THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2021 First Quarter Consolidated Results of Operations
•Net income of$733 million , or$2.89 per share basic and$2.87 per share diluted •Net earned premiums of$7.39 billion •Catastrophe losses of$835 million ($659 million after-tax) •Net favorable prior year reserve development of$317 million ($249 million after-tax) •Combined ratio of 96.6% •Net investment income of$701 million ($590 million after-tax) •Net realized investment gains of$44 million ($34 million after-tax) •Operating cash flows of$1.19 billion
2021 First Quarter Consolidated Financial Condition
•Total investments of$83.89 billion ; fixed maturities and short-term securities comprised 94% of total investments •Total assets of$117.03 billion •Total debt of$6.55 billion , resulting in a debt-to-total capital ratio of 18.8% (20.5% excluding net unrealized investment gains, net of tax) •Total capital returned to shareholders of$613 million , comprising$397 million of share repurchases and$216 million of dividends •Share repurchase authorization increased by$5.0 billion onApril 20, 2021 •Shareholders' equity of$28.27 billion •Net unrealized investment gains of$3.58 billion ($2.82 billion after-tax) •Book value per common share of$112.42 •Holding company liquidity of$1.76 billion 28 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
Three Months Ended
March 31,
(in millions, except ratio and per share amounts) 2021 2020
Revenues
Premiums $ 7,386 $ 7,229
Net investment income 701 611
Fee income 101 108
Net realized investment gains (losses) 44 (98)
Other revenues 81 58
Total revenues 8,313 7,908
Claims and expenses
Claims and claim adjustment expenses 4,970 4,789
Amortization of deferred acquisition costs 1,207
1,178
General and administrative expenses 1,163 1,137 Interest expense 82 84 Total claims and expenses 7,422 7,188 Income before income taxes 891 720 Income tax expense 158 120 Net income$ 733 $ 600 Net income per share Basic$ 2.89 $ 2.34 Diluted$ 2.87 $ 2.33 Combined ratio Loss and loss adjustment expense ratio 66.7 % 65.5 % Underwriting expense ratio 29.9 30.0 Combined ratio 96.6 % 95.5 % 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$2.87 in the first quarter of 2021 increased by 23% over diluted net income per share of$2.33 in the same period of 2020. Net income of$733 million in the first quarter of 2021 increased by 22% over net income of$600 million in the same period of 2020. The slightly 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) higher net favorable prior year reserve development, (ii) net realized investment gains compared to net realized investment losses in the same period of 2020, (iii) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") and (iv) higher net investment income, partially offset by (v) higher catastrophe losses. Net favorable prior year reserve development in the first quarters of 2021 and 2020 was$317 million and$27 million , respectively. Catastrophe losses in the first quarters of 2021 and 2020 were$835 million and$333 million , respectively. The higher underlying underwriting margins in the first quarter of 2021 were driven byBusiness Insurance andBond & Specialty Insurance , partially offset byPersonal Insurance . Underlying underwriting margins in the first quarter of 2021 reflected a net favorable impact from COVID-19 and related economic conditions, compared with net charges associated with COVID-19 and related economic conditions in the same period of 2020. Income tax expense in the first quarter of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in income before income taxes. 29 --------------------------------------------------------------------------------
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued For discussion regarding the impact of COVID-19 and related economic conditions on the Company's results for the year endedDecember 31, 2020 , see "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2020 Annual Report. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see "Outlook" herein and "The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity" included in "Part I-Item 1A-Risk Factors" in the Company's 2020 Annual Report. The Company has insurance operations inCanada , theUnited Kingdom , theRepublic of Ireland and throughout other parts of the world as a corporate member of Lloyd's, as well as inBrazil andColombia through joint ventures. Because these operations are conducted in local currencies other than theU.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the three months endedMarch 31, 2021 and 2020, 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 first quarter of 2021 were$7.39 billion ,$157 million or 2% higher than in the same period of 2020. InBusiness Insurance , earned premiums in the first quarter of 2021 decreased by 2% from the same period of 2020. Earned premiums inBusiness Insurance in the first quarter of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case driven by COVID-19 and related economic conditions. InBond & Specialty Insurance , earned premiums in the first quarter of 2021 increased by 11% over the same period of 2020. InPersonal Insurance , earned premiums in the first quarter of 2021 increased by 5% over the same period of 2020. Earned premiums inBond & Specialty Insurance andPersonal Insurance in the first quarters of both 2021 and 2020 were not materially impacted by COVID-19 and related economic conditions. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow. Net Investment Income The following table sets forth information regarding the Company's investments. Three Months Ended March 31, (dollars in millions) 2021 2020 Average investments (1)$ 81,209 $ 76,191 Pre-tax net investment income 701 611 After-tax net investment income 590 519 Average pre-tax yield (2) 3.5 % 3.2 % Average after-tax yield (2) 2.9 % 2.7 %
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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 first quarter of 2021 was$701 million ,$90 million or 15% higher than in the same period of 2020. Net investment income from fixed maturity investments in the first quarter of 2021 was$491 million ,$20 million lower than in the same period of 2020, primarily resulting 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 first quarter of 2021 was$3 million ,$19 million lower than in the same period of 2020, primarily resulting from lower short-term interest rates. Net investment income generated by the Company's remaining investment portfolios in the first quarter of 2021 was$218 million ,$130 million higher than in the same period of 2020, primarily reflecting higher returns from private equity partnerships. 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. 30 --------------------------------------------------------------------------------
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Fee Income
Fee income in the first quarter of 2021 was $101 million , $7 million lower than
in the same period of 2020. The National Accounts market in Business Insurance
is the primary source of the Company's fee-based business and is discussed in
the Business 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
March 31,
(in millions) 2021 2020
Credit impairment gains (losses) $
-
23 (79)
Other net realized investment gains (losses), including from sales
21 (3)
Total $ 44 $ (98)
Net realized investment gains on equity securities still held of $23 million in
the first quarter of 2021 were driven by the impact of changes in fair value
attributable to favorable equity markets. Net realized losses on equity
securities still held for the first quarter of 2020 were driven by the impact of
changes in fair value attributable to the disruption in global financial markets
associated with the global pandemic beginning in March 2020 related to the novel
coronavirus COVID-19.
Other Revenues
Other revenues in the first quarters of 2021 and 2020 included revenues from
Simply Business and installment premium charges.
Claims and Expenses
Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the first quarter of 2021 were$4.97 billion ,$181 million or 4% higher than in the same period of 2020, primarily reflecting (i) higher catastrophe losses, (ii) loss cost trends, (iii) higher losses in the homeowners and other product line inPersonal Insurance , primarily attributable to a comparison to a low level of non-catastrophe weather-related losses in the first quarter of 2020, and (iv) higher business volumes, partially offset by (v) higher net favorable prior year reserve development, (vi) lower losses in the automobile product line inPersonal Insurance due to a decrease in miles driven primarily attributable to COVID-19 and related economic conditions and (vii) a net charge associated with COVID-19 and related economic conditions inBusiness Insurance in the first quarter of 2020. Catastrophe losses in the first quarter of 2021 primarily resulted from winter storms and wind storms in several regions ofthe United States . Catastrophe losses in the first quarter of 2020 primarily resulted from tornado activity inTennessee and other wind storms and winter storms in several regions ofthe United States . The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses are discussed in more detail in the segment discussions that follow. Factors contributing to net favorable prior year reserve development during the first quarters of 2021 and 2020 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 endedMarch 31, 2021 and 2020, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months endedMarch 31, 2021 and 2020 for significant catastrophes that occurred in 2020 and 2019, and the estimate of ultimate losses for those catastrophes atMarch 31, 2021 andDecember 31, 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. The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for 2021 ranged from$20 million to$30 million of losses before reinsurance and taxes. For the Company's definition of a catastrophe, refer to "Part II-Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations- Consolidated Overview" in the Company's 2020 Annual Report. 31
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