was$195 million ,$30 million or 18% higher than in 2021, primarily reflecting the impact of the$270 million increase in segment income before income taxes in 2022, partially offset by the$24 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters.
Combined Ratio
The combined ratio of 75.3% in 2022 was 6.2 points lower than the combined ratio
of 81.5% in 2021. The loss and loss adjustment expense ratio of 39.9% in 2022
was 6.7 points lower than the loss and loss adjustment expense ratio of 46.6% in
69
--------------------------------------------------------------------------------2021. The underwriting expense ratio of 35.4% in 2022 was 0.5 points higher than the underwriting expense ratio of 34.9% in 2021.
Net favorable prior year reserve development in 2022 and 2021 provided 6.5 points and 3.3 points of benefit, respectively, to the combined ratio. Catastrophe losses in 2022 and 2021 accounted for 0.7 points and 1.3 points, respectively, of the combined ratio. The underlying combined ratio in 2022 was 2.4 points lower than the 2021 ratio on the same basis, primarily reflecting the benefit of earned pricing. Written Premiums
Gross Written Premiums
(for the year ended
2020
Domestic:
Management Liability $ 2,361 $ 2,243 $ 1,920
Surety 1,153 952 910
Total Domestic 3,514 3,195 2,830
International 568 530 354
Total Bond & Specialty Insurance $ 4,082 $ 3,725 $ 3,184
Net Written Premiums
(for the year ended
2020 Domestic: Management Liability$ 2,112 $ 1,983 $ 1,769 Surety 1,081 888 845 Total Domestic 3,193 2,871 2,614 International 539 505 337 Total Bond & Specialty Insurance$ 3,732 $ 3,376
Gross written premiums and net written premiums in 2022 increased by 10% and 11%, respectively, over 2021.
Domestic. Net written premiums in 2022 were$3.19 billion ,$322 million or 11% higher than in 2021. Excluding the surety line of business, for which the following are not relevant measures, retention rates remained strong in 2022 and increased over 2021. Renewal premium changes in 2022 remained positive and were lower than in 2021. New business premiums in 2022 increased over 2021. International. Net written premiums in 2022 were$539 million ,$34 million or 7% higher than in 2021, primarily driven by increases in theUnited Kingdom and broaderEurope , as well asCanada , partially offset by the impact of changes in foreign currency exchange rates. 70 --------------------------------------------------------------------------------
Results ofPersonal Insurance were as follows: (for the year ended December 31, in millions) 2022 2021 2020 Revenues Earned premiums$ 13,250 $ 11,983 $ 10,927 Net investment income 440 521 381 Fee income 30 27 24 Other revenues 83 97 76 Total revenues 13,803 12,628 11,408 Total claims and expenses 14,033 11,689 9,905 Segment income (loss) before income taxes (230) 939 1,503 Income tax expense (benefit) (90) 179 308 Segment income (loss)$ (140) $ 760 $ 1,195 Loss and loss adjustment expense ratio 79.8 % 70.3 % 62.8 % Underwriting expense ratio 25.1 26.2 26.9 Combined ratio 104.9 % 96.5 % 89.7 % Overview Segment loss in 2022 was$140 million , compared with segment income of$760 million in 2021. Segment loss before income taxes primarily reflected the pre-tax impacts of (i) lower underlying underwriting margins, (ii) lower net favorable prior year reserve development, (iii) higher catastrophe losses and (iv) lower net investment income. Catastrophe losses in 2022 and 2021 were$1.20 billion and$1.01 billion , respectively. Net favorable prior year reserve development in 2022 and 2021 was$46 million and$260 million , respectively. The lower underlying underwriting margins primarily reflected the impacts of (i) elevated losses in both the automobile and homeowners and other product lines, partially offset by (ii) higher business volumes. The segment recorded an income tax benefit in 2022 compared to income tax expense in 2021, primarily reflecting the impact of the segment loss before income taxes compared with segment income before income taxes in 2021 and a$20 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters. Revenues Earned Premiums
Earned premiums in 2022 were
Net Investment Income
Net investment income in 2022 was$440 million ,$81 million or 16% lower than in 2021. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion for a description of the factors contributing to the decrease in the Company's consolidated net investment income in 2022 as compared with 2021. In addition, refer to note 2 of the notes to the consolidated financial statements for a discussion of the Company's net investment income allocation methodology. Other Revenues
Other revenues in all years presented primarily consisted of installment premium charges.
71
--------------------------------------------------------------------------------Claims and Expenses
Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses in 2022 were$10.57 billion ,$2.14 billion or 25% higher than in 2021, primarily reflecting the impacts of (i) loss cost trends, including elevated losses in both the automobile and homeowners and other product lines, (ii) higher business volumes, (iii) lower net favorable prior year reserve development and (iv) higher catastrophe losses. Catastrophe losses and non-catastrophe weather-related losses in 2021 were reduced by recoveries under the Company's 2021 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty. Net favorable prior year reserve development was not significant for the year endedDecember 31, 2022 . Factors contributing to net favorable prior year reserve development during the years endedDecember 31, 2021 and 2020 are discussed in more detail in note 8 of the notes to the consolidated financial statements.
Amortization of Deferred Acquisition Costs
Amortization of deferred acquisition costs in 2022 was
General and Administrative Expenses
General and administrative expenses in 2022 were$1.36 billion ,$8 million or 1% lower than in 2021, primarily reflecting lower contingent commissions, partially offset by the impact of higher business volumes.
Income Tax Expense (Benefit)
The income tax benefit in 2022 was$90 million , compared with income tax expense of$179 million in 2021, primarily reflecting the impact of the segment loss before income taxes of$230 million in 2022 compared with segment income before income taxes of$939 million in 2021 and the$20 million reduction in income tax expense in the first quarter of 2022 as a result of the resolution of prior year tax matters. Combined Ratio The combined ratio of 104.9% in 2022 was 8.4 points higher than the combined ratio of 96.5% in 2021. The loss and loss adjustment expense ratio of 79.8% in 2022 was 9.5 points higher than the loss and loss adjustment expense ratio of 70.3% in 2021. The underwriting expense ratio of 25.1% in 2022 was 1.1 points lower than the underwriting expense ratio of 26.2% in 2021. Catastrophe losses accounted for 9.0 points and 8.5 points of the combined ratio in 2022 and 2021, respectively. Net favorable prior year reserve development in 2022 and 2021 provided 0.3 points and 2.2 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2022 was 6.0 points higher than the 2021 ratio on the same basis, primarily reflecting the impacts of (i) elevated losses in both the automobile and homeowners and other product lines, partially offset by (ii) a lower expense ratio. 72 --------------------------------------------------------------------------------
Written Premiums
Gross Written Premiums
(for the year ended
2020
Domestic:
Automobile $ 6,507 $ 5,852 $ 5,395
Homeowners and Other 7,099 6,137 5,457
Total Domestic 13,606 11,989 10,852
International 667 701 667
Total Personal Insurance $ 14,273 $ 12,690 $ 11,519
Net Written Premiums
(for the year ended
2020
Domestic:
Automobile $ 6,482 $ 5,827 $ 5,369
Homeowners and Other 6,916 5,980 5,329
Total Domestic 13,398 11,807 10,698
International 649 684 652
Total Personal Insurance $ 14,047 $ 12,491 $ 11,350 Gross and net written premiums in 2022 both increased by 12% over 2021.
Domestic
Automobile net written premiums of$6.48 billion in 2022 increased by 11% over 2021. Retention rates remained strong in 2022 but were lower than in 2021. Renewal premium changes in 2022 remained positive and were higher than in 2021. New business premiums in 2022 increased over 2021. Homeowners and Other net written premiums of$6.92 billion in 2022 increased by 16% over 2021. Retention rates remained strong in 2022 but were lower than in 2021. Renewal premium changes in 2022 remained positive and were higher than in 2021. New business premiums in 2022 were comparable with 2021.
For its Domestic business,
International
International net written premiums of$649 million in 2022 decreased by 5% from 2021, driven by the impact of changes in foreign currency exchange rates and declines in the automobile product line.
For its International business,
Interest Expense and Other (for the year ended December 31, in millions) 2022 2021 2020 Income (loss)$ (301) $ (291) $ (291) The income (loss) for Interest Expense and Other in 2022 and 2021 was$(301) million and$(291) million , respectively. Pre-tax interest expense in 2022 and 2021 was$351 million and$340 million , respectively. After-tax interest expense in 2022 and 2021 was$277 million and$269 million , respectively. 73 --------------------------------------------------------------------------------
ASBESTOS CLAIMS AND LITIGATION
The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims. Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the focus by plaintiffs on defendants, such as manufacturers of talcum powder, who were not traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Company's asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. The Company continues to be involved in disputes, including litigation, with a number of policyholders, some of whom are in bankruptcy, over coverage for asbestos-related claims. Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company, but which could result in settlements for larger amounts than originally anticipated. Although the Company has seen a reduction in the overall risk associated with these disputes, it remains difficult to predict the ultimate cost of these claims. As in the past, the Company will continue to pursue settlement opportunities. In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers' conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. It is possible that other direct actions against insurers, including the Company, could be filed in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions. Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder with open claims at least annually. Among the factors the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder's potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. The Company's net asbestos reserves atDecember 31, 2022 and 2021 were$1.31 billion and$1.34 billion , respectively, and include case reserves, IBNR reserves and reserves for the costs of defending asbestos-related coverage litigation. IBNR reserves include amounts for new claims and adverse development on existing policyholders, as well as reserves for claims from policyholders reporting asbestos claims for the first time and for policyholders for which there is, or may be, litigation. Asbestos reserves also include amounts related to certain policyholders with whom the Company has entered into permanent settlement agreements, which are based on the expected payout for each policyholder under the applicable agreement. Additionally, a portion of the asbestos reserves relates to assumed reinsurance contracts primarily consisting of reinsurance of excess coverage, including various pool participations. The Company conducts an annual review of domestic policyholders with open asbestos claims. Policyholders are identified for this review based upon, among other factors: a combination of past payments and current case reserves in excess of a specified threshold (currently$100,000 ), perceived level of exposure, number of reported claims, products/completed operations and potential "non-product" exposures, size of policyholder and geographic distribution of products or services sold by the policyholder. 74 -------------------------------------------------------------------------------- In the third quarter of 2022, the Company completed its annual in-depth asbestos claim review, including a review of policyholders with open claims and litigation cases for potential product and "non-product" liability. The number of policyholders with open asbestos claims and net asbestos payments were relatively flat compared to 2021. Payments on behalf of these policyholders continue to be influenced by an increase in severity for certain policyholders and a high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily mesothelioma, continue to target defendants who were not traditionally primary targets of asbestos litigation. The Company's quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders and the assumed reinsurance component of reserves, as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves, and the Company's evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment. The completion of these reviews and analyses in 2022, 2021 and 2020 resulted in$212 million ,$225 million and$295 million increases, respectively, to the Company's net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company's estimate of projected settlement and defense costs related to a broad number of policyholders. The increase in the estimate of projected settlement and defense costs primarily resulted from payment trends that continue to be higher than previously anticipated due to the continued high level of mesothelioma claim filings and the impact of the current litigation environment surrounding those claims discussed above. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company's overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company's overall view of the current underlying asbestos environment is essentially unchanged from recent periods, and there remains a high degree of uncertainty with respect to future exposure to asbestos claims. Net asbestos paid loss and loss expenses in 2022, 2021 and 2020 were$245 million ,$221 million and$237 million , respectively. Approximately 2%, 9% and 1% of total net paid losses in 2022, 2021 and 2020, respectively, related to policyholders with whom the Company entered into settlement agreements that limit those policyholders' ability to present future claims to the Company. 75 -------------------------------------------------------------------------------- The following table displays activity for asbestos losses and loss expenses and reserves: (at and for the year ended December 31, in millions) 2022 2021 2020 Beginning reserves: Gross$ 1,687 $ 1,668 $ 1,601 Ceded (346) (330) (322) Net 1,341 1,338 1,279 Incurred losses and loss expenses: Gross 287 287 362 Ceded (75) (62) (67) Net 212 225 295 Paid loss and loss expenses: Gross 298 267 295 Ceded (53) (46) (58) Net 245 221 237 Foreign exchange and other: Gross (2) (1) - Ceded (1) - 1 Net (3) (1) 1 Ending reserves: Gross 1,674 1,687 1,668 Ceded (369) (346) (330) Net$ 1,305 $ 1,341 $ 1,338
ENVIRONMENTAL CLAIMS AND LITIGATION
The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of the alleged storage, emissions or disposal of toxic substances, frequently under policies issued prior to the mid-1980s. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. For example, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under these statutes may be joint and several with other responsible parties. The Company has also been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions pertaining to environmental claims have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. For more information regarding environmental claims and litigation, see note 8 of the notes to the consolidated financial statements. In 2022, 2021 and 2020, the Company increased its net environmental reserves by$132 million ,$89 million and$54 million , respectively. Net environmental paid loss and loss expenses in 2022, 2021 and 2020 were$82 million ,$75 million and$69 million , respectively. Net environmental reserves were$371 million ,$321 million and$307 million atDecember 31, 2022 , 2021 and 2020, respectively.
UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management's judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation:
•the risks and lack of predictability inherent in complex litigation;
76
--------------------------------------------------------------------------------
•a further increase in the cost to resolve, and/or the number of, asbestos and
environmental claims beyond that which is anticipated;
•the emergence of a greater number of asbestos claims than anticipated as a
result of extended life expectancies resulting from medical advances and
lifestyle improvements;
•the role of any umbrella or excess policies we have issued;
•the resolution or adjudication of disputes concerning coverage for asbestos and
environmental claims in a manner inconsistent with our previous assessment of
these disputes;
•the number and outcome of direct actions against us;
•future developments pertaining to our ability to recover reinsurance for
asbestos and environmental claims;
•any impact on asbestos defendants we insure due to the bankruptcy of other
asbestos defendants;
•the unavailability of other insurance sources potentially available to
policyholders, whether through exhaustion of policy limits or through the
insolvency of other participating insurers; and
•uncertainties arising from the insolvency or bankruptcy of policyholders.
Changes in the legal, regulatory and legislative environment may impact the
future resolution of asbestos and environmental claims and result in adverse
loss reserve development. The emergence of a greater number of asbestos or
environmental claims beyond that which is anticipated may result in adverse loss
reserve development. Changes in applicable legislation and future court and
regulatory decisions and interpretations, including the outcome of legal
challenges to legislative and/or judicial reforms establishing medical criteria
for the pursuit of asbestos claims, could affect the settlement of asbestos and
environmental claims. It is also difficult to predict the ultimate outcome of
complex coverage disputes until settlement negotiations near completion and
significant legal questions are resolved or, failing settlement, until the
dispute is adjudicated. This is particularly the case with policyholders in
bankruptcy where negotiations often involve a large number of claimants and
other parties and require court approval to be effective. As part of its
continuing analysis of asbestos and environmental reserves, the Company
continues to study the implications of these and other developments.
Because of the uncertainties set forth above, additional liabilities may arise
for amounts in excess of the Company's current reserves. In addition, the
Company's estimate of claims and claim adjustment expenses may change. These
additional liabilities or increases in estimates, or a range of either, cannot
now be reasonably estimated and could result in income statement charges that
could be material to the Company's operating results in future periods.
INVESTMENT PORTFOLIO
The Company's invested assets atDecember 31, 2022 were$80.45 billion , of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a thoughtful investment philosophy that focuses on appropriate risk-adjusted returns. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxableU.S. government, tax-exempt and taxableU.S. municipal and taxable corporate andU.S. agency mortgage-backed bonds. The carrying value of the Company's fixed maturity portfolio atDecember 31, 2022 was$71.16 billion . The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's insurance and debt obligations. The weighted average credit quality of the Company's fixed maturity portfolio, both including and excludingU.S. Treasury securities, was "Aa2" at bothDecember 31, 2022 and 2021. Below investment grade securities represented 1.3% and 1.4% of the total fixed maturity investment portfolio atDecember 31, 2022 and 2021, respectively. The weighted average effective duration of fixed maturities and short-term securities was 4.6 (4.8 excluding short-term securities) atDecember 31, 2022 and 4.2 (4.4 excluding short-term securities) atDecember 31, 2021 . 77 --------------------------------------------------------------------------------
The carrying values of investments in fixed maturities classified as available
for sale at
2022 2021
Weighted Average Credit Weighted Average Credit
(at December 31, in millions) Carrying Value Quality (1) Carrying Value Quality (1)
$ 5,438 Aaa/Aa1 $ 3,562 Aaa/Aa1
Obligations of
17,823 Aaa/Aa1 19,667 Aaa/Aa1
Revenue 10,198 Aaa/Aa1 11,940 Aaa/Aa1
State general obligation 1,019 Aaa/Aa1 1,223 Aaa/Aa1
Pre-refunded 2,339 Aaa/Aa1 4,032 Aaa/Aa1
Total obligations of
31,379 36,862
Debt securities issued by foreign governments 994 Aaa/Aa1 1,041 Aaa/Aa1
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities
1,991 Aaa/Aa1 1,817 Aaa/Aa1
Corporate and all other bonds:
Financial:
Bank 4,505 A1 4,473 A1
Insurance 1,628 Aa3 1,626 Aa3
Finance/leasing 47 Ba2 34 Ba3
Brokerage and asset management 136 A1 101 Aa3
Total financial 6,316 6,234
Industrial 17,237 A3 19,459 A3
Public utility 4,064 A2 4,706 A2
Canadian municipal securities 1,523 Aa1 1,687 Aa2
Sovereign corporate securities (2) 559 Aaa 607 Aaa
Commercial mortgage-backed securities and project loans (3) 1,136 Aaa 1,304 Aaa
Asset-backed and other 523 Aa1 531 Aa1
Total corporate and all other bonds 31,358 34,528
Total fixed maturities $ 71,160 Aa2 $ 77,810 Aa2
___________________________________________
(1)Rated using external rating agencies or by the Company when a public rating does not exist.
(2)Sovereign corporate securities include corporate securities that are backed by a government and include sovereign banks and securities issued under the Federal Ship Financing Programs.
(3)Included in commercial mortgage-backed securities and project loans at
78
--------------------------------------------------------------------------------
The following table sets forth the Company's fixed maturity investment portfolio
rated using external ratings agencies or by the Company when a public rating
does not exist:
Carrying Percent of Total
(at December 31, 2022, in millions) Value Carrying Value
Quality Rating:
Aaa $ 31,688 44.6 %
Aa 16,217 22.8
A 13,333 18.7
Baa 8,992 12.6
Total investment grade 70,230 98.7
Below investment grade 930 1.3
Total fixed maturities $ 71,160 100.0 %
Obligations of
The Company's fixed maturity investment portfolio atDecember 31, 2022 and 2021 included$31.38 billion and$36.86 billion , respectively, of securities which are obligations ofU.S. states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified acrossthe United States , theDistrict of Columbia andPuerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio atDecember 31, 2022 and 2021 were$2.34 billion and$4.03 billion , respectively, of pre-refunded bonds, which are bonds for whichU.S. states or municipalities have established irrevocable trusts, almost exclusively comprised ofU.S. Treasury securities and obligations ofU.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee. All of the Company's holdings of securities issued byPuerto Rico and related entities have either been pre-refunded and therefore are defeased byU.S. Treasury securities or have FHA guarantees subject to federal appropriation. 79 --------------------------------------------------------------------------------
The following table shows the geographic distribution of the
Weighted Average
(at December 31, 2022, in State General Local General Total Carrying Credit
millions) Obligation Obligation Revenue Value Quality(1)
State:
Texas $ 38 $ 2,928 $ 1,457 $ 4,423 Aaa
California - 1,905 453 2,358 Aaa/Aa1
Virginia 41 967 780 1,788 Aaa/Aa1
Washington 114 1,140 305 1,559 Aaa/Aa1
North Carolina 167 756 462 1,385 Aaa
Minnesota 142 954 175 1,271 Aaa/Aa1
Colorado - 775 364 1,139 Aa1
Massachusetts - 202 843 1,045 Aaa/Aa1
Maryland 31 866 126 1,023 Aaa/Aa1
Wisconsin 68 769 97 934 Aa1
Tennessee 7 807 88 902 Aa1
Florida 50 148 603 801 Aa1
Georgia 141 541 51 733 Aaa/Aa1
All others (2) 220 5,065 4,394 9,679 Aaa/Aa1
Total $ 1,019 $ 17,823 $ 10,198 $ 29,040 Aaa/Aa1
___________________________________________
(1)Rated using external rating agencies or by the Company when a public rating does not exist. Ratings shown are the higher of the rating of the underlying issuer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default.
(2)No other single state accounted for 2.5% or more of the total non-pre-refunded municipal bonds.
80
--------------------------------------------------------------------------------
The following table displays the funding sources for the
Weighted Average
Carrying Credit
(at December 31, 2022, in millions) Value Quality(1)
Source:
Water $ 2,830 Aaa/Aa1
Higher education 2,563 Aaa/Aa1
Sewer 1,005 Aaa/Aa1
Power utilities 703 Aa1
Special tax 486 Aaa/Aa1
Transit 355 Aaa/Aa1
Highway tolls 227 Aa2
Industrial 183 Aa3
Fuel sales 181 Aa1
Health care 177 Aa2
Housing 30 Aaa/Aa1
Lease 30 Aaa/Aa1
Natural gas 10 Aa2
Lottery 7 Aa1
Other revenue sources 1,411 Aaa/Aa1
Total $ 10,198 Aaa/Aa1
___________________________________________
(1)Rated using external rating agencies or by the Company when a public rating does not exist. Ratings shown are the higher of the rating of the underlying issuer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default.
The Company bases its investment decision on the underlying credit
characteristics of the municipal security. The weighted average credit rating
of the municipal bond portfolio was "Aaa/Aa1" at
Debt Securities Issued by Foreign Governments
The following table shows the geographic distribution of the Company's long-term fixed maturity investments in debt securities issued by foreign governments atDecember 31, 2022 : Carrying Weighted Average
Credit
(at December 31, 2022, in millions) Value Quality (1) Foreign Government: Canada$ 800 Aaa/Aa1 United Kingdom 177 Aa3 All others (2,3) 17 Aa1 Total$ 994 Aaa/Aa1
___________________________________________
(1)Rated using external rating agencies or by the Company when a public rating does not exist.
(2)The Company does not have direct exposure to sovereign debt issued by the
(3) No other country accounted for 2.5% or more of total debt securities issued by foreign governments.
The following table shows the Company'sEurozone exposure atDecember 31, 2022 to all debt securities issued by foreign governments, financial companies, sovereign corporations (including sovereign banks) whose securities are backed by the respective country's government and all other corporate securities (comprised of industrial corporations and utility companies) which could be affected if economic conditions deteriorated due to a prolonged recession: 81 --------------------------------------------------------------------------------
Corporate Securities
Debt Securities Issued
by Foreign Governments Financial Sovereign Corporates All Other
Weighted Average Weighted Average Weighted Average Weighted Average
Carrying Credit Carrying Credit Carrying Credit Carrying Credit
(at December 31, 2022 , in millions) Value Quality (1) Value Quality (1) Value Quality (1) Value Quality (1)
Eurozone Periphery
Spain $ - - $ 57 Aa3 $ - - $ 6 Baa3
Ireland - - - - - - 151 Baa2
Italy - - - - - - - -
Greece - - - - - - - -
Portugal - - - - - - - -
Subtotal - 57 - 157
Eurozone Non-Periphery
Germany 10 Aaa - - 275 Aaa/Aa1 435 A3
France 75 Aa2 - - - - 537 A1
Netherlands - - 92 A1 104 Aaa 184 A2
Finland - - 44 Aa3 - - - -
Belgium - - - - - - 113 Baa1
Austria - - - - 137 Aa2 - -
Subtotal 85 136 516 1,269
Total $ 85 $ 193 $ 516 $ 1,426 ___________________________________________
(1)Rated using external rating agencies or by the Company when a public rating does not exist. The table includes$487 million of short-term securities which have the highest ratings issued by external rating agencies for short-term issuances. For purposes of this table, the short-term securities, which are rated "A-1+" and/or "P-1," are included as "Aaa" rated securities. In addition to fixed maturities noted in the foregoing table, the Company has exposure totaling$289 million to private equity limited partnerships and real estate partnerships (both of which are included in other investments in the Company's consolidated balance sheet) whose primary investing focus is acrossEurope . The Company has unfunded commitments totaling$169 million to these partnerships.
The Company's fixed maturity investment portfolio atDecember 31, 2022 and 2021 included$1.99 billion and$1.82 billion , respectively, of residential mortgage-backed securities, including pass-through-securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company's investment strategy generally favors securities that reduce this risk within expected interest rate ranges. The Company makes investments in residential CMOs that are either guaranteed by GNMA,FNMA or FHLMC, or if not guaranteed, are senior or super-senior positions within their respective securitizations. Both guaranteed and non-guaranteed residential CMOs allocate the distribution of payments from the underlying mortgages among different classes of bondholders. In addition, non-guaranteed residential CMOs provide structures that allocate the impact of credit losses to different classes of bondholders. Senior and super-senior CMOs are protected, to varying degrees, from credit losses as those losses are initially allocated to subordinated bondholders. The Company's investment strategy is to purchase CMO tranches that are expected to offer the most favorable return given the Company's assessment of associated risks. The Company does not purchase residual interests in CMOs. For more information regarding the Company's investments in residential mortgage-backed securities, see note 3 of the notes to the consolidated financial statements.
At
82
--------------------------------------------------------------------------------See note 1 of the notes to the consolidated financial statements for further information about these invested asset classes.
Other Investments
The Company also invests in private equity, hedge fund and real estate partnerships, and joint ventures. These asset classes have historically provided a higher return than investments in fixed maturities but are subject to more volatility. The Company also enters into certain derivative financial instruments from time to time that are reported as part of other investments. AtDecember 31, 2022 and 2021, the carrying value of the Company's other investments was$4.07 billion and$3.86 billion , respectively. The Company has unfunded commitments to private equity limited partnerships, real estate partnerships and others in which it invests. These commitments totaled$1.80 billion and$1.70 billion atDecember 31, 2022 and 2021, respectively. It is the opinion of the Company's management that the Company has adequate liquidity to meet these commitments. Securities Lending The Company has, from time to time, engaged in securities lending activities from which it generates net investment income by lending certain of its investments to other institutions for short periods of time. AtDecember 31, 2022 and 2021, the Company had$445 million and$253 million , respectively, of securities on loan, respectively, as part of a tri-party lending agreement. The average monthly balance of securities on loan during 2022 and 2021 was$347 million and$329 million , respectively. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest. The Company did not incur any investment losses in its securities lending program for the years endedDecember 31, 2022 and 2021.
The Company meets its capital requirements to support its underwriting atLloyd's using a combination of the share capital and retained earnings of the Company's subsidiaries participating inLloyd's , trust deposits and uncollateralized letters of credit. Securities with a fair value of approximately$28 million and$33 million held by a wholly-owned subsidiary atDecember 31, 2022 and 2021, respectively, and$58 million and$34 million held by TRV atDecember 31, 2022 and 2021, respectively, were pledged intoLloyd's trust accounts to provide a portion of theLloyd's capital requirements. For more information regarding the Company's utilization of uncollateralized letters of credit, see "Liquidity and Capital Resources" herein.
Net Unrealized Investment Gains (Losses)
The net unrealized investment gains (losses) that were included in shareholders' equity were as follows:
(at December 31, in millions) 2022 2021 2020 Fixed maturities$ (6,217) $ 3,062 $ 5,175 Other (3) (2) - Unrealized investment gains (losses) before tax (6,220) 3,060 5,175 Tax expense (benefit) (1,322) 645 1,101
Net unrealized investment gains (losses) included in shareholders' equity at end of year
$
(4,898)
Net unrealized investment losses included in shareholders' equity were$4.90 billion atDecember 31, 2022 compared with net unrealized investment gains of$2.42 billion atDecember 31, 2021 . AtDecember 31, 2022 , the Company had$2.18 billion fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost. AtDecember 31, 2021 , the Company had no fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost. These year-over-year changes were driven by rising interest rates. Since the Company generally holds its high-quality fixed maturity investments to maturity, these net unrealized losses are considered temporary in nature and are not expected to result in significant realized losses. In addition, given the temporary nature of net unrealized losses combined with the Company's strong operating cash flows, which include income received on investments and the proceeds received upon maturity of the investments, the net unrealized investment loss is not expected to meaningfully impact the Company's assessment of capital adequacy or liquidity. Equity securities, which include common and non-redeemable preferred stocks, are reported at fair value with changes in fair value recognized in net income. 83 -------------------------------------------------------------------------------- For fixed maturity investments where fair value is less than the carrying value and the Company did not reach a decision to impair, the Company continues to have the intent and ability to hold such investments to a projected recovery in value, which may not be until maturity. AtDecember 31, 2022 and 2021, below investment grade securities comprised 1.3% and 1.4%, respectively, of the fair value of the Company's fixed maturity investment portfolio. Included in below investment grade securities atDecember 31, 2022 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of$937 million and a fair value of$844 million , resulting in a net pre-tax unrealized investment loss of$93 million . These securities in an unrealized loss position represented 1% of both the amortized cost and fair value of the fixed maturity portfolio atDecember 31, 2022 and accounted for 1.5% of the total gross pre-tax unrealized investment loss in the fixed maturity portfolio atDecember 31, 2022 .
Impairment Charges
Impairment charges included in net realized investment gains (losses) in the consolidated statement of income were$38 million ,$2 million and$55 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. See note 3 of the notes to the consolidated financial statements for further information.
Purchases and Sales of
Purchases and sales of investments are based on cash requirements, the characteristics of the insurance liabilities and current market conditions. The Company identifies investments to be sold to achieve its primary investment goals of assuring the Company's ability to meet policyholder obligations as well as to optimize investment returns, given these obligations. During the year endedDecember 31, 2022 , the Company incurred pre-tax realized losses of$99 million on the sale of fixed maturity investments having a fair value of$2.07 billion . CATASTROPHE MODELING The Company uses various analyses and methods, including proprietary and third-party modeling processes, to make underwriting and reinsurance decisions designed to manage its exposure to catastrophic events. There are no industry-standard methodologies or assumptions for projecting catastrophe exposure. Accordingly, catastrophe estimates provided by different insurers may not be comparable. The Company actively monitors and evaluates changes in third-party models and, when necessary, calibrates the catastrophe risk model estimates delivered via its own proprietary modeling processes. The Company considers historical loss experience, recent events, underwriting practices, market share analyses, external scientific analysis and various other factors, including non-modeled losses, to refine its proprietary view of catastrophe risk. These proprietary models are updated regularly as new information and techniques emerge. Based on the proprietary and third-party models utilized by the Company, the tables below set forth, as ofDecember 31, 2022 , the probabilities that estimated losses, comprising claims and allocated claim adjustment expenses (but excluding unallocated claim adjustment expenses), from a single event occurring in a one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars, net of tax, and as a percentage of the Company's common equity). For example, on the basis described below the tables, the Company estimates that there is a one percent chance that the Company's loss from a singleU.S. and Canadian hurricane in a one-year timeframe would equal or exceed$2.1 billion , or 8% of the Company's common equity atDecember 31, 2022 . Dollars (in billions) Single U.S. and Single U.S. and Canadian Canadian Likelihood of Exceedance (1) Hurricane Earthquake 2.0% (1-in-50)$ 1.7 $ 0.6 1.0% (1-in-100)$ 2.1 $ 1.1 0.4% (1-in-250)$ 3.4 $ 1.9 0.1% (1-in-1,000)$ 7.4 $ 3.1 84
--------------------------------------------------------------------------------
Percentage of Common Equity (2)
Single U.S. and Single U.S. and
Canadian Canadian
Likelihood of Exceedance Hurricane Earthquake
2.0% (1-in-50) 6 % 2 %
1.0% (1-in-100) 8 % 4 %
0.4% (1-in-250) 13 % 7 %
0.1% (1-in-1,000) 28 % 12 %
___________________________________________
(1) An event that has, for example, a 2% likelihood of exceedance is sometimes described as a "1-in-50 year event." As noted above, however, the probabilities in the table represent the likelihood of losses from a single event equaling or exceeding the indicated threshold loss amount in a one-year timeframe, not over a multi-year timeframe. Also, because the probabilities relate to a single event, the probabilities do not address the likelihood of more than one event occurring in a particular period, and, therefore, the amounts do not address potential aggregate catastrophe losses occurring in a one-year timeframe. (2) The percentage of common equity is calculated by dividing (a) indicated loss amounts in dollars by (b) total common equity excluding net unrealized investment gains and losses, net of taxes, included in shareholders' equity. Net unrealized investment gains and losses can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. Accordingly, the Company's management uses the percentage of common equity calculated on this basis as a metric to evaluate the potential impact of a single hurricane or single earthquake on the Company's financial position for purposes of making underwriting and reinsurance decisions. The threshold loss amounts in the tables above, which are based on the Company's in-force portfolio atDecember 31, 2022 and catastrophe reinsurance program atJanuary 1, 2023 , are net of reinsurance, after-tax and exclude unallocated claim adjustment expenses, which historically have been less than 10% of loss estimates. For further information regarding the Company's reinsurance, see "Item 1-Business-Reinsurance." The amounts for hurricanes reflectU.S. and Canadian exposures and include property exposures, property residual market exposures and an adjustment for certain non-property exposures. The hurricane loss amounts are based on the Company's catastrophe risk model estimates and include losses from the hurricane hazards of wind and storm surge. The amounts for earthquakes reflectU.S. and Canadian property and workers' compensation exposures. These loss amounts include the effects of exposure growth, inflation and modeling updates based on recent trends and scientific analysis. The Company does not believe that the inclusion of hurricane or earthquake losses arising from other geographical areas or other exposures would materially change the estimated threshold loss amounts. Catastrophe modeling relies upon inputs based on experience, science, engineering and history. These inputs reflect a significant amount of judgment and are subject to changes which may result in volatility in the modeled output. Catastrophe modeling output may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseeable. Catastrophe modeling assumptions include, among others, the portion of purchased reinsurance that is collectible after a catastrophic event, which may prove to be materially incorrect. Consequently, catastrophe modeling estimates are subject to significant uncertainty. In the tables above, the uncertainty associated with the estimated threshold loss amounts increases significantly as the likelihood of exceedance decreases. In other words, in the case of a relatively more remote event (e.g., 1-in-1,000), the estimated threshold loss amount is relatively less reliable. Actual losses from an event could materially exceed the indicated threshold loss amount. In addition, more than one such event could occur in any period. Moreover, the Company is exposed to the risk of material losses from other than property and workers' compensation coverages arising out of hurricanes and earthquakes, and it is exposed to catastrophe losses from perils other than hurricanes and earthquakes, such as tornadoes and other windstorms, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions, solar flares and other naturally-occurring events, as well as acts of terrorism and cyber events. In addition, compared to models for hurricanes, models for earthquakes are less reliable due to there being a more limited number of significant historical events to analyze, while models for tornadoes, hail storms, wildfires and winter storms are newer and may be less reliable due to the highly random geographic nature and size of these events. Accordingly, these models may be less accurate in predicting risks and estimating losses. Further, changes in climate conditions could cause our underlying modeling data to be less predictive, thus limiting our ability to effectively evaluate and manage catastrophe risk. As compared to natural catastrophes, modeling for man-made catastrophes, such as terrorism and cyber events, is even more difficult and less reliable, and for some events (both natural and man-made), models are either in early stages of development and, therefore, not widely adopted, or are not available. 85 -------------------------------------------------------------------------------- For more information about the Company's exposure to catastrophe losses, see "Item 1A-Risk Factors-High levels of catastrophe losses, including as a result of factors such as increased concentrations of insured exposures in catastrophe-prone areas, could materially and adversely affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance" and "Item 1A-Risk Factors- We may be adversely affected if our pricing and capital models provide materially different indications than actual results." CHANGING CLIMATE CONDITIONS Severe weather events over the last two decades underscore the unpredictability of climate trends. For example, the frequency and/or severity of hurricane, tornado, hail and wildfire events inthe United States have been more volatile during this time period. The insurance industry has experienced increased catastrophe losses due to a number of potential causal factors, including, in addition to weather/climate variability, aging infrastructure, more people living in, and moving to, high-risk areas, population growth in areas with weaker enforcement of building codes, urban expansion, an increase in the number of amenities included in, and average size of, a home and increased inflation, including as a result of post-event demand surge. We believe that changing climate conditions have also likely added to the frequency and severity of natural disasters and created additional uncertainty as to future trends and exposures. Climate studies by government agencies, academic institutions, catastrophe modeling organizations and other groups indicate that an increase in frequency and/or intensity of hurricanes, heavy precipitation events, flash flooding, sea level rise, droughts, heat waves and wildfires has occurred, and can be expected into the future. Understanding the potential impacts of changing climate conditions is important to the Company's business. Changing climate conditions are expected to evolve over decades. Importantly, because most of its policies renew annually, the Company is able to respond to these changes over time through adjustments to its underwriting strategy, product pricing and related policy terms and conditions, as appropriate. As an example, in recent years the Company has focused on enhancing the strategic management of its catastrophe exposure, adding experts in data science, meteorology, including climate and flood science, wind and structural engineering and geophysics, among others, to its catastrophe management organization. The Company has also established dedicated teams for each catastrophe peril, with the goal of developing industry-leading scientific and underwriting expertise. This expertise has been incorporated into the Company's product development, risk selection, pricing, capital allocation and claim response. The Company discusses how changing climate conditions may present other issues for its business under "Item 1A - Risk Factors." and "Outlook." For example, among other things: •Increasingly unpredictable and severe weather conditions could result in increased frequency and severity of claims under policies issued by the Company. See "Item 1A-Risk Factors-High levels of catastrophe losses, including as a result of factors such as increased concentrations of insured exposures in catastrophe-prone areas and changing climate conditions, could materially and adversely affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance" and "-Outlook-Underwriting Gain/Loss." Moreover, the Company's catastrophe models may be less reliable due to the increased unpredictability in frequency and severity of severe weather events, emerging trends in climate conditions and regulatory responses to catastrophe events not being appropriately reflected in the models, in addition to the other factors mentioned above. Accordingly, the Company may be subject to increased losses from catastrophes and other weather-related events. •Changing climate conditions could also impact the creditworthiness of issuers of securities in which the Company invests. For example, water supply adequacy could impact the creditworthiness of bond issuers with significant assets or business activities in theSouthwestern United States ; more frequent and/or severe hurricanes could impact the creditworthiness of issuers with significant assets or business activities in theSoutheastern United States , among other areas; and increased regulation adopted in response to potential changes in climate conditions could impact the creditworthiness of issuers affected by such regulations. In addition, as issuers of securities in which the Company invests become increasingly focused on mitigating the potential environmental impact of their operations, the costs associated with such initiatives could affect the business models and realized returns of such issuers. See "Item 1A-Risk Factors-Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses." •Increased regulation adopted in response to potential changes in climate conditions may impact the Company and its customers, including state insurance regulations that could impact the Company's ability to manage property exposures in areas vulnerable to significant climate driven losses. For example, state laws have been passed that restrict a carrier's ability to cancel or non-renew certain policies within or adjacent to declared state of emergency zip codes and mandate discounts for risk mitigation practices that may not be effective. If the Company is unable to implement risk-based pricing, modify policy terms or reduce exposures to the extent necessary to address rising losses 86 -------------------------------------------------------------------------------- related to catastrophes and smaller scale weather events (should those increased losses occur), its business may be adversely affected. See "Item 1-Business-U.S. State and Federal Regulation-Regulatory and Legislative Responses to Catastrophes." In addition, climate change regulation could increase the Company's customers' costs of doing business. For example, insureds faced with carbon management regulatory requirements may have less available capital for investment in loss prevention and safety features which may, over time, increase loss exposures. Increased regulation may also result in reduced economic activity, which would decrease the amount of insurable assets and businesses, and increased claim costs, to the extent such regulations require that damaged homes or businesses be rebuilt according to more expensive specifications. •The full range of potential liability exposures related to changing climate conditions continues to evolve. For example, from time to time third parties sue our policyholders alleging that they caused or contributed to changing climate conditions. Through the Company's Enterprise Casualty Emerging Risk Committee and itsCommittee on Climate , Energy and the Environment, the Company works with its business units and corporate groups, as appropriate, to identify and try to assess climate change-related liability issues, which are continually evolving and often hard to fully evaluate. The Company regularly reviews emerging issues, including changing climate conditions, to consider potential changes to its modeling and the use of such modeling, as well as to help determine the need for new underwriting strategies, coverage modifications or new products. See "Item 1A-Risk Factors-The effects of emerging claim and coverage issues on our business are uncertain, and court decisions or legislative changes that take place after we issue our policies can result in an unexpected increase in the number of claims and have a material adverse impact on our results of operations."
REINSURANCE RECOVERABLES
The Company reinsures a portion of the risks it underwrites in order to control its exposure to losses. For additional discussion regarding the Company's reinsurance coverage, see "Part I-Item 1-Business-Reinsurance."
The following table summarizes the composition of the Company's reinsurance recoverables:
(at December 31, in millions) 2022 2021
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses
$ 3,792 $ 3,931 Gross structured settlements 2,802 2,900 Mandatory pools and associations 1,601 1,762 Gross reinsurance recoverables 8,195 8,593 Allowance for estimated uncollectible reinsurance (132) (141) Net reinsurance recoverables
Net reinsurance recoverables at
The following table presents the Company's top five reinsurer groups by
reinsurance recoverable at
Reinsurance A.M. Best Rating of Group's Predominant
Reinsurer Group Recoverable Reinsurer
Swiss Re Group $ 561 A+ second highest of 16 ratings
Berkshire Hathaway 515 A++ highest of 16 ratings
Munich Re Group 318 A+ second highest of 16 ratings
Axa Group 152 A+ second highest of 16 ratings
PartnerRe Group 140 A+ second highest of 16 ratings
At
87
--------------------------------------------------------------------------------
Included in net reinsurance recoverables are amounts related to structured
settlements, which are annuities purchased from various life insurance companies
to settle certain personal physical injury claims, of which workers'
compensation claims comprise a significant portion. In cases where the Company
did not receive a release from the claimant, the amount due from the life
insurance company related to the structured settlement is included in the
Company's consolidated balance sheet as a reinsurance recoverable and the
related claim cost is included in the liability for claims and claim adjustment
expense reserves, as the Company retains the contingent liability to the
claimant. If it is expected that the life insurance company is not able to pay,
the Company would recognize an impairment of the related reinsurance recoverable
if, and to the extent, the purchased annuities are not covered by state guaranty
associations. In the event that the life insurance company fails to make the
required annuity payments, the Company would be required to make such payments.
The following table presents the Company's top five groups by structured
settlements at December 31, 2022 (in millions). Also included is the A.M. Best
rating of the Company's predominant insurer from each such insurer group at
February 16, 2023 :
Structured A.M. Best Rating of Group's Predominant
Group Settlements Insurer
Fidelity & Guaranty Life Group $ 699 A- fourth highest of 16 ratings
Genworth Financial Group 310 B- eighth highest of 16 ratings
John Hancock Group 249 A+ second highest of 16 ratings
Symetra Financial Corporation 215 A third highest of 16 ratings
Brighthouse Financial, Inc. 207 A third highest of 16 ratings
The Company considers the ratings and related outlook assigned to reinsurance
companies and life insurance companies by various independent ratings agencies
in assessing the adequacy of its allowance for uncollectible amounts.
OUTLOOK
The following discussion provides outlook information for certain key drivers of the Company's results of operations and capital position.
Premiums. The Company's earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case ofBusiness Insurance , affect audit premium adjustments, policy endorsements and mid-term cancellations. Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.
Overall, the Company expects that retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards during 2023.
Property and casualty insurance market conditions are expected to remain competitive during 2023 for new business. In each of the Company's business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time. In periods of meaningful decreases in new business, despite its negative impact on underwriting gains over time, the impact of lower new business levels may positively impact the combined ratio for a period of time. EffectiveJanuary 1, 2023 , the Company entered into a quota share reinsurance agreement with subsidiaries ofFidelis Insurance Holdings Limited (Fidelis) pursuant to which the Company will assume 20% of the business written by Fidelis during 2023, subject to a loss ratio cap. The Company's portion of net written premiums from Fidelis is expected to be approximately$550 million to$600 million for the full year and will be reported as part of the International results ofBusiness Insurance . The Company also has a minority investment in Fidelis.
Underwriting Gain/Loss. The Company's underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins. Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss
88
--------------------------------------------------------------------------------
activity; changes in current period loss estimates resulting from prior period
loss development; changes in loss cost trends; changes in business mix; changes
in reinsurance coverages and/or costs; premium adjustments; and variability in
expenses and assessments.
Catastrophe losses and non-catastrophe weather-related losses are inherently
unpredictable from period to period. The Company's results of operations could
be adversely impacted if significant catastrophe and non-catastrophe
weather-related losses were to occur.
On average for the ten-year period ended December 31, 2022 , the Company
experienced approximately 41% of its annual catastrophe losses during the second
quarter, primarily arising out of severe wind and hail storms, including
tornadoes. Hurricanes, wildfires and winter storms tend to happen at other times
of the year and can also have a material impact on the Company's results of
operations. Catastrophe losses incurred in a particular quarter in any given
year may differ materially from historical experience. In addition, most of the
Company's reinsurance programs renew on January 1 or July 1 of each year, and,
therefore, any changes to the availability, cost or coverage terms of such
programs will be effective after such dates.
Over much of the past decade, the Company's results have included significant
amounts of net favorable prior year reserve development driven by better than
expected loss experience. However, given the inherent uncertainty in estimating
claims and claim adjustment expense reserves, loss experience could develop such
that the Company recognizes in future periods higher or lower levels of
favorable prior year reserve development, no favorable prior year reserve
development or unfavorable prior year reserve development. In addition, the
ongoing review of prior year claims and claim adjustment expense reserves, or
other changes in current period circumstances, may result in the Company
revising current year loss estimates upward or downward in future periods of the
current year.
It is possible that changes in economic conditions, the supply chain, the labor
market and geopolitical tensions, as well as steps taken by federal, state
and/or local governments and the Federal Reserve , could lead to higher or lower
inflation than the Company anticipated, which could in turn lead to an increase
or decrease in the Company's loss costs and the need to strengthen or reduce
claims and claim adjustment expense reserves. These impacts of inflation on loss
costs and claims and claim adjustment expense reserves could be more pronounced
for those lines of business that require a relatively longer period of time to
finalize and settle claims for a given accident year and, accordingly, are
relatively more inflation sensitive. Labor shortages, higher costs of used
vehicles and parts, and increased demand and decreased supply for raw materials
are adversely impacting severity in our auto and property businesses and may
continue to do so in future quarters. For a further discussion, see "Part I-Item
1A-Risk Factors-If actual claims exceed our claims and claim adjustment expense
reserves, or if changes in the estimated level of claims and claim adjustment
expense reserves are necessary, including as a result of, among other things,
changes in the legal/tort, regulatory and economic environments in which the
Company operates, our financial results could be materially and adversely
affected."
The Company's results of operations may be impacted by a number of other
factors, including an economic slowdown, a recession, financial market
volatility, supply chain disruptions, monetary and fiscal policy measures
(including future actions or inactions of the United States government related
to the "debt-ceiling"), heightened geopolitical tensions, fluctuations in
interest rates and foreign currency exchange rates, the political and regulatory
environment, changes to the U.S. Federal budget and potential changes in tax
laws.
Investment Portfolio. The Company expects to continue to focus its investment
strategy on maintaining a high-quality investment portfolio and a relatively
short average effective duration. The weighted average effective duration of
fixed maturities and short-term securities was 4.6 (4.8 excluding short-term
securities) at December 31, 2022 . From time to time, the Company enters into
short positions in U.S. Treasury futures contracts to manage the duration of its
fixed maturity portfolio. At December 31, 2022 , the Company had no open U.S.
Treasury futures contracts. The Company regularly evaluates its investment
alternatives and mix. Currently, the majority of the Company's investments are
comprised of a widely diversified portfolio of high-quality, liquid, taxable
U.S. government, tax-exempt and taxable U.S. municipal and taxable corporate and
U.S. agency mortgage-backed bonds.
The Company also invests much smaller amounts in equity securities, real estate,
and private equity, hedge fund and real estate partnerships, and joint
ventures. These investment classes have the potential for higher returns but
also the potential for greater volatility and higher degrees of risk, including
less stable rates of return and less liquidity.
Approximately 26% of the fixed maturity portfolio is expected to mature over the
next three years (including the early redemption of bonds, assuming interest
rates (including credit spreads) do not rise significantly by applicable call
dates). As a result, the overall yield on and composition of its portfolio could
be meaningfully impacted by the types of investments available for reinvestment
with the proceeds of maturing bonds.
89
--------------------------------------------------------------------------------
Net investment income is a material contributor to the Company's results of
operations. Based on our current expectations for slightly higher levels of
fixed income investments and the impact of expected higher reinvestment yields
on fixed income investments, the Company expects that after-tax net investment
income from that portfolio will be approximately $515 million in the first
quarter of 2023, increasing to an estimated $560 million by the fourth quarter
of 2023. This expectation could be impacted by the direction of interest rates
and disruptions in global financial markets. 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 or loss from these
other investments is generally reflected in the Company's financial statements
on a quarter lag basis. The Company's net investment income in future periods
from its non-fixed income investment portfolio will be impacted, positively or
negatively, by the performance of global financial markets.
The Company had net pre-tax realized investment losses of
The Company had a net pre-tax unrealized investment loss of$6.22 billion ($4.90 billion after-tax) in its fixed maturity investment portfolio atDecember 31, 2022 , compared to a net pre-tax unrealized investment gain of$3.06 billion ($2.42 billion after-tax) atDecember 31, 2021 , primarily due to the increases in interest rates during 2022. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment reduces the market value of fixed maturity investments and, therefore, reduces shareholders' equity, and a declining interest rate environment has the opposite effects. Since the Company generally holds its high-quality fixed maturity investments to maturity, the net unrealized loss discussed above is considered temporary in nature and is not expected to result in significant realized losses. In addition, given the temporary nature of net unrealized losses combined with the Company's strong operating cash flows, which include income received on investments and the proceeds received upon maturity of the investments, the net unrealized investment loss is not expected to meaningfully impact the Company's assessment of capital adequacy or liquidity. Additionally, disruptions in global financial markets could also impact the market value of the Company's investment portfolio. The Company's investment portfolio has benefited from certain tax exemptions (primarily those related to interest from municipal bonds) and certain other tax laws, including, but not limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits). Changes in these laws could adversely impact the value of the Company's investment portfolio. See "Our businesses are heavily regulated by the states and countries in which we conduct business, including licensing, market conduct and financial supervision, and changes in regulation, including higher tax rates, may reduce our profitability and limit our growth" included in "Part I-Item 1A-Risk Factors." For further discussion of the Company's investment portfolio, see "Investment Portfolio." For a discussion of the risks to the Company's business during or following a financial market disruption and risks to the Company's investment portfolio, see the risk factors entitled "During or following a period of financial market disruption or an economic downturn, our business could be materially and adversely affected" and "Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses" included in "Part I-Item 1A-Risk Factors." For a discussion of the risks to the Company's investments from foreign currency exchange rate fluctuations, see the risk factor entitled "We are subject to additional risks associated with our business outsidethe United States " included in "Part I-Item 1A-Risk Factors" and see "Part II-Item 7A-Quantitative and Qualitative Disclosures About Market Risk-Foreign Currency Exchange Rate Risk." Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders, subject to the considerations described below. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. The Company also expects that to the extent that it continues to grow premium volumes, the level of capital to support the Company's financial strength ratings will also increase, and accordingly, the amount of capital returned to shareholders relative to earnings would be somewhat less than it otherwise would have been absent the growth in premium volumes. The timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Company's financial position, earnings, share price, catastrophe losses, maintaining capital levels appropriate for the Company's business operations, changes in levels of written premiums, funding of the Company's qualified pension plan, capital requirements of the Company's operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions, changes in tax laws (including the Inflation Reduction Act) and other factors. For information regarding the Company's common share repurchases in 2022, see "Liquidity and Capital Resources" herein. S&P has announced that it intends to change its capital adequacy model. While the proposed model has not been finalized, it could increase the level of capital S&P requires for a particular financial strength rating. As part of its capital management strategy, the Company will continue to make its own assessment of the appropriate level of capital to support the Company's business 90 -------------------------------------------------------------------------------- operations. For a discussion of the risks to the Company's claims-paying and financial strength ratings, see the risk factor entitled "A downgrade in our claims-paying and financial strength ratings could adversely impact our business volumes, adversely impact our ability to access the capital markets and increase our borrowing costs" included in "Part I-Item 1A-Risk Factors." As a result of the Company's business outside ofthe United States , primarily inCanada , theUnited Kingdom (includingLloyd's ), theRepublic of Ireland and inBrazil through a joint venture, the Company's capital is also subject to the effects of changes in foreign currency exchange rates. Strengthening of theU.S. dollar in comparison to other currencies could result in a reduction in shareholders' equity, while a weakening of theU.S. dollar in comparison to other currencies could result in an increase in shareholders' equity. For additional discussion of the Company's foreign exchange market risk exposure, see "Part II-Item 7A-Quantitative and Qualitative Disclosures About Market Risk." Many of the statements in this "Outlook" section and in "Liquidity and Capital Resources" are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Company's control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them. See "-Forward Looking Statements." For a discussion of potential risks and uncertainties that could impact the Company's results of operations or financial position, see "Part I-Item 1A-Risk Factors" and "Critical Accounting Estimates."
LIQUIDITY AND CAPITAL RESOURCES
Consistent with 2021, the Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during 2022.
Liquidity is a measure of a company's ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed. Operating Company Liquidity. The liquidity requirements of the Company's insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities. Cash provided from these sources is used primarily for claims and claim adjustment expense payments and operating expenses. The insurance subsidiaries' liquidity requirements can be impacted by, among other factors, the timing and amount of catastrophe claims, which are inherently unpredictable, as well as the timing and amount of reinsurance recoveries, which may be affected by reinsurer solvency and reinsurance coverage disputes. Additionally, the variability of asbestos-related claim payments, as well as the volatility of potential judgments and settlements arising out of litigation, may also result in increased liquidity requirements. Increases in interest rates in 2022 resulted in net unrealized investment losses; however, since the Company generally holds its high-quality fixed maturity investments to maturity, the net unrealized loss is considered temporary in nature and is not expected to result in significant realized losses. In addition, given the temporary nature of net unrealized losses combined with the Company's strong operating cash flows, which include income received on investments and the proceeds received upon maturity of the investments, the net unrealized investment loss is not expected to meaningfully impact the Company's assessment of capital adequacy or liquidity. It is the opinion of the Company's management that the insurance subsidiaries' future liquidity needs will be adequately met from all of the sources described above. Subject to restrictions imposed by states in which the Company's insurance subsidiaries are domiciled, the Company's principal insurance subsidiaries pay dividends to their respective parent companies, which, in turn, pay dividends to the corporate holding (parent) company (TRV). For further information regarding restrictions on dividends paid by the Company's insurance subsidiaries, see "Part I-Item 1-Business-Regulation." Holding Company Liquidity. TRV's liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan. AtDecember 31, 2022 , TRV held total cash and short-term invested assets inthe United States aggregating$1.45 billion and having a weighted average maturity of 39 days. TRV has established a holding company liquidity target equal to its estimated annual pre-tax interest expense and common shareholder dividends (currently approximately$1.20 billion ). TRV's holding company liquidity of$1.45 billion atDecember 31, 2022 exceeded this target, and it is the opinion of the Company's management that these assets are sufficient to meet TRV's current liquidity requirements. TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company's foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company's financial position or liquidity atDecember 31, 2022 . 91 -------------------------------------------------------------------------------- TRV has a shelf registration statement filed with theSecurities and Exchange Commission that expires onJune 8, 2025 which permits it to issue securities from time to time. TRV also has a$1.0 billion line of credit facility with a syndicate of financial institutions that expires onJune 15, 2027 . AtDecember 31, 2022 , the Company had$100 million of commercial paper outstanding. TRV is not reliant on its commercial paper program to meet its operating cash flow needs. The Company has no senior notes or junior subordinated debentures maturing untilApril 2026 , at which time$200 million of senior notes will mature. The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of$260 million to provide a portion of the capital needed to support its obligations atLloyd's atDecember 31, 2022 . If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may have to seek alternative means of supporting its obligations atLloyd's , which could include utilizing holding company funds on hand.
Operating Activities
Net cash provided by operating activities were$6.47 billion and$7.27 billion in 2022 and 2021, respectively. The decrease in cash flows in 2022 primarily reflected the impacts of higher levels of payments for claims and claim adjustment expenses and commissions, partially offset by higher levels of cash received for premiums. The increase in cash paid for claims and claim adjustment expenses in 2022 was impacted by business growth and higher loss costs. Cash paid for claims and claim adjustment expenses continue to be impacted by reduced judicial system and claims settlement activity related to COVID-19 and related economic conditions. The increase in cash received for premiums in 2022 compared to the prior year was impacted by business growth including the impact of positive renewal premium changes.
Investing Activities
Net cash used in investing activities was$3.73 billion and$5.20 billion in 2022 and 2021, respectively. The Company's consolidated total investments atDecember 31, 2022 decreased by$6.92 billion , or 8% fromDecember 31, 2021 , primarily reflecting the impacts of (i) net unrealized losses on investments atDecember 31, 2022 as compared with net unrealized investment gains atDecember 31, 2021 , due to the impact of higher interest rates during 2022 and (ii) net cash used in financing activities, partially offset by (iii) net cash flows provided by operating activities. The Company's investment portfolio is managed to support its insurance operations; accordingly, the portfolio is positioned to meet obligations to policyholders. As such, the primary goals of the Company's asset-liability management process are to satisfy the insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows. Generally, the expected principal and interest payments produced by the Company's fixed maturity portfolio adequately fund the estimated runoff of the Company's insurance reserves. Although this is not an exact cash flow match in each period, the substantial amount by which the market value of the fixed maturity portfolio exceeds the value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, contributes to the Company's ability to fund claim payments without having to sell illiquid assets or access credit facilities.
Financing Activities
Net cash used in financing activities were$2.67 billion and$2.04 billion in 2022 and 2021, respectively. The totals in both 2022 and 2021 reflected common share repurchases and dividends paid to shareholders, partially offset by the net proceeds from employee stock option exercises. The total in 2021 also included net proceeds from the issuance of debt. Common share repurchases in 2022 and 2021 were$2.06 billion and$2.20 billion , respectively. 92 --------------------------------------------------------------------------------
Debt Transactions.
2021. OnJune 8, 2021 , the Company issued$750 million aggregate principal amount of 3.05% senior notes that will mature onJune 8, 2051 . The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately$739 million . Interest on the senior notes is payable semi-annually in arrears onJune 8 andDecember 8 . Prior toDecember 8, 2050 , the senior notes may be redeemed, in whole or in part, at the Company's option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excludingDecember 8, 2050 on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then currentTreasury rate (as defined in the senior notes), plus 15 basis points. On or afterDecember 8, 2050 , the senior notes may be redeemed, in whole or in part, at the Company's option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Dividends. Dividends paid to shareholders were$875 million and$869 million in 2022 and 2021, respectively. The declaration and payment of future dividends to holders of the Company's common stock will be at the discretion of the Company's Board of Directors and will depend upon many factors, including the Company's financial position, earnings, capital requirements of the Company's operating subsidiaries, legal requirements, regulatory constraints and other factors as the Board of Directors deems relevant. Dividends will be paid by the Company only if declared by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. OnJanuary 24, 2023 , the Company announced that its Board of Directors declared a regular quarterly dividend of$0.93 per share, payableMarch 31, 2023 to shareholders of record onMarch 10, 2023 . Share Repurchases. The Company's Board of Directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The most recent authorization was approved by the Board of Directors onApril 20, 2021 and added$5.0 billion of repurchase capacity to the$805 million capacity remaining at that date. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. The Company also expects that to the extent that it continues to grow premium volumes, the amount of capital returned to shareholders relative to earnings would be somewhat less than it otherwise would have been. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company's financial position, earnings, share price, catastrophe losses, maintaining capital levels appropriate for the Company's business operations, changes in levels of written premiums, funding of the Company's qualified pension plan, capital requirements of the Company's operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions, changes in tax laws (including the Inflation Reduction Act) and other factors. During 2022, the Company repurchased 11.6 million shares under its share repurchase authorization, for a total of$2.00 billion . The average cost per share repurchased was$172.82 . Common share repurchases in 2022 were slightly lower than the total of$2.16 billion in 2021. AtDecember 31, 2022 , the Company had$2.00 billion of capacity remaining under its share repurchase authorization.
From the inception of the first authorization on
In 2022 and 2021, the Company acquired 0.4 million and 0.3 million shares of common stock, respectively, from employees as treasury stock primarily to cover payroll withholding taxes in connection with the vesting of restricted stock unit awards and performance share awards, and shares used by employees to cover the price of certain stock options that were exercised.
Capital Resources
Capital resources reflect the overall financial strength of the Company and its ability to borrow funds at competitive rates and raise new capital to meet its needs. The following table summarizes the components of the Company's capital structure atDecember 31, 2022 and 2021: 93 --------------------------------------------------------------------------------
(at December 31, in millions) 2022 2021 Debt: Short-term$ 100 $ 100 Long-term 7,254 7,254 Net unamortized fair value adjustments and debt issuance costs (62) (64) Total debt 7,292 7,290 Shareholders' equity: Common stock and retained earnings, less treasury stock 28,005 27,694 Accumulated other comprehensive income (6,445) 1,193 Total shareholders' equity 21,560 28,887 Total capitalization$ 28,852 $ 36,177 Total capitalization atDecember 31, 2022 was$28.85 billion ,$7.33 billion lower than atDecember 31, 2021 , primarily reflecting the impacts of (i) other comprehensive loss of$7.64 billion , primarily reflecting the decrease in net unrealized appreciation on investments due to an increase in interest rates during 2022, (ii) common share repurchases totaling$2.00 billion under the Company's share repurchase authorization and (iii) shareholder dividends of$880 million , partially offset by (iv) net income of$2.84 billion and (v) proceeds from the exercise of employee share options of$267 million . The following table provides a reconciliation of total capitalization presented in the foregoing table to total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity: (at December 31, dollars in millions) 2022 2021 Total capitalization$ 28,852 $ 36,177
Less: net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
(4,898) 2,415
Total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
$ 33,750 $ 33,762 Debt-to-total capital ratio 25.3 % 20.2 %
Debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity
21.6 % 21.6 %
The increase in the debt-to-total capital ratio was primarily due to net
unrealized investment losses at December 31, 2022 compared to net unrealized
investment gains at December 31, 2021 as a result of rising interest rates. The
debt-to-total capital ratio excluding net unrealized gains (losses) on
investments, net of taxes, included in shareholders' equity, is calculated by
dividing (a) debt by (b) total capitalization excluding net unrealized gains and
losses on investments, net of taxes, included in shareholders' equity. Net
unrealized gains and losses on investments can be significantly impacted by both
interest rate movements and other economic factors. Accordingly, in the opinion
of the Company's management, the debt-to-total capital ratio calculated on this
basis provides another useful metric for investors to understand the Company's
financial leverage position. The Company's ratio of debt-to-total capital
excluding after-tax net unrealized investment gains (losses) included in
shareholders' equity of 21.6% at December 31, 2022 was within the Company's
target range of 15% to 25%.
Credit Agreement. The Company is a party to a five-year, $1.0 billion revolving
credit agreement with a syndicate of financial institutions that expires on
June 15, 2027 . Terms of the credit agreement are discussed in more detail in
note 9 of the notes to the consolidated financial statements.
Shelf Registration. The Company has filed a universal shelf registration
statement with the Securities and Exchange Commission that expires on June 8,
2025 for the potential offering and sale of securities. The Company may offer
these securities from time to time at prices and on other terms to be determined
at the time of offering.
Share Repurchase Authorization. At December 31, 2022 , the Company had $2.00
billion of capacity remaining under its share repurchase authorization approved
by the Board of Directors.
94
--------------------------------------------------------------------------------Cash Requirements from Contractual and Other Obligations
The following table summarizes, as ofDecember 31, 2022 , the Company's future payments under material contractual obligations and estimated claims and claim-related payments. The table includes only liabilities atDecember 31, 2022 that are expected to be settled in cash. The table below includes the amount and estimated future timing of claims and claim-related payments. The amounts do not represent the exact liability, but instead represent estimates, generally utilizing actuarial projection techniques, at a given accounting date. These estimates include expectations of what the ultimate settlement and administration of claims will cost based on the Company's assessment of facts and circumstances known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation or deflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the policyholder event and the time it is actually reported to the insurer. The future cash flows related to the items contained in the table below required estimation of both amount (including severity considerations) and timing. Amount and timing are frequently estimated separately. An estimation of both amount and timing of future cash flows related to claims and claim-related payments has unavoidable estimation uncertainty.
The material cash requirements from contractual and other obligations at
Less than 1-3 3-5 After 5
Payments Due by Period (in millions) Total 1 Year Years Years Years
Debt
Senior notes$ 7,000 $
- $ -
254 - - 125 129
Total debt principal 7,254 - - 325 6,929
Interest 6,571 348 696 673 4,854
Total long-term debt obligations (1) 13,825 348 696 998 11,783
Real estate and other operating leases (2) 308 93 121 70 24
Information systems-related commitments
(3) 563 272 222 69 -
Long-term unfunded investment commitments
(4) 1,802 399 544 601 258
Estimated claims and claim-related
payments
Claims and claim adjustment expenses (5) 57,014 12,897 14,599 7,223 22,295
Claims from large deductible policies (6) - - - - -
Total estimated claims and claim-related
payments 57,014 12,897 14,599 7,223 22,295
Total $ 73,512 $ 14,009 $ 16,182 $ 8,961 $ 34,360 ________________________________________
(1)See note 9 of the notes to the consolidated financial statements for a further discussion of outstanding indebtedness. Because the amounts reported in the foregoing table include principal and interest, the total long-term debt obligations will not agree with the amounts reported in note 9.
(2)Represents agreements entered into in the ordinary course of business to lease office space, equipment and furniture.
(3)Includes agreements with vendors to purchase system software (including software as a service), software maintenance services and technology-related costs.
(4)Represents estimated timing for fulfilling unfunded commitments for private equity limited partnerships, real estate partnerships and other, as well as a put/call option entered into by the Company in connection with a business acquisition.
(5)The amounts in "Claims and claim adjustment expenses" in the table above represent the estimated timing of future payments for both reported and unreported claims incurred and related claim adjustment expenses, gross of reinsurance recoverables, excluding structured settlements expected to be paid by annuity companies.
The Company has entered into reinsurance agreements to manage its exposure to losses and protect its capital as described in note 6 of the notes to the consolidated financial statements.
95
--------------------------------------------------------------------------------
In order to qualify for reinsurance accounting, a reinsurance agreement must
indemnify the insurer from insurance risk, i.e., the agreement must transfer
amount and timing risk. Since the timing and amount of cash inflows from such
reinsurance agreements are directly related to the underlying payment of claims
and claim adjustment expenses by the insurer, reinsurance recoverables are
recognized in a manner consistent with the liabilities (the estimated liability
for claims and claim adjustment expenses) relating to the underlying reinsured
contracts. The presence of any feature that can delay timely reimbursement of
claims by a reinsurer results in the reinsurance contract being accounted for as
a deposit rather than reinsurance. The assumptions used in estimating the amount
and timing of the reinsurance recoverables are consistent with those used in
estimating the amount and timing of the related liabilities.
The estimated future cash inflows from the Company's reinsurance contracts that qualify for reinsurance accounting are as follows:
Less than 1 1-3 3-5 After 5
(in millions) Total Year Years Years Years
Reinsurance recoverables $ 5,088 $ 926 $ 1,055 $ 604 $ 2,503
The Company manages its business and evaluates its liabilities for claims and
claim adjustment expenses on a net of reinsurance basis. The estimated cash
flows on a net of reinsurance basis are as follows:
Less than 1 1-3 3-5 After 5
(in millions) Total Year Years Years Years
Claims and claim adjustment
expenses, net $ 51,926 $ 11,971 For business underwritten by non-U.S. operations, future cash flows related to reported and unreported claims incurred and related claim adjustment expenses were translated at the spot rate onDecember 31, 2022 . The amounts reported in the table above and in the table of reinsurance recoverables above are presented on a nominal basis and have not been adjusted to reflect the time value of money. Accordingly, the amounts above will differ from the Company's balance sheet to the extent that the liability for claims and claim adjustment expenses and the related reinsurance recoverables have been discounted in the balance sheet. See note 1 of the notes to the consolidated financial statements. (6) Workers' compensation large deductible policies provide third-party coverage in which the Company typically is responsible for paying the entire loss under such policies and then seeks reimbursement from the insured for the deductible amount. "Claims from large deductible policies" represent the estimated future payment for claims and claim related expenses below the deductible amount, net of the estimated recovery of the deductible. The liability and the related deductible receivable for unpaid claims are presented in the consolidated balance sheet as "contractholder payables" and "contractholder receivables," respectively. Most deductibles for such policies are paid directly from the policyholder's escrow, which is periodically replenished by the policyholder. The payment of the loss amounts above the deductible are reported within "Claims and claim adjustment expenses" in the above table. Because the timing of the collection of the deductible (contractholder receivables) occurs shortly after the payment of the deductible to a claimant (contractholder payables), these cash flows offset each other in the table.
The estimated timing of the payment of the contractholder payables and the collection of contractholder receivables (net of allowance for expected credit losses) for workers' compensation policies is presented below:
Less than 1 1-3 3-5 After 5
(in millions) Total Year
Years Years Years
Contractholder payables/receivables
The above table does not include an analysis of liabilities reported for structured settlements for which the Company has purchased annuities and remains contingently liable in the event of default by the company issuing the annuity. The Company is not reasonably likely to incur material future payment obligations under such agreements. In addition, the Company is not currently subject to any minimum funding requirements for its qualified pension plan. Accordingly, future contributions are not included in the foregoing table.
The Company believes that the combination of operating company liquidity, holding company liquidity, its investment portfolio and its capital resources are sufficient to meet its contractual obligations.
96
--------------------------------------------------------------------------------Dividend Availability
The Company's principal insurance subsidiaries are domiciled in theState of Connecticut . The insurance holding company laws ofConnecticut applicable to the Company's subsidiaries requires notice to, and approval by, the state insurance commissioner for the declaration or payment of any dividend that, together with other distributions made within the preceding twelve months, exceeds the greater of 10% of the insurer's statutory capital and surplus as of the precedingDecember 31 , or the insurer's net income for the twelve-month period ending the precedingDecember 31 , in each case determined in accordance with statutory accounting practices and by state regulation. This declaration or payment is further limited by adjusted unassigned surplus, as determined in accordance with statutory accounting practices. The insurance holding company laws of other states in which the Company's subsidiaries are domiciled generally contain similar, although in some instances somewhat more restrictive, limitations on the payment of dividends. A maximum of$2.55 billion is available by the end of 2023 for such dividends to the holding company, TRV, without prior approval of theConnecticut Insurance Department . The Company may choose to accelerate the timing within 2023 and/or increase the amount of dividends from its insurance subsidiaries in 2023, which could result in certain dividends being subject to approval by theConnecticut Insurance Department . In addition to the regulatory restrictions on the availability of dividends that can be paid by the Company'sU.S. insurance subsidiaries, the maximum amount of dividends that may be paid to the Company's shareholders is limited, to a lesser degree, by certain covenants contained in its line of credit agreement with a syndicate of financial institutions that require the Company to maintain a minimum consolidated net worth as described in note 9 of the notes to the consolidated financial statements. TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company's foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company's financial position or liquidity atDecember 31, 2022 . TRV and its two non-insurance holding company subsidiaries received dividends of$2.90 billion and$2.18 billion from theirU.S. insurance subsidiaries in 2022 and 2021, respectively.
Pension and Other Postretirement Benefit Plans
The Company sponsors a qualified non-contributory defined benefit pension plan (the qualified domestic pension plan), which covers substantially allU.S. domestic employees and provides benefits primarily under a cash balance formula. In addition, the Company sponsors a nonqualified defined benefit pension plan which covers certain highly-compensated employees, pension plans for employees of its foreign subsidiaries, and a postretirement health and life insurance benefit plan for employees satisfying certain age and service requirements and for certain retirees. The qualified domestic pension plan is subject to regulations under the Employee Retirement Income Security Act of 1974 as amended (ERISA), which requires plans to meet minimum standards of funding and requires such plans to subscribe to plan termination insurance through thePension Benefit Guaranty Corporation (PBGC). The Company does not have a minimum funding requirement for the qualified domestic pension plan for 2023 and does not anticipate having a minimum funding requirement in 2024. The Company has significant discretion in making contributions above those necessary to satisfy the minimum funding requirements. In 2022, 2021 and 2020, there was no minimum funding requirement for the qualified domestic pension plan. In 2022, 2021 and 2020, the Company made no voluntary contributions to the qualified domestic pension plan. The qualified domestic pension plan had a funded status of 116% at bothDecember 31, 2022 and 2021. Based on its funded status atDecember 31, 2022 , the Company does not currently anticipate making a voluntary contribution to the qualified domestic pension plan in 2023. In determining future contributions, the Company will consider the performance of the plan's investment portfolio, the effects of interest rates on the projected benefit obligation of the plan and the Company's other capital requirements. The qualified domestic pension plan assets are managed to maximize long-term total return while maintaining an appropriate level of risk. The Company's overall investment strategy is to achieve a mix of approximately 85% to 90% of investments for long-term growth and 10% to 15% for near-term benefit payments with a diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 55% to 65% equity securities and 20% to 40% fixed income securities, with the remainder allocated to short-term securities. For 2023, the Company plans to apply an expected long-term rate of return on plan assets of 7.00%, compared with 6.50% in 2022. The expected rate of return reflects the Company's current expectations with regard to long-term returns in the capital markets, taking into account the pension plan's asset allocation targets, the historical performance and current valuation ofU.S. and international equities, and the level of long term interest rate and inflation expectations. 97 --------------------------------------------------------------------------------
For further discussion of the pension and other postretirement benefit plans, see note 15 of the notes to the consolidated financial statements.
The NAIC has an RBC requirement for most property and casualty insurance companies, which determines minimum capital requirements and is intended to raise the level of protection for policyholder obligations. The Company'sU.S. insurance subsidiaries are subject to these NAIC RBC requirements based on laws that have been adopted by individual states. These requirements subject insurers having policyholders' surplus less than that required by the RBC calculation to varying degrees of regulatory action, depending on the level of capital inadequacy. Each of the Company'sU.S. insurance subsidiaries had policyholders' surplus atDecember 31, 2022 significantly above the level at which any RBC regulatory action would occur. Regulators in the jurisdictions in which the Company's foreign insurance subsidiaries are located require insurance companies to maintain certain levels of capital depending on, among other things, the type and amount of insurance policies written. Each of the Company's foreign insurance subsidiaries had capital significantly above their respective regulatory requirements atDecember 31, 2022 .
Off-Balance Sheet Arrangements
The Company has entered into certain contingent obligations for guarantees related to selling businesses to third parties, certain investments, certain insurance policy obligations of former insurance subsidiaries and various other indemnifications. See note 17 of the notes to the consolidated financial statements. The Company does not believe it is reasonably likely that these arrangements will have a material current or future effect on the Company's financial position, changes in financial position, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING ESTIMATES
The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, and impairments of investments, goodwill and other intangible assets.
Claims and Claim Adjustment Expense Reserves
Gross claims and claim adjustment expense reserves by product line were as
follows:
December 31, 2022 December 31, 2021
(in millions) Case IBNR Total Case IBNR Total
General liability $ 5,465 $ 9,220 $ 14,685 $ 5,351 $ 8,863 $ 14,214
Commercial property 1,200 439 1,639 1,220 392 1,612
Commercial multi-peril 2,624 2,759 5,383 2,404 2,573 4,977
Commercial automobile 2,625 2,388 5,013 2,594 2,335 4,929
Workers' compensation 10,034 9,458 19,492 10,152 9,551 19,703
Fidelity and surety 166 496 662 188 436 624
Personal automobile 2,139 2,133 4,272 2,062 1,765 3,827
Personal homeowners and other 1,095 1,913 3,008 1,021 1,395 2,416
International and other 2,420 2,069 4,489 2,525 2,070 4,595
Property-casualty 27,768 30,875 58,643 27,517 29,380 56,897
Accident and health 6 - 6 10 - 10
Claims and claim adjustment expense
reserves $ 27,774 $ 30,875 $ 58,649 $ 27,527 $ 29,380 $ 56,907
The $1.74 billion increase in gross claims and claim adjustment expense reserves
since December 31, 2021 primarily reflected the impacts of (i) higher volumes of
insured exposures, (ii) loss cost trends for the current accident year and (iii)
catastrophe losses in 2022, partially offset by (iv) claim payments made during
2022 and (v) net favorable prior year reserve development.
Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the foregoing summary table. Asbestos and environmental reserves are discussed separately; see "Asbestos Claims and
98
--------------------------------------------------------------------------------Litigation," "Environmental Claims and Litigation" and "Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves" herein.
Claims and claim adjustment expense reserves represent management's estimate of the ultimate liability for unpaid losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported (IBNR) as of the balance sheet date. Claims and claim adjustment expense reserves do not represent an exact calculation of liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods. These estimates are expectations of what the ultimate settlement and administration of claims will cost upon final resolution in the future, based on the Company's assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, expected interpretations of legal theories of liability and other factors. In establishing gross claims and claim adjustment expense reserves, the Company also considers salvage and subrogation. Estimated recoveries from reinsurance are included in "Reinsurance Recoverables" as an asset on the Company's consolidated balance sheet. The claims and claim adjustment expense reserves are reviewed regularly by qualified actuaries employed by the Company. The process of estimating claims and claim adjustment expense reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, changes in individuals involved in the reserve estimation process, economic inflation, changes in the tort environment, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. The Company refines its estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The Company rigorously attempts to consider all significant facts and circumstances known at the time claims and claim adjustment expense reserves are established. Due to the inherent uncertainty underlying these estimates including, but not limited to, the future settlement environment, final resolution of the estimated liability for claims and claim adjustment expenses may be higher or lower than the related claims and claim adjustment expense reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially different than the amount currently recorded-favorable or unfavorable. Because establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates and the application of judgment, currently established claims and claim adjustment expense reserves may change. The Company reflects adjustments to the reserves in the results of operations in the period the estimates are changed. There are also additional risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes, tornadoes, wildfires and other catastrophic events can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties, including the interpretation of policy terms and conditions, and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; estimating the impact of demand surge, infrastructure disruption, fraud, the effect of mold damage and business interruption costs; and reinsurance collectibility. The timing of a catastrophe, such as at or near the end of a reporting period, can also affect the information available to the Company in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge. A portion of the Company's gross claims and claim adjustment expense reserves (totaling$2.07 billion atDecember 31, 2022 ) are for asbestos and environmental claims and related litigation. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs' expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company's management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current insurance reserves by an amount that could be material to the Company's future operating results. See the preceding discussion of "Asbestos Claims and Litigation" and "Environmental Claims and Litigation." 99 --------------------------------------------------------------------------------
General Discussion
The process for estimating the liabilities for claims and claim adjustment
expenses begins with the collection and analysis of claim data. Data on
individual reported claims, both current and historical, including paid amounts
and individual claim adjuster estimates, are grouped by common characteristics
(components) and evaluated by actuaries in their analyses of ultimate claim
liabilities. Such data is occasionally supplemented with external data as
available and when appropriate. The process of analyzing reserves for a
component is undertaken on a regular basis, generally quarterly, in light of
continually updated information.
Multiple estimation methods are available for the analysis of ultimate claim
liabilities. Each estimation method has its own set of assumption variables and
its own advantages and disadvantages, with no single estimation method being
better than the others in all situations and no one set of assumption variables
being meaningful for all product line components. The relative strengths and
weaknesses of the particular estimation methods when applied to a particular
group of claims can also change over time. Therefore, the actual choice of
estimation method(s) can change with each evaluation. The estimation method(s)
chosen are those that are believed to produce the most reliable indication at
that particular evaluation date for the claim liabilities being evaluated.
In most cases, multiple estimation methods will be valid for the particular
facts and circumstances of the claim liabilities being evaluated. This will
result in a range of reasonable estimates for any particular claim liability.
The Company uses such range analyses to back test whether previously established
estimates for reserves by reporting segments are reasonable, given available
information. Reported values found to be closer to the endpoints of a range of
reasonable estimates are subject to further detailed reviews. These reviews may
substantiate the validity of management's recorded estimate or lead to a change
in the reported estimate.
The exact boundary points of these ranges are more qualitative than quantitative
in nature, as no clear line of demarcation exists to determine when the set of
underlying assumptions for an estimation method switches from being reasonable
to unreasonable. As a result, the Company does not believe that the endpoints of
these ranges are or would be comparable across companies. In addition, potential
interactions among the different estimation assumptions for different product
lines make the aggregation of individual ranges a highly judgmental and inexact
process.
Property-casualty insurance policies are either written on a "claims-made" or on
an "occurrence" basis. Claims-made policies generally cover, subject to
requirements in individual policies, claims reported during the policy period.
Policies that are written on an occurrence basis require that the insured
demonstrate that a loss occurred in the policy period, even if the insured
reports the loss many years later.
Most general liability policies are written on an occurrence basis. These
policies are subject to substantial loss development over time as facts and
circumstances change in the years following the policy issuance. The occurrence
form, which accounts for much of the reserve development in asbestos and
environmental exposures, is also used to provide coverage for construction
general liability, including construction defect. Occurrence-based forms of
insurance for general liability exposures require substantial projection of loss
trends, which can be influenced by a number of factors, including future
inflation, judicial interpretations and societal litigation trends (e.g., size
of jury awards and propensity of individuals to pursue litigation), among
others.
A basic premise in most actuarial analyses is that past patterns demonstrated in
the data will repeat themselves in the future, absent a material change in the
associated risk factors discussed below. To the extent a material change
affecting the ultimate claim liability is known, such change is estimated to the
extent possible through an analysis of internal company data and, if available
and when appropriate, external data. Such a measurement is specific to the facts
and circumstances of the particular claim portfolio and the known change being
evaluated. Significant structural changes to the available data, product mix or
organization can materially impact the reserve estimation process. In addition,
the introduction of new products creates a unique risk as historical company
data would typically not be available.
Informed judgment is applied throughout the reserving process. This includes the
application of various individual experiences and expertise to multiple sets of
data and analyses. In addition to actuaries, experts involved with the reserving
process also include underwriting and claims personnel and lawyers, as well as
other company management. Therefore, management may have to consider varying
individual viewpoints as part of its estimation of claims and claim adjustment
expense reserves. It is also likely that during periods of significant change,
such as a merger, consistent application of informed judgment becomes even more
complicated and difficult.
100
--------------------------------------------------------------------------------
The variables discussed above in this general discussion have different impacts
on reserve estimation uncertainty for a given product line, depending on the
length of the claim tail, the reporting lag, the impact of individual claims and
the complexity of the claim process for a given product line.
Product lines are generally classifiable as either long tail or short tail,
based on the average length of time between the event triggering claims under a
policy and the final resolution of those claims. Short tail claims are reported
and settled quickly, resulting in less estimation variability. The longer the
time to final claim resolution, the greater the exposure to estimation risks and
hence the greater the estimation uncertainty.
A major component of the claim tail is the reporting lag. The reporting lag,
which is the time between the event triggering a claim and the reporting of the
claim to the insurer, makes estimating IBNR inherently more uncertain. In
addition, the greater the reporting lag, the greater the proportion of IBNR to
the total claim liability for the product line. Writing new products with
material reporting lags can result in adding several years' worth of IBNR claim
exposure before the reporting lag exposure becomes clearly observable, thereby
increasing the risk associated with estimating the liabilities for claims and
claim adjustment expenses for such products. The most extreme example of claim
liabilities with long reporting lags are asbestos claims.
For some lines, the impact of large individual claims can be material to the
analysis. These lines are generally referred to as being "low frequency/high
severity," while lines without this "large claim" sensitivity are referred to as
"high frequency/low severity." Estimates of claim liabilities for low
frequency/high severity lines can be sensitive to the impact of a small number
of potentially large claims. As a result, the role of judgment is much greater
for these reserve estimates. In contrast, for high frequency/low severity lines
the impact of individual claims is relatively minor and the range of reasonable
reserve estimates is likely narrower and more stable.
Claim complexity can also greatly affect the estimation process by impacting the
number of assumptions needed to produce the estimate, the potential stability of
the underlying data and claim process, and the ability to gain an understanding
of the data. Product lines with greater claim complexity, such as for certain
surety and construction exposures, have inherently greater estimation
uncertainty.
Actuaries have to exercise a considerable degree of judgment in the evaluation
of all these factors in their analysis of reserves. The human element in the
application of actuarial judgment is unavoidable when faced with material
uncertainty. Different actuaries may choose different assumptions when faced
with such uncertainty, based on their individual backgrounds, professional
experiences and areas of focus. Hence, the estimates selected by the various
actuaries may differ materially from each other.
Lastly, significant structural changes to the available data, product mix or
organization can also materially impact the reserve estimation process. Events
such as mergers increase the inherent uncertainty of reserve estimates for a
period of time, until stable trends re-establish themselves within the new
organization.
Risk Factors
The major causes of material uncertainty ("risk factors") generally will vary
for each product line, as well as for each separately analyzed component of the
product line. In a few cases, such risk factors are explicit assumptions of the
estimation method, but in most cases, they are implicit. For example, a method
may explicitly assume that a certain percentage of claims will close each year,
but will implicitly assume that the legal interpretation of existing contract
language will remain unchanged. Actual results will likely vary from
expectations for each of these assumptions, causing actual paid losses, as
claims are settled in the future, to be different in amount than the reserves
being estimated currently.
Some risk factors will affect more than one product line. Examples, some of
which have been exacerbated by COVID-19, include changes in claim department
practices, changes in the tort environment, changes in settlement patterns,
regulatory and legislative actions, court actions, timeliness of claim
reporting, state mix of claimants, medical utilization and degree of claimant
fraud. The extent of the impact of a risk factor will also vary by components
within a product line. Individual risk factors are also subject to interactions
with other risk factors within product line components.
The effect of a particular risk factor on estimates of claim liabilities cannot
be isolated in most cases. For example, estimates of potential claim settlements
may be impacted by the risk associated with potential court rulings, but the
final settlement agreement typically does not delineate how much of the settled
amount is due to this and other factors.
101
--------------------------------------------------------------------------------
The evaluation of data is also subject to distortion from extreme events or
structural shifts, sometimes in unanticipated ways. For example, the timing of
claims payments in one geographic region may be impacted if claim adjusters are
temporarily reassigned from that region to help settle catastrophe claims in
another region.
While some changes in the claim environment are sudden in nature (such as a new
court ruling affecting the interpretation of all contracts in that
jurisdiction), others are more evolutionary. Evolutionary changes can occur when
multiple factors affect final claim values, with the uncertainty surrounding
each factor being resolved separately, in stepwise fashion. The final impact is
not known until all steps have occurred.
Sudden changes generally cause a one-time shift in claim liability estimates, although there may be some lag in reliable quantification of their impact. Evolutionary changes generally cause a series of shifts in claim liability estimates, as each component of the evolutionary change becomes evident and estimable.
Actuarial Methods for Analyzing and Estimating Claims and Claim Adjustment Expense Reserves
The principal estimation and analysis methods utilized by the Company's actuaries to evaluate management's existing estimates for prior accident periods are the paid loss development method, the case incurred development method, the Bornhuetter-Ferguson (BF) method, and average value analysis combined with the reported claim development method. The BF method is usually utilized for more recent accident periods, with a transition to other methods as the underlying claim data becomes more voluminous and therefore more credible. These estimation and analysis methods are typically referred to as conventional actuarial methods. (See note 8 of the notes to the consolidated financial statements for an explanation of these methods). While the Company utilizes these conventional actuarial methods to estimate the claims liability for its various businesses, Company actuaries evaluating a particular component for a product line may select from the full range of methods developed within the casualty actuarial profession. The Company's actuaries are also regularly monitoring developments within the profession for advances in existing techniques or the creation of new techniques that might improve current and future estimates.
Some components of a product line may be susceptible to infrequent large claims or not be subject to conventional methods. In such cases, the Company's actuarial analysis will isolate such components for review. The reserves excluding such large claims are generally analyzed using the conventional methods described above. The reserves associated with large claims are then analyzed utilizing various methods, such as:
•Estimating the number of large claims and their average values based on
historical trends from prior accident periods, adjusted for the current
environment and supplemented with actual data for the accident year analyzed to
the extent available.
•Utilizing individual claim adjuster estimates of the large claims, combined
with continual monitoring of the aggregate accuracy of such claim adjuster
estimates. (This monitoring may lead to supplemental adjustments to the
aggregate of such claim estimates).
•Utilizing historic longer-term average ratios of large claims to small claims,
and applying such ratios to the estimated ultimate small claims from
conventional analysis.
•Ground-up analysis of the underlying exposure (typically used for asbestos and
environmental).
The results of such methodologies are subjected to various reasonability and
diagnostic tests, including implied incurred-loss-to-earned-premium ratios,
non-zero claim severity trends and paid-to-incurred loss ratios. An actual
versus expected analysis is also performed comparing actual loss development to
expected development embedded within management's estimate. Additional analyses
may be performed based on the results of these diagnostics, including the
investigation of other actuarial methods.
The methods described above are generally utilized to evaluate management's
estimate for prior accident periods. For the initial estimate of the current
accident year, however, the available claim data is typically insufficient to
produce a reliable indication. As a result, the initial estimate for an accident
year is generally based on an exposure-based method using either the loss ratio
projection method or the expected loss method. The loss ratio projection method,
which is typically used for guaranteed-cost business, develops an initial
estimate for an accident year by multiplying earned premiums for the accident
year by a projected loss ratio. The projected loss ratio is determined by
analyzing prior period experience, and adjusting for loss cost trends, rate
level differences, mix of business changes and other known or observed factors
influencing the current accident year relative to prior accident years. The
exact number of prior accident years utilized varies by product line component,
based on the stability and consistency of the individual accident year
estimates. The expected loss method, which is typically used for
102
--------------------------------------------------------------------------------loss sensitive business, develops an initial estimate of ultimate claims and claim adjustment expenses for an accident year by analyzing exposures by account.
Management's Estimates
At least once per quarter, members of Company management meet with the Company's actuaries to review the latest claims and claim adjustment expense reserve analyses. Based on these analyses, management determines whether its ultimate claim liability estimates should be changed from the prior period. In doing so, it must evaluate whether the new data provided represents credible actionable information or an anomaly that will have no effect on estimated ultimate claim liability. For example, as described above, payments may have decreased in one geographic region due to fewer claim adjusters being available to process claims. The resulting claim payment patterns would be analyzed to determine whether or not the change in payment pattern represents a change in ultimate claim liability. This type of assessment requires considerable judgment. It is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. The overall detailed analyses supporting such an effort can take several months to perform as the underlying causes of the trends observed need to be evaluated, which may require the gathering or assembling of data not previously available. It may also include interviews with experts involved with the underlying processes. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the Company's estimated claim liabilities. The final estimate selected by management in a reporting period is based on these various detailed analyses of past data, adjusted to reflect any new actionable information.
The Audit Committee of the Board of Directors reviews the process by which the Company establishes reserves for the purpose of the Company's financial statements.
Discussion of Product Lines
The following section details reserving considerations and common risk factors by product line. There are many additional risk factors that may impact ultimate claim costs. Each risk factor presented will have a different impact on required reserves. Also, risk factors can have offsetting or compounding effects on required reserves. For example, in workers' compensation, the use of expensive medical procedures that result in medical cost inflation may enable workers to return to work faster, thereby lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely measure the effect of a single risk factor and construct a meaningful sensitivity expectation. In order to provide information on reasonably possible reserving changes by product line, the historical changes in year-end claims and claim adjustment expense reserves over a one-year period are provided for theU.S. product lines. This information is provided for both the Company and the industry for the nine most recent years, and is based on the most recent publicly available data for the reported line(s) that most closely match the individual product line being discussed. These changes were calculated, net of reinsurance, from statutory annual statement data found in Schedule P of those statements, and represent the reported reserve development on the beginning-of-the-year claim liabilities divided by the beginning claim liabilities, all accident years combined, excluding non-defense related claim adjustment expense. Data presented for the Company includes history for the entire Travelers group (U.S. companies only), as required by the statutory reporting instructions promulgated by state regulatory authorities for Schedule P. Comparable data for non-U.S. companies is not available. General Liability General liability is generally considered a long tail line, as it takes a relatively long period of time to finalize and settle claims from a given accident year. The speed of claim reporting and claim settlement is a function of the characteristics of claims, including specific coverage provided, the jurisdiction and specific policy provisions such as self-insured retentions, among others. There are numerous components underlying the general liability product line. Some of these have relatively moderate payment patterns (with most of the claims for a given accident year closed within five to seven years), while others can have extreme lags in both reporting and payment of claims (e.g., a reporting lag of a decade or more for "construction defect" claims). While the majority of general liability coverages are written on an "occurrence" basis, certain general liability coverages (such as those covering management and professional liability, including cyber coverages) are typically insured on a "claims-made" basis. 103 -------------------------------------------------------------------------------- General liability reserves are generally analyzed as two components: primary and excess/umbrella, with the primary component generally analyzed separately for bodily injury and property damage. Bodily injury liability payments reimburse the claimant for damages pertaining to physical injury as a result of the policyholder's legal obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In some cases the damages can include future wage loss (which is a function of future earnings power and wage inflation) and future medical treatment costs. Property damage liability payments result from damages to the claimant's private property arising from the policyholder's legal obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the loss date, or soon thereafter.
In addition, sizable or unique exposures are reviewed separately. These exposures include asbestos, environmental, other mass torts, construction defect and large unique accounts that would otherwise distort the analysis. These unique categories often require a very high degree of judgment and require reserve analyses that do not rely on conventional actuarial methods.
Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For some products this risk is mitigated by policy language such that the insured portion of defense costs is included in the policy limit available to pay the claim. Such "defense within the limits" policies are most common for "claims-made" products. When defense costs are outside of the policy limits, the full amount of the policy limit is available to pay claims and the amounts paid for defense costs have no contractual limit. This line is typically the largest source of reserve estimate uncertainty inthe United States (excluding assumed reinsurance contracts covering the same risk). Major contributors to this reserve estimate uncertainty include the reporting lag (i.e., the length of time between the event triggering coverage and the actual reporting of the claim), the number of parties involved in the underlying tort action, whether the "event" triggering coverage is confined to only one time period or is spread over multiple time periods, the potential dollars involved (in the individual claim actions), whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written (i.e., coverage dispute potential), and the potential for mass claim actions. Claims with longer reporting lags result in greater estimation uncertainty. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential recognition lag (i.e., the lag between writing a type of policy in a certain market and the recognition that such policies have potential mass tort and/or latent claim exposure). The amount of reserve estimate uncertainty also varies significantly by component for the general liability product line. The components in this product line with the longest latency, longest reporting lags, largest potential dollars involved and greatest claim settlement complexity are asbestos and environmental. Components that include latency, reporting lag and/or complexity issues, but to a materially lesser extent than asbestos and environmental, include construction defect and other mass tort actions. Many components of general liability are not subject to material latency or claim complexity risks and hence have materially less uncertainty than the previously mentioned components. In general, components with shorter reporting lags, fewer parties involved in settlement negotiations, only one policy potentially triggered per claim, fewer potential settlement dollars, reasonably foreseeable (and stable) potential hazards/claims and no mass tort potential result in much less reserve estimate uncertainty than components without those characteristics. In addition to the conventional actuarial methods mentioned in the general discussion section, the company utilizes various report year development methods for the construction defect components of this product line. The Construction Defect report year development analysis is supplemented with projected claim counts and average values for IBNR claim counts. For components with greater lags in claim reporting, such as excess and umbrella components of this product line, the Company relies more heavily on the BF method than on the paid and case incurred development methods. Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required general liability reserves (beyond those included in the general discussion section) include: General liability risk factors •Changes in claim handling philosophies •Changes in policy provisions or court interpretation of such provisions •New or expanded theories of liability •Trends in jury awards •Changes in the propensity to sue, in general with specificity to particular issues •Changes in the propensity to litigate rather than settle a claim •Increases in attorney involvement in, or impact on, claims 104 -------------------------------------------------------------------------------- •Changes in statutes of limitations •Changes in the underlying court system •Distortions from losses resulting from large single accounts or single issues •Changes in tort law •Shifts in lawsuit mix between federal and state courts •Changes in claim adjuster processes or reporting which may cause distortions in the data being analyzed •The impact of inflation on loss costs •Changes in settlement patterns General liability book of business risk factors •Changes in policy provisions (e.g., deductibles, policy limits, endorsements) •Changes in underwriting standards •Product mix (e.g., size of account, industries insured, jurisdiction mix) Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for general liability (excluding asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.6% increase (decrease) in claims and claim adjustment expense reserves. Historically, the one-year change in the reserve estimate for this product line, excluding estimated asbestos and environmental amounts, over the last nine years has varied from -5% to 6% (averaging -1%) for the Company, and from -3% to 3% (averaging 0%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. General liability reserves (excluding asbestos and environmental) represent approximately 22% of the Company's total claims and claim adjustment expense reserves. The Company's change in reserve estimate for this product line related to the last nine accident years, which excludes the impacts of increases in asbestos and environmental reserves, the extension of the statute of limitations for childhood sexual molestation claims and increases in reserves in the Company's runoff operations, was 2% for 2022, 1% for 2021 and 3% for 2020. The 2022 change primarily reflected higher than expected loss experience inBusiness Insurance for accident years 2017 through 2019. The 2021 change primarily reflected higher than expected loss experience inBond & Specialty Insurance for accident years 2012 and 2017 through 2019 and inBusiness Insurance for accident years 2018 through 2020. The 2020 change primarily reflected higher than expected loss experience inBusiness Insurance for both primary and excess coverages for accident years 2015 through 2019 and inBond & Specialty Insurance for accident years 2015, 2018 and 2019. Commercial Property Commercial property is generally considered a short tail line with a simpler and faster claim reporting and adjustment process than liability coverages, and less uncertainty in the reserve setting process (except for more complex business interruption claims). It is generally viewed as a moderate frequency, low to moderate severity line, except for catastrophes and coverage related to large properties. The claim reporting and settlement process for property coverage claim reserves is generally restricted to the insured and the insurer. Overall, the claim liabilities for this line create a low estimation risk, except possibly for catastrophes and business interruption claims. Commercial property reserves are typically analyzed in two components, one for catastrophic or other large single events, and another for all other events. Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required property reserves (beyond those included in the general discussion section) include: Commercial property risk factors •Physical concentration of policyholders •Availability and cost of local contractors •Inflation and materials shortages •For the more severe catastrophic events, "demand surge" inflation, which refers to significant short-term increases in building material and labor costs due to a sharp increase in demand for those materials and services •Local building codes •Amount of time to return property to full usage (for business interruption claims) •Frequency of claim re-openings on claims previously closed •Court interpretation of policy provisions (such as occurrence definition, wind versus flooding or communicable disease exclusions) 105 --------------------------------------------------------------------------------
•Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake, hail damage to roofs and/or equipment on roofs) •Court or legislative changes to the statute of limitations •Weather/climate variability
Commercial property book of business risk factors •Policy provisions mix (e.g., deductibles, policy limits, endorsements) •Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for property, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -21% to -6% (averaging -11%) for the Company, and from -10% to -2% (averaging -6%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Commercial property reserves represent approximately 3% of the Company's total claims and claim adjustment expense reserves. Since commercial property is considered a short tail coverage, the one year change for commercial property can be more volatile than that for the longer tail product lines. This is due to the fact that the majority of the reserve for commercial property relates to the most recent accident year, which is subject to the most uncertainty for all product lines. This recent accident year uncertainty is relevant to commercial property because weather-related events that occur in the second half of the year may not be completely resolved until the following year. Reserve estimates associated with catastrophes may take even longer to resolve. The reserve estimates for this product line are also potentially subject to material changes due to uncertainty in measuring ultimate losses for significant catastrophes such as hurricanes, tornadoes, hail storms and wildfires. The Company's change in reserve estimate for this product line was -8% for 2022, -10% for 2021 and -11% for 2020. The 2022 change primarily reflected better than expected loss experience related to both catastrophe and non-catastrophe losses for accident years 2020 and 2021. The 2021 change primarily reflected better than expected loss experience related to both catastrophe and non-catastrophe losses for accident year 2020. The 2020 change primarily reflected better than expected loss experience related to both catastrophe and non-catastrophe losses for accident year 2019 and the PG&E subrogation recovery for accident years 2017 and 2018. Commercial Multi-Peril Commercial multi-peril provides a combination of property and liability coverage typically for small businesses and, therefore, includes both short and long tail coverages. For property coverage, it generally takes a relatively short period of time to close claims, while for the other coverages, generally for the liability coverages, it takes a longer period of time to close claims. The reserving risk for this line is dominated by the liability coverage portion of this product, except occasionally in the event of catastrophic or other large single loss events. The reserving risk for this line differs from that of the general liability product line and the property product line due to the nature of the customer. Commercial multi-peril is generally sold to small- to mid-sized accounts, while the customer profile for general liability and commercial property includes larger customers.
See "Commercial property risk factors" and "General liability risk factors," discussed above, with regard to reserving risk for commercial multi-peril.
Unanticipated changes in risk factors can affect reserves. As an indicator of
the causal effect that a change in one or more risk factors could have on
reserves for commercial multi-peril (excluding asbestos and environmental), a 1%
increase (decrease) in incremental paid loss development for each future
calendar year could result in a 1.3% increase (decrease) in claims and claim
adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line,
excluding estimated asbestos and environmental amounts, over the last nine years
has varied from -5% to 4% (averaging 0%) for the Company, and from -3% to 1%
(averaging -1%) for the industry overall. The Company's year-to-year changes are
driven by, and are based on, observed events during the year. The Company
believes that its range of historical outcomes is illustrative of reasonably
possible one-year changes in
106
--------------------------------------------------------------------------------reserve estimates for this product line. Commercial multi-peril reserves (excluding asbestos and environmental reserves) represent approximately 9% of the Company's total claims and claim adjustment expense reserves.
As discussed above, this line combines general liability and commercial property coverages and it has been impacted in the past by many of the same events as those two lines. The Company's change in reserve estimate for this product line related to the last nine accident years, which excludes the impacts of increases in asbestos and environmental reserves and increases in reserves in the Company's runoff operations, was -2% for 2022, 0% for 2021 and 0% for 2020. The 2022 change primarily reflected better than expected loss experience for property coverages for accident year 2021. In 2021, higher than expected loss experience for liability coverages for accident years 2017 and 2018 was largely offset by better than expected loss experience for liability coverages for accident years 2012 through 2016. In 2020, higher than expected loss experience for liability coverages for accident year 2019 was largely offset by the PG&E subrogation recovery for accident years 2017 and 2018.
Commercial Automobile
The commercial automobile product line is a mix of property and liability coverages and, therefore, includes both short and long tail coverages. The payments that are made quickly typically pertain to auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. In general, claim reporting lags are generally short, claim complexity is not a major issue, and the line is viewed as high frequency, low to moderate severity. Overall, the claim liabilities for this line create a moderate estimation risk. Recently, the Company has seen more of an increase in the rate of attorney involvement than it had anticipated and a lengthening of the claim development pattern. As a consequence, the Company has experienced a higher level of bodily injury severity than it had anticipated. Commercial automobile reserves are typically analyzed in four components: bodily injury liability; property damage liability; collision claims; and comprehensive claims. These last two components have minimum reserve risk and fast payouts and, accordingly, separate risk factors are not presented.
The Company utilizes the conventional actuarial methods mentioned in the general discussion above in estimating claim liabilities for this line. This is supplemented with detailed custom analyses where needed.
Examples of common risk factors, or perceptions thereof, that could change and,
thus, affect the required commercial automobile reserves (beyond those included
in the general discussion section) include:
Bodily injury and property damage liability risk factors
•Trends in jury awards
•Changes in the underlying court system
•Changes in case law
•Litigation trends
•Increases in attorney involvement in, or impact on, claims
•Frequency of claims with payment capped by policy limits
•Change in average severity of accidents, or proportion of severe accidents,
including the impact of inflation
•Changes in auto safety technology
•Subrogation opportunities
•Changes in claim handling philosophies
•Frequency of visits to health providers
•Number of medical procedures given during visits to health providers
•Types of health providers used
•Types of medical treatments received
•Changes in cost of medical treatments
•Degree of patient responsiveness to treatment
Commercial automobile book of business risk factors
•Changes in policy provisions (e.g., deductibles, policy limits, endorsements,
etc.)
•Changes in mix of insured vehicles (e.g., long haul trucks versus local and
smaller vehicles, fleet risks versus non-fleets)
•Changes in underwriting standards
107
--------------------------------------------------------------------------------
Unanticipated changes in risk factors can affect reserves. As an indicator of
the causal effect that a change in one or more risk factors could have on
reserves for commercial automobile, a 1% increase (decrease) in incremental paid
loss development for each future calendar year could result in a 1.3% increase
(decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line
over the last nine years has varied from -2% to 11% (averaging 2%) for the
Company, and from 2% to 7% (averaging 5%) for the industry overall. The
Company's year-to-year changes are driven by, and are based on, observed events
during the year. The Company believes that its range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for
this product line. Commercial automobile reserves represent approximately 9% of
the Company's total claims and claim adjustment expense reserves.
The Company's change in reserve estimate for this product line was 0% for 2022,
-2% for 2021 and 4% for 2020. In 2022, higher than expected loss experience for
liability coverages for accident years 2017 through 2019 and 2021 was largely
offset by better than expected loss experience for physical damage coverages for
accident year 2021 and for liability coverages for accident year 2020. The 2021
change primarily reflected better than expected loss experience for liability
and physical damage coverages for accident year 2020. The 2020 change primarily
reflected higher than expected loss experience for liability coverages for
accident year 2019.
Workers' Compensation
Workers' compensation is generally considered a long tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year. While certain payments such as initial medical treatment or temporary wage replacement for the injured worker are made quickly, some other payments are made over the course of several years, such as awards for permanent partial injuries. In addition, some payments can run as long as the injured worker's life, such as permanent disability benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are generally short, payment obligations are generally not complex, and most of the liability can be considered high frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims providing lifetime coverage for medical expense arising from a worker's injury, as such claims are subject to greater inflation risk. Overall, the claim liabilities for this line create a somewhat greater than moderate estimation risk.
Workers' compensation reserves are typically analyzed in three components: indemnity losses, medical losses and claim adjustment expenses.
Examples of common risk factors, or perceptions thereof, that could change and,
thus, affect the required workers' compensation reserves (beyond those included
in the general discussion section) include:
Indemnity risk factors
•Time required to recover from the injury
•Degree of available transitional jobs
•Degree of legal involvement
•Changes in the interpretations and processes of the administrative bodies that
oversee workers' compensation claims
•Future wage inflation for states that index benefits
•Changes in the administrative policies of second injury funds
Medical risk factors
•Changes in the cost of medical treatments (including prescription drugs) and
underlying fee schedules ("inflation")
•Availability of medical providers and medical wage impacts
•Frequency of visits to health providers
•Number of medical procedures given during visits to health providers
•Types of health providers used
•Type of medical treatments received
•Use of preferred provider networks and other medical cost containment practices
•Availability of new medical processes and equipment
•Changes in the use of pharmaceutical drugs, including drugs for pain management
•Degree of patient responsiveness to treatment
General workers' compensation risk factors •Frequency of reopening claims previously closed •Mortality trends of injured workers with lifetime benefits and medical treatment
108
--------------------------------------------------------------------------------•Changes in statutory benefits, including due to presumption laws •The impact, if any, of potential future changes to government health insurance legislation
Workers' compensation book of business risk factors •Product mix •Injury type mix •Changes in underwriting standards Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for workers' compensation, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.2% increase (decrease) in claims and claim adjustment expense reserves. Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -4% to 0% (averaging -3%) for the Company, and from -5% to -1% (averaging -3%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Workers' compensation reserves represent approximately 33% of the Company's total claims and claim adjustment expense reserves. The Company's change in reserve estimate for this product line was -4% for 2022, -3% for 2021 and -3% for 2020. The 2022 change primarily reflected better than expected loss experience for accident years 2021 and prior. The 2021 change primarily reflected better than expected loss experience for accident years 2020 and prior. The 2020 change primarily reflected better than expected loss experience for accident years 2018 and prior.
Fidelity and Surety
Fidelity is generally considered a short tail coverage. It takes a relatively
short period of time to finalize and settle most fidelity claims. The volatility
of fidelity reserves is generally related to the type of business of the
insured, the size and complexity of the insured's business operations, amount of
policy limit and attachment point of coverage. The uncertainty surrounding
reserves for small, commercial insureds is typically less than the uncertainty
for large commercial or financial institutions. The high frequency, low severity
nature of small commercial fidelity losses provides for stability in loss
estimates, whereas the low frequency, high severity nature of losses for large
insureds results in a wider range of ultimate loss outcomes. Actuarial
techniques that rely on a stable pattern of loss development are generally not
applicable to low frequency, high severity claims.
Surety has certain components that are generally considered short tail coverages
with short reporting lags, although large individual construction and commercial
surety contracts can result in a long settlement tail, based on the length and
complexity of the construction project(s) or commercial transaction being
bonded. The frequency of losses in surety generally has a lagging correlation
with economic cycles as the primary cause of surety loss is the inability of an
insured to fulfill its contractual obligations. The Company actively seeks to
mitigate this exposure to loss through disciplined risk selection, adherence to
underwriting standards and ongoing monitoring of contractor progress in
significant construction projects. The volatility of surety losses is generally
related to the type of business performed by the bonded party, the type of
bonded obligation, the amount of limit exposed to loss and the amount of assets
available to the surety company to mitigate losses, such as unbilled contract
funds, collateral, first and third party indemnity, and other security positions
of a bonded party's assets. Certain classes of surety claims are very high
severity, low frequency in nature. These can include large construction
contractors involved with one or multiple large, complex projects as well as
certain large commercial surety exposures. Other claim factors affecting reserve
variability of surety include litigation related to amounts owed by the bonded
party and due to the surety company (e.g., salvage and subrogation efforts), the
results of financial restructuring of a bonded party and the availability and
cost of replacement contractors, labor and materials.
Examples of common risk factors, or perceptions thereof, that could change and,
thus, affect the required fidelity and surety reserves (beyond those included in
the general discussion section) include:
Fidelity risk factors
•Type of business of insured
•Policy limit and attachment points
•Third-party claims
•Coverage litigation
•Complexity of claims
•Growth in insureds' operations
109
--------------------------------------------------------------------------------
Surety risk factors
•Economic trends, including the general level of construction activity
•Concentration of reserves in a relatively few large claims
•Type of business bonded
•Type of obligation bonded
•Cumulative limits of liability for the bonded party
•Assets available to mitigate loss
•Defective workmanship/latent defects
•Financial strategy of the bonded party
•Changes in statutory obligations
•Geographic spread of business
Fidelity and Surety book of business risk factors •Changes in policy provisions (e.g., deductibles, limits, endorsements) •Changes in underwriting standards
Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for fidelity and surety, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.5% increase (decrease) in claims and claim adjustment expense reserves. Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -36% to -10% (averaging -22%) for the Company, and from -18% to 0% (averaging -12%) for the industry overall. The Company's year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Fidelity and surety reserves represent approximately 1% of the Company's total claims and claim adjustment expense reserves.
In general, developments on single large claims (both adverse and favorable) are a primary source of changes in reserve estimates for this product line.
The Company's change in reserve estimate for this product line was -30% for 2022, -27% for 2021 and -12% for 2020. The 2022 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2015 through 2019 and 2021. The 2021 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2015 through 2017 and 2020. The 2020 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2015, 2018 and 2019.
Personal Automobile
Personal automobile includes both short and long tail coverages. The payments
that are made quickly typically pertain to auto physical damage (property)
claims and property damage (liability) claims. The payments that take longer to
finalize and are more difficult to estimate relate to bodily injury claims.
Reporting lags are relatively short and the claim settlement process for
personal automobile liability generally is the least complex of the liability
products. It is generally viewed as a high frequency, low to moderate severity
product line. Overall, the claim liabilities for this line create a moderate
estimation risk.
Personal automobile reserves are typically analyzed in five components: bodily
injury liability, property damage liability, no-fault losses, collision claims
and comprehensive claims. These last two components have minimum reserve risk
and fast payouts and, accordingly, separate factors are not presented.
Examples of common risk factors, or perceptions thereof, that could change and,
thus, affect the required personal automobile reserves (beyond those included in
the general reserve discussion section) include:
Bodily injury, property damage liability and no-fault risk factors
•Trends in jury awards
•Changes in the underlying court system and its philosophy
•Changes in case law
•Litigation trends
•Increases in attorney involvement in, or impact on, claims
•Frequency of claims with payment capped by policy limits
•Change in frequency trends, including the impact of changes in driving behavior
110
--------------------------------------------------------------------------------
•Change in average severity of accidents, or proportion of severe accidents,
including the impact of inflation, changes in driving behavior and the
involvement of pedestrians
•Changes in auto technology, including safety features
•Subrogation opportunities
•Frequency of visits to health providers
•Number of medical procedures given during visits to health providers
•Types of health providers used
•Types of medical treatments received
•Changes in cost of medical treatments
•Effectiveness of no-fault laws
•Degree of patient responsiveness to treatment
•Changes in claim handling philosophies
Personal automobile book of business risk factors
•Changes in policy provisions (e.g., deductibles, policy limits, endorsements,
etc.)
•Changes in underwriting standards
•Changes in the use of permissible data for rating and underwriting
Unanticipated changes in risk factors can affect reserves. As an indicator of
the causal effect that a change in one or more risk factors could have on
reserves for personal automobile, a 1% increase (decrease) in incremental paid
loss development for each future calendar year could result in a 1.1% increase
(decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line
over the last nine years has varied from -4% to 3% (averaging -1%) for the
Company, and from -2% to 2% (averaging 0%) for the industry overall. The
Company's year-to-year changes are driven by, and are based on, observed events
during the year. The Company believes that its range of historical outcomes is
illustrative of reasonably possible one-year changes in reserve estimates for
this product line. Personal automobile reserves represent approximately 7% of
the Company's total claims and claim adjustment expense reserves.
The Company's change in reserve estimate for this product line was 0% for 2022,
-4% for 2021 and -2% for 2020. In 2022, higher than expected loss experience for
liability coverages for accident year 2021 was largely offset by better than
expected loss experience for physical damage coverages for accident year 2021
and for liability coverages for accident years 2018 through 2020. The 2021
change primarily reflected better than expected loss experience for liability
and physical damage coverages for accident years 2017 through 2020. The 2020
change primarily reflected better than expected loss experience for liability
and physical damage coverages for accident years 2016 through 2018.
Personal Homeowners and Other
Homeowners is generally considered a short tail coverage. Most payments are related to the property portion of the policy, where the claim reporting and settlement process is generally restricted to the insured and the insurer. Claims on property coverage are typically reported soon after the actual damage occurs, although delays of several months are not unusual. The resulting settlement process is typically fairly short term, although exceptions do exist. The liability portion of the homeowners policy generates claims which take longer to pay due to the involvement of litigation and negotiation, but with generally small reporting lags. Personal Insurance Other products include personal umbrella policies, among others. See "general liability reserving risk factors," discussed above, for reserving risk factors related to umbrella coverages.
Overall, the line is generally high frequency, low to moderate severity (except for catastrophes), with simple to moderate claim complexity.
Homeowners reserves are typically analyzed in two components: non-catastrophe related losses and catastrophe losses.
Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required homeowners reserves (beyond those included in the general discussion section) include:
Homeowners and Other risk factors
•Weather/climate variability
•Inflation and materials costs and shortages
111
--------------------------------------------------------------------------------
•For the more severe catastrophic events, "demand surge" inflation, which refers
to significant short-term increases in building material and labor costs due to
a sharp increase in demand for those materials and services
•Amount of time to return property to residential use
•Lags in reporting claims (e.g., winter damage to summer homes, hidden damage
after an earthquake, hail damage to roofs and/or equipment on roofs)
•Availability and cost of local contractors
•Quality of construction of insured homes
•Local building codes
•Litigation trends
•Trends in jury awards
•Court interpretation of policy provisions (such as occurrence definition, or
wind versus flooding)
•Court or legislative changes to the statute of limitations
•Salvage and subrogation opportunities
Homeowners and Other book of business risk factors
•Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)
•Degree of concentration of policyholders
•Changes in underwriting standards
•Changes in the use of permissible data for rating and underwriting
Unanticipated changes in risk factors can affect reserves. As an indicator of
the causal effect that a change in one or more risk factors could have on
reserves for personal homeowners and other, a 1% increase (decrease) in
incremental paid loss development for each future calendar year could result in
a 1.1% increase (decrease) in claims and claim adjustment expense reserves.
Historically, the one-year change in the reserve estimate for this product line
(excluding Personal Insurance Other, which for statutory reporting purposes is
included with other lines of business) over the last nine years has varied from
-28% to 3% (averaging -8%) for the Company, and from -7% to 1% (averaging -2%)
for the industry overall. The Company's year-to-year changes are driven by, and
are based on, observed events during the year. The Company believes that its
range of historical outcomes is illustrative of reasonably possible one-year
changes in reserve estimates for this product line. Personal homeowners and
other reserves represent approximately 5% of the Company's total claims and
claim adjustment expense reserves.
This line combines both liability and property coverages; however, the majority
of the reserves relate to property. While property is considered a short tail
coverage, the one year change for property can be more volatile than that for
the longer tail product lines. This is due to the fact that the majority of the
reserve for property relates to the most recent accident year, which is subject
to the most uncertainty for all product lines. This recent accident year
uncertainty is relevant to property because weather-related events in the second
half of the year may not be completely resolved until the following year.
Reserve estimates associated with catastrophes, including wildfires in recent
years, may take even longer to resolve.
The Company's change in reserve estimate for this product line (excluding
Personal Insurance Other) was -2% for 2022, -9% for 2021 and -28% for 2020. The
2022 change primarily reflected better than expected loss experience for
catastrophe and non-catastrophe losses for accident years 2018 through 2020. The
2021 change primarily reflected better than expected loss experience for
catastrophe and non-catastrophe losses for accident years 2016 through 2018 and
2020. The 2020 change primarily reflected the PG&E subrogation recovery for
accident years 2017 and 2018, partially offset by higher than expected loss
experience for catastrophe and non-catastrophe losses for accident year 2019.
International and Other
International and other includes products written by the Company's international operations, as well as all other products not explicitly discussed above. The principal component of "other" claim reserves is assumed reinsurance written on an excess-of-loss basis, which may include reinsurance of non-U.S. exposures, and is runoff business. International and other claim liabilities result from a mix of coverages, currencies and jurisdictions/countries. The common characteristic is the need to customize the analysis to the individual component, and the inability to rely on data characterizations and reporting requirements in theU.S. statutory reporting framework. Due to changes in the business mix for this product line over time, incurred claim liabilities for more recent years are generally shorter-tailed (due to both the products and the jurisdictions involved, e.g.,Canada , theRepublic of Ireland and the United 112 -------------------------------------------------------------------------------- Kingdom), compared to the older liabilities from runoff operations that are extremely long tail (e.g.,U.S. excess liabilities reinsured through theLondon market, and several underwriting pools in runoff). The speed of claim reporting and claim settlement is a function of the specific coverage provided, the jurisdiction, the distribution system (e.g., underwriting pool versus direct) and the proximity of the insurance sale to the insured hazard (e.g., insured and insurer located in different countries). In particular, liabilities arising from the underwriting pools in runoff may result in significant reporting lags, settlement lags and claim complexity, due to the need to coordinate with other pool members or co-insurers through a broker or lead-insurer for claim settlement purposes. International reserves are generally analyzed by country and general coverage category (e.g., General Liability inCanada , Commercial Property in theUnited Kingdom , etc.). The business is also generally split by direct versus assumed reinsurance for a given coverage. Where the underlying insured hazard is outsidethe United States , the underlying coverages are generally similar to those described under the Homeowners, Personal Automobile, Commercial Automobile, General Liability, Commercial Property and Surety discussions above, taking into account differences in the legal environment and differences in terms and conditions. However, statutory coverage differences exist amongst various jurisdictions. For example, in some jurisdictions there are no aggregate policy limits on certain liability coverages. Other reserves, primarily assumed reinsurance in runoff, are generally analyzed by program/pool, treaty type, and general coverage category (e.g., General Liability - excess of loss reinsurance). Excess exposure requires the insured to "prove" not only claims under the policy, but also the prior payment of claims reaching up to the excess policy's attachment point. Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required International and other reserves (beyond those included in the general discussion section, and in the Personal Automobile, Homeowners, General Liability, Commercial Property, Commercial Automobile and Surety discussions above) include: International and other risk factors •Changes in claim handling procedures, including those of the primary carriers •Changes in policy provisions or court interpretation of such provision •Economic trends •New theories of liability •Trends in jury awards •Changes in the propensity to sue •Changes in statutes of limitations •Changes in the underlying court system •Distortions from losses resulting from large single accounts or single issues •Changes in tort law •Changes in claim adjuster office structure (causing distortions in the data) •Changes in foreign currency exchange rates International and other book of business risk factors •Changes in policy provisions (e.g., deductibles, policy limits, endorsements, "claims-made" language) •Changes in underwriting standards •Product mix (e.g., size of account, industries insured, jurisdiction mix) Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for International and other (excluding asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves. International and other reserves (excluding asbestos and environmental) represent approximately 7% of the Company's total claims and claim adjustment expense reserves. International and other represents a combination of different product lines, some of which are in runoff. Comparative historical information is not available for international product lines as insurers domiciled outside ofthe United States do not fileU.S. statutory reports. Comparative historical information on runoff business is not indicative of reasonably possible one-year changes in the reserve estimate for this mix of runoff business. Accordingly, the Company has not included comparative analyses for International and other. 113 --------------------------------------------------------------------------------
Reinsurance Recoverables
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In addition, in the ordinary course of business, the Company becomes involved in coverage disputes with its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the Company's rights and obligations under the various reinsurance agreements. The Company employs dedicated specialists and comprehensive strategies to manage reinsurance collections and disputes. The Company has entered into a reinsurance contract in connection with catastrophe bonds issued by Long Point Re IV. This contract meets the requirements to be accounted for as reinsurance in accordance with guidance for accounting for reinsurance contracts. The catastrophe bonds are described in more detail in "Item 1-Business-Catastrophe Reinsurance." Recoverables attributable to structured settlements relate primarily to personal injury claims, of which workers' compensation claims comprise a significant portion, for which the Company has purchased annuities and remains contingently liable in the event of a default by the companies issuing the annuities. Recoverables attributable to mandatory pools and associations relate primarily to workers' compensation service business. These recoverables are supported by the participating insurance companies' obligation to pay a pro rata share based on each company's voluntary market share of written premium in each state in which it is a pool participant. In the event a member of a mandatory pool or association defaults on its share of the pool's or association's obligations, the other members' share of such obligation increases proportionally. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance. The allowance is based upon the Company's ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes, applicable coverage defenses and other relevant factors. For structured settlements, the allowance is also based upon the Company's ongoing review of life insurers' creditworthiness and estimated amounts of coverage that would be available from state guaranty funds if a life insurer defaults. A probability-of-default methodology which reflects current and forecasted economic conditions is used to estimate the amount of uncollectible reinsurance due to credit-related factors and the estimate is reported in an allowance for estimated uncollectible reinsurance. The allowance also includes estimated uncollectible amounts related to dispute risk with reinsurers. Amounts deemed to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance. Changes in the allowance, as well as any subsequent collections of amounts previously written off, are reported as part of claims and claim adjustment expenses. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. Impairments Investment Impairments
See note 1 of the notes to the consolidated financial statements for a discussion of investment impairments.
Due to the subjective nature of the Company's analysis and estimates of future cash flows, along with the judgment that must be applied in the analysis, it is possible that the Company could reach a different conclusion whether or not to impair a security if it had access to additional information about the issuer. Additionally, it is possible that the issuer's actual ability to meet contractual obligations may be different than what the Company determined during its analysis, which may lead to a different impairment conclusion in future periods.
The Company performs a review, on at least an annual basis, of goodwill held by
the reporting units which are the Company's three operating and reportable
segments: Business Insurance; Bond & Specialty Insurance; and Personal
Insurance. The Company uses a discounted cash flow model to estimate the fair
value of its reporting units that incorporates multiple inputs into discounted
cash flow calculations, including assumptions that market participants may make
in valuing the reporting unit. The discounted cash flow model is an income
approach to valuation that is based on a detailed cash flow analysis for
deriving a current fair value of reporting units and is representative of the
Company's reporting units' current and expected future financial performance.
The assumptions used include earnings projections, including projected growth,
projected levels of economic capital needed to support the business, and the
weighted average cost of capital used for purposes of discounting the projected
cash flows. Changes in the estimates of projected earnings, business growth,
economic capital, and the weighted average cost of capital will directly impact
the estimated fair value of the reporting units and, depending on the
directional
114
--------------------------------------------------------------------------------
change of inputs, may increase the risk of impairment of goodwill. Once the
Company estimates the fair value of its reporting units, those estimates are
compared to their carrying values. If the carrying values of the reporting units
were to exceed their fair value, the amount of the impairment would be
calculated, and goodwill adjusted accordingly.
Other indefinite-lived intangible assets held by the Company are also reviewed
for impairment on at least an annual basis. The Company uses various methods for
estimating the fair value of the intangible assets and relies on inputs such as
replacement cost, projected earnings, including projected growth of earnings,
and market royalty rates applied to the projected earnings.
See note 1 of the notes to the consolidated financial statements for a discussion of impairments of goodwill and other intangible assets.
OTHER UNCERTAINTIES
For a discussion of other risks and uncertainties that could impact the Company's results of operations or financial position, see note 17 of the notes to the consolidated financial statements and "Item 1A-Risk Factors."
FORWARD-LOOKING STATEMENTS
This report contains, and management may make, certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as "may," "will," "should," "likely," "probably," "anticipates," "expects," "intends," "plans," "projects," "believes," "views," "estimates" and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company's statements about: •the Company's outlook, the impact of trends on its business, such as the impact of elevated industrywide loss costs in Personal Insurance, and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, renewal premium changes, underwriting margins and underlying underwriting margins, net and core income, investment income and performance, loss costs, return on equity, core return on equity and expected current returns, and combined ratios and underlying combined ratios); •the impact of legislative or regulatory actions or court decisions; •share repurchase plans; •future pension plan contributions; •the sufficiency of the Company's reserves, including asbestos; •the impact of emerging claims issues as well as other insurance and non-insurance litigation; •the cost and availability of reinsurance coverage; •catastrophe losses and modeling, including statements about probabilities or likelihood of exceedance; •the impact of investment (including changes in interest rates), economic (including inflation, changes in tax laws, changes in commodity prices and fluctuations in foreign currency exchange rates) and underwriting market conditions; •the impact of changing climate conditions; •the impact of COVID-19 and related economic conditions; •strategic and operational initiatives to improve profitability and competitiveness; •the Company's competitive advantages and innovation agenda; •new product offerings; •the impact of developments in the tort environment, such as increased attorney involvement in insurance claims; and •the impact of developments in the geopolitical environment. The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company's control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.
For a discussion of some of the factors that could cause actual results to differ, see "Item 1A-Risk Factors" and "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Company's forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update its forward-looking statements.
115--------------------------------------------------------------------------------
© Edgar Online, source
