THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2020 Third Quarter Consolidated Results of Operations
•Net income of$827 million , or$3.24 per share basic and$3.23 per share diluted •Net earned premiums of$7.38 billion •Catastrophe losses of$397 million ($314 million after-tax) •Net favorable prior year reserve development of$142 million ($113 million after-tax) •Combined ratio of 94.9% •Net investment income of$671 million ($566 million after-tax) •Net realized investment gains of$37 million ($29 million after-tax) •Operating cash flows of$2.33 billion
2020 Third Quarter Consolidated Financial Condition
•Total investments of$83.56 billion ; fixed maturities and short-term securities comprised 94% of total investments •Total assets of$116.38 billion •Total debt of$7.05 billion , resulting in a debt-to-total capital ratio of 20.2% (22.7% excluding net unrealized investment gains, net of tax) •Paid$217 million of dividends to shareholders •Shareholders' equity of$27.85 billion •Net unrealized investment gains of$4.84 billion ($3.81 billion after-tax) •Book value per common share of$109.94 •Holding company liquidity of$2.28 billion 36 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions, except ratio and per share amounts) 2020 2019 2020 2019
Revenues
Premiums $ 7,380 $ 7,179 $ 21,564 $ 21,022
Net investment income 671 622 1,550 1,852
Fee income 101 121 323 346
Net realized investment gains (losses) 37 23 (48) 101
Other revenues 86 68 195 197
Total revenues 8,275 8,013 23,584 23,518
Claims and expenses
Claims and claim adjustment expenses 4,886 5,230 14,782 14,493
Amortization of deferred acquisition costs 1,207 1,169 3,558
3,420
General and administrative expenses 1,109 1,098 3,367 3,280 Interest expense 87 84 256 261 Total claims and expenses 7,289 7,581 21,963 21,454 Income before income taxes 986 432 1,621 2,064 Income tax expense 159 36 234 315 Net income$ 827 $ 396 $ 1,387 $ 1,749 Net income per share Basic$ 3.24 $ 1.52 $ 5.44 $ 6.65 Diluted$ 3.23 $ 1.50 $ 5.41 $ 6.59 Combined ratio Loss and loss adjustment expense ratio 65.6 % 72.0 % 67.8 % 68.1 % Underwriting expense ratio 29.3 29.5 30.1 29.8 Combined ratio 94.9 % 101.5 % 97.9 % 97.9 % The following discussions of the Company's net income and segment income are presented on an after-tax basis. Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted. Discussions of net income per common share are presented on a diluted basis.
Overview
Diluted net income per share of
Net
income of$827 million in the third quarter of 2020 increased by 109% over net income of$396 million in the same period of 2019. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) net favorable prior year reserve development, compared with net unfavorable prior year reserve development in the same period of 2019, (ii) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), (iii) higher net investment income and (iv) higher net realized investment gains, partially offset by (v) higher catastrophe losses. Net favorable prior year reserve development in the third quarter of 2020 was$142 million . Net unfavorable prior year reserve development in the third quarter of 2019 was$294 million . Catastrophe losses in the third quarters of 2020 and 2019 were$397 million and$241 million , respectively. The higher underlying underwriting margins in the third quarter of 2020 were driven byPersonal Insurance andBusiness Insurance , partially offset byBond & Specialty Insurance . Income tax expense in the third quarter of 2020 was higher than in the same period of 2019, primarily reflecting the impact of the increase in income before income taxes. 37 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Diluted net income per share of$5.41 in the first nine months of 2020 decreased by 18% from diluted net income per share of$6.59 in the same period of 2019. Net income of$1.39 billion in the first nine months of 2020 decreased by 21% from net income of$1.75 billion in the same period of 2019. 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) higher catastrophe losses, (ii) lower net investment income and (iii) net realized investment losses compared to net realized investment gains in the same period of 2019, partially offset by (iv) higher underlying underwriting margins and (v) net favorable prior year reserve development, compared to net unfavorable prior year reserve development in the same period of 2019. Catastrophe losses in the first nine months of 2020 and 2019 were$1.58 billion and$801 million , respectively. Net favorable prior year reserve development in the first nine months of 2020 was$171 million . Net unfavorable prior year reserve development in the first nine months of 2019 was$120 million . The higher underlying underwriting margins in the first nine months of 2020 were driven byPersonal Insurance andBusiness Insurance , partially offset byBond & Specialty Insurance . Income tax expense in the first nine months of 2020 was lower than in the same period of 2019, primarily reflecting the impact of the decrease in income before income taxes.
Impact of COVID-19 and Related Economic Conditions
Beginning inMarch 2020 and continuing through the third quarter of 2020, the global pandemic caused by the novel coronavirus COVID-19 ("COVID-19") and related economic conditions impacted the Company's results of operations. For the third quarter and first nine months of 2020, the Company's underwriting margins were impacted as follows: •Earned premiums were negatively impacted by premium refunds inPersonal Insurance provided to personal automobile customers, primarily in the second quarter of 2020. InBusiness Insurance , earned premiums were negatively impacted by a modest reduction in exposures and reduced levels of new business. Additionally,Business Insurance earned premiums were negatively impacted by reductions in the Company's estimate of ultimate audit premiums receivable, primarily in the second quarter of 2020. Earned premiums inBond & Specialty Insurance were not materially impacted by COVID-19 and related economic conditions. •Claims and claim adjustment expenses inBusiness Insurance included modestly lower loss estimates in certain product lines, primarily commercial automobile, partially offset by modestly higher loss estimates in certain other product lines, primarily workers' compensation and commercial property. Claims and claim adjustment expenses inBond & Specialty Insurance were negatively impacted by higher loss estimates for management liability coverages. Claims and claim adjustment expenses inPersonal Insurance were favorably impacted by lower loss estimates in the automobile product line, largely due to the impact of a decrease in miles driven. •General and administrative expenses were modestly impacted by an increased allowance for expected credit losses on premiums receivable in all segments and higher contingent commission expense inPersonal Insurance , partially offset by lower travel-related expenses in all business segments.
In addition to the foregoing impacts on its underwriting margins, for the third quarter and first nine months of 2020, the Company also experienced the following impacts of COVID-19 and related economic conditions:
•Other income was negatively impacted by declines in installment premium charges attributable to the impact of billing relief actions offered to customers.
•Net investment income from the Company's other investments of$173 million and$27 million for the third quarter and first nine months of 2020, respectively, was impacted by continued volatility in global financial markets. Other investments include 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, the impact of any volatility in global financial markets on net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. •Net realized gains (losses) included net realized investment gains (losses) on equity securities still held of$19 million and$(14) million for the third quarter and first nine months of 2020, respectively, driven by the impact of changes in fair value on the Company's equity investments attributable to the volatility in global financial markets. 38 --------------------------------------------------------------------------------
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see "Outlook" and "Part II-Item 1A-Risk Factors."
The Company has insurance operations inCanada , theUnited Kingdom , theRepublic of Ireland and throughout other parts of the world as a corporate member of Lloyd's, as well as inBrazil andColombia , 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 three months and nine months endedSeptember 30, 2020 and 2019, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company's net income or segment income for the periods reported. Revenues Earned Premiums Earned premiums in the third quarter of 2020 were$7.38 billion ,$201 million or 3% higher than in the same period of 2019. Earned premiums in the first nine months of 2020 were$21.56 billion ,$542 million or 3% higher than in the same period of 2019. InBusiness Insurance , earned premiums in the third quarter of 2020 decreased by 1% from the same period of 2019. Earned premiums in the first nine months of 2020 were comparable with the same period of 2019. Earned premiums inBusiness Insurance in both periods of 2020 were negatively impacted by a modest reduction in exposures and a decrease in new business volume, as well as reductions in the Company's estimate of ultimate audit premiums receivable, in each case impacted by COVID-19 and related economic conditions. InBond & Specialty Insurance , earned premiums in the third quarter and first nine months of 2020 increased by 11% and 10%, respectively, over the same periods of 2019. Earned premiums inBond & Specialty Insurance in both periods of 2020 were not materially impacted by COVID-19 and related economic conditions. InPersonal Insurance , earned premiums in the third quarter and first nine months of 2020 increased by 7% and 4%, respectively, over the same periods of 2019. Earned premiums inPersonal Insurance in the first nine months of 2020 were reduced by premium refunds provided to personal automobile customers, primarily in the second quarter of 2020, in response to COVID-19 and related economic conditions. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow. Net Investment Income The following table sets forth information regarding the Company's investments. Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2020 2019 2020 2019 Average investments (1)$ 78,722 $ 74,910 $ 77,304 $ 74,475 Pre-tax net investment income 671 622 1,550 1,852 After-tax net investment income 566 528 1,336 1,572 Average pre-tax yield (2) 3.4 % 3.3 % 2.7 % 3.3 % Average after-tax yield (2) 2.9 % 2.8 % 2.3 % 2.8 %
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(1)Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income. (2)Excludes net realized and net unrealized investment gains and losses. Net investment income in the third quarter of 2020 was$671 million ,$49 million or 8% higher than in the same period of 2019. Net investment income in the first nine months of 2020 was$1.55 billion ,$302 million or 16% lower than in the same period of 2019. Net investment income from fixed maturity investments in the third quarter and first nine months of 2020 was$502 million and$1.51 billion , respectively,$18 million and$34 million lower, respectively, than in the same periods of 2019. The decreases primarily resulted from lower long-term interest rates, partially offset by a higher average level of fixed maturity investments. Net investment income from short-term securities in the third quarter and first nine months of 2020 was$6 million and$41 million , respectively, a decline of$20 million and$40 million , respectively, as compared to the same periods of 2019. The decreases in both periods of 2020 primarily resulted from lower short-term interest rates. The Company's remaining investment portfolios had net investment income of$173 million and$27 million in the third quarter and first nine months of 2020, respectively, compared with income of$85 million and$256 million , respectively, in the same periods of 2019. The decline in net investment income from these portfolios in the first nine months of 2020 compared with the same period of 2019 primarily reflected the impact of the disruption in global financial markets associated with COVID-19. Included 39 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued 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, the impact of any volatility in global financial markets, including the impact of COVID-19 during 2020, on net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. Fee Income Fee income in the third quarter and first nine months of 2020 was$101 million and$323 million , respectively,$20 million and$23 million lower, respectively, than in the same periods of 2019. The National Accounts market inBusiness Insurance is the primary source of the Company's fee-based business and is discussed in theBusiness Insurance segment discussion that follows. Net Realized Investment Gains (Losses) The following table sets forth information regarding the Company's net realized investment gains (losses). Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2020 2019 2020 2019 Credit impairment gains (losses): Fixed maturities$ 4 $ -$ (18) $ (2) Other investments - - (40) - Net realized investment gains (losses) on equity securities still held 19 4 (14) 49 Other net realized investment gains, including from sales 14 19 24 54 Total$ 37 $ 23 $ (48) $ 101 Net realized investment gains (losses) on equity securities still held of$19 million and$(14) million in the third quarter and first nine months of 2020, respectively, were driven by the impact of changes in fair value attributable to the volatility in global financial markets.
In the second quarter of 2020, the Company recorded a
Other Revenues Other revenues in the third quarters and first nine months of 2020 and 2019 included installment premium charges and revenues from Simply Business.
Claims and Expenses
Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the third quarter of 2020 were$4.89 billion ,$344 million or 7% lower than in the same period of 2019, primarily reflecting (i) net favorable prior year reserve development compared with net unfavorable prior year reserve development in the same period of 2019 and (ii) lower losses in the automobile product line inPersonal Insurance due to a decrease in miles driven attributable to COVID-19 and related economic conditions, partially offset by (iii) loss cost trends, (iv) higher catastrophe losses, (v) higher loss estimates for management liability coverages inBond & Specialty Insurance , including the impact of COVID-19 and related economic conditions, (vi) higher non-catastrophe weather-related losses, including losses from wildfires, in the homeowners and other product line inPersonal Insurance , and (vii) higher business volumes. Catastrophe losses in the third quarter of 2020 primarily resulted from the derecho windstorm in the midwestern region ofthe United States , the Glass wildfire inCalifornia , Tropical Storm Isaias, Hurricane Laura and additional wildfires in the westernUnited States . Catastrophe losses and non-catastrophe weather-related losses, including losses from wildfires, in the third quarter of 2020 were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty, as described in more detail in the "Catastrophe Reinsurance" section herein. Catastrophe losses in the third quarter of 2019 primarily resulted from wind and hail storms in several regions ofthe United States and Hurricane Dorian. 40 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Claims and claim adjustment expenses in the first nine months of 2020 were$14.78 billion ,$289 million or 2% higher than in the same period of 2019, primarily reflecting (i) higher catastrophe losses, (ii) loss cost trends, (iii) higher loss estimates for management liability coverages inBond & Specialty Insurance , including the impact of COVID-19 and related economic conditions, and (iv) higher business volumes, partially offset by (v) lower losses in the automobile product line inPersonal Insurance due to a decrease in miles driven attributable to COVID-19 and related economic conditions, (vi) net favorable prior year reserve development as compared with net unfavorable prior year reserve development in the same period of 2019 and (vii) lower non-catastrophe weather-related losses inPersonal Insurance . Catastrophe losses in the first nine months of 2020 included the third quarter events described above, as well as tornado activity inTennessee and other wind storms and winter storms in several regions ofthe United States in the first quarter of 2020, and severe storms in several regions ofthe United States and civil unrest in the second quarter of 2020. Catastrophe losses and non-catastrophe weather-related losses in the first nine months of 2020 were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty, as described in more detail in the "Catastrophe Reinsurance" section herein. Catastrophe losses in the first nine months of 2019 included the third quarter events described above, as well as and winter storms and wind storms in several regions ofthe United States in the first half of 2019. Net favorable prior year reserve development in the third quarter and first nine months of 2020 included subrogation recoveries related to wildfires inCalifornia in 2017 and 2018, which are discussed in more detail in note 7 of notes to the unaudited consolidated financial statements. Factors contributing to net prior year reserve development during the third quarters and first nine months of 2020 and 2019 are discussed in more detail in note 7 of notes to the unaudited consolidated financial statements. Significant Catastrophe Losses The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in the three months and nine months endedSeptember 30, 2020 and 2019, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and nine months endedSeptember 30, 2020 and 2019 for significant catastrophes that occurred in 2019 and 2018, and the estimate of ultimate losses for those catastrophes atSeptember 30, 2020 andDecember 31, 2019 . For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be$100 million or more after reinsurance and before taxes. The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for 2020 ranged from approximately$20 million to$30 million of losses before reinsurance and taxes. For the Company's definition of a catastrophe, refer to "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations- Consolidated Overview" in the Company's 2019 Annual Report. 41
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