THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2021 Second Quarter Consolidated Results of Operations
•Net income of$934 million , or$3.70 per share basic and$3.66 per share diluted •Net earned premiums of$7.62 billion •Catastrophe losses of$475 million ($376 million after-tax) •Net favorable prior year reserve development of$182 million ($144 million after-tax) •Combined ratio of 95.3% •Net investment income of$818 million ($682 million after-tax) •Net realized investment gains of$61 million ($47 million after-tax) •Operating cash flows of$1.85 billion
2021 Second Quarter Consolidated Financial Condition
•Total investments of$86.55 billion ; fixed maturities and short-term securities comprised 94% of total investments •Total assets of$119.76 billion •Total debt of$7.29 billion , resulting in a debt-to-total capital ratio of 20.0% (22.0% excluding net unrealized investment gains, net of tax) •Total capital returned to shareholders of$625 million , comprising$401 million of share repurchases and$224 million of dividends •Shareholders' equity of$29.16 billion •Net unrealized investment gains of$4.11 billion ($3.24 billion after-tax) •Book value per common share of$116.86 •Holding company liquidity of$2.43 billion 31 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
CONSOLIDATED OVERVIEW
Consolidated Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except ratio and per share amounts) 2021 2020 2021 2020
Revenues
Premiums $ 7,616 $ 6,955 $ 15,002 $ 14,184
Net investment income 818 268 1,519 879
Fee income 104 114 205 222
Net realized investment gains (losses) 61 13 105 (85)
Other revenues 88 51 169 109
Total revenues 8,687 7,401 17,000 15,309
Claims and expenses
Claims and claim adjustment expenses 5,045 5,107 10,015 9,896
Amortization of deferred acquisition costs 1,254 1,173 2,461
2,351
General and administrative expenses 1,174 1,121 2,337 2,258 Interest expense 83 85 165 169 Total claims and expenses 7,556 7,486 14,978 14,674 Income (loss) before income taxes 1,131 (85) 2,022 635 Income tax expense (benefit) 197 (45) 355 75 Net income (loss)$ 934 $ (40) $ 1,667 $ 560 Net income (loss) per share Basic$ 3.70 $ (0.16) $ 6.58 $ 2.19 Diluted$ 3.66 $ (0.16) $ 6.53 $ 2.19 Combined ratio Loss and loss adjustment expense ratio 65.6 % 72.7 % 66.1 % 69.0 % Underwriting expense ratio 29.7 31.0 29.8 30.5 Combined ratio 95.3 % 103.7 % 95.9 % 99.5 % The following discussions of the Company's net income (loss) and segment income (loss) are presented on an after-tax basis. Discussions of the components of net income (loss) and segment income (loss) are presented on a pre-tax basis, unless otherwise noted. Discussions of net income (loss) per common share are presented on a diluted basis.
Overview
Diluted net income per share was$3.66 in the second quarter of 2021, compared to a diluted net loss per share of$0.16 in the same period of 2020. Net income was$934 million in the second quarter of 2021, compared to a net loss of$40 million in the same period of 2020. Income before income taxes in the second quarter of 2021 primarily reflected the pre-tax impacts of (i) higher net investment income, (ii) lower catastrophe losses, (iii) higher net favorable prior year reserve development, (iv) higher net realized investment gains and (v) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"). Catastrophe losses in the second quarters of 2021 and 2020 were$475 million and$854 million , respectively. Net favorable prior year reserve development in the second quarters of 2021 and 2020 was$182 million and$2 million , respectively. The higher underlying underwriting margins in the second quarter of 2021 were driven byBusiness Insurance andBond & Specialty Insurance , partially offset byPersonal Insurance . Underlying underwriting margins in the second quarters of both 2021 and 2020 included a net favorable impact from COVID-19 and related economic conditions. The Company recorded income tax expense in the second quarter of 2021 compared with an income tax benefit in the same period of 2020, primarily reflecting the impact of the increase in income before income taxes. 32 --------------------------------------------------------------------------------THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Diluted net income per share of$6.53 in the first six months of 2021 increased by 198% over diluted net income per share of$2.19 in the same period of 2020. Net income of$1.67 billion in the first six months of 2021 increased by 198% over net income of$560 million in the same period of 2020. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) higher net investment income, (ii) higher net favorable prior year reserve development, (iii) net realized investment gains compared to net realized investment losses in the same period of 2020 and (iv) higher underlying underwriting margins, partially offset by (v) higher catastrophe losses. Net favorable prior year reserve development in the first six months of 2021 and 2020 was$499 million and$29 million , respectively. Catastrophe losses in the first six months of 2021 and 2020 were$1.31 billion and$1.19 billion , respectively. The higher underlying underwriting margins in the first six months of 2021 were driven byBusiness Insurance andBond & Specialty Insurance , partially offset byPersonal Insurance . Underlying underwriting margins in the first six months 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 six months of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in income before income taxes. 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 and six months endedJune 30, 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 second quarter of 2021 were$7.62 billion ,$661 million or 10% higher than in the same period of 2020. Earned premiums in the first six months of 2021 were$15.00 billion ,$818 million or 6% higher than in the same period of 2020. InBusiness Insurance , earned premiums in the second quarter and first six months of 2021 increased by 4% and 1%, respectively, from the same periods of 2020. Earned premiums inBusiness Insurance in both periods of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case driven by COVID-19 and related economic conditions. Earned premiums inBusiness Insurance in both periods of 2020 were negatively impacted by reduced exposures and reductions in the Company's estimate of ultimate audit premiums receivable, in each case reflecting the impact of COVID-19 and related economic conditions, including a decrease in new business levels. InBond & Specialty Insurance , earned premiums in each of the second quarter and first six months of 2021 increased by 12% over the same periods of 2020. Earned premiums inBond & Specialty Insurance in both periods of 2021 and 2020 were not materially impacted by COVID-19 and related economic conditions. InPersonal Insurance , earned premiums in the second quarter and first six months of 2021 increased by 17% and 11%, respectively, over the same periods of 2020. Earned premiums inPersonal Insurance in both periods of 2021 were not materially impacted by COVID-19 and related economic conditions. Earned premiums inPersonal Insurance in both periods of 2020 were reduced by premium refunds provided to personal automobile customers 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. 33 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Net Investment Income The following table sets forth information regarding the Company's investments. Three Months Ended Six Months Ended June 30, June 30, (dollars in millions) 2021 2020 2021 2020 Average investments (1)$ 82,594 $ 76,635 $ 81,954 $ 76,508 Pre-tax net investment income 818 268 1,519 879 After-tax net investment income 682 251 1,272 770 Average pre-tax yield (2) 4.0 % 1.4 % 3.7 % 2.3 % Average after-tax yield (2) 3.3 % 1.3 % 3.1 % 2.0 %
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(1)Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income. (2)Excludes net realized and net unrealized investment gains and losses. Net investment income in the second quarter of 2021 was$818 million ,$550 million or 205% higher than in the same period of 2020. Net investment income in the first six months of 2021 was$1.52 billion ,$640 million or 73% higher than in the same period of 2020. Net investment income from fixed maturity investments in the second quarter and first six months of 2021 was$493 million and$984 million , respectively,$5 million and$25 million lower, respectively, than in the same periods of 2020. 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 second quarter and first six months of 2021 was$1 million and$4 million , respectively,$12 million and$31 million lower, respectively, than in the same periods of 2020. The decreases in both periods of 2021 primarily resulted from lower short-term interest rates. The Company's remaining investment portfolios had net investment income of$335 million and$553 million in the second quarter and first six months of 2021, respectively, compared with losses of$234 million and$146 million , respectively, in the same periods of 2020. 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. The losses from these investments in both periods of 2020 was related to the disruption in global financial markets associated with COVID-19. Fee Income Fee income in the second quarter and first six months of 2021 was$104 million and$205 million , respectively,$10 million and$17 million lower, respectively, than in the same periods of 2020. The National Accounts market inBusiness Insurance is the primary source of the Company's fee-based business and is discussed in theBusiness Insurance segment discussion that follows. Net Realized Investment Gains (Losses) The following table sets forth information regarding the Company's net realized investment gains (losses). Three Months Ended Six Months Ended June 30, June 30, (in millions) 2021 2020 2021 2020 Credit impairment gains (losses): Fixed maturities $ -$ (6) $ -$ (22) Other investments - (40) - (40) Net realized investment gains (losses) on equity securities still held 28 46 51 (33) Other net realized investment gains, including from sales 33 13 54 10 Total$ 61 $ 13 $ 105 $ (85) Net realized investment gains on equity securities still held of$28 million and$51 million in the second quarter and first six months of 2021 were driven by the impact of changes in fair value attributable to favorable equity markets. Net realized investment gains (losses) on equity securities still held of$46 million and$(33) million in the second quarter and first six months of 2020 were driven by the impact of changes in fair value attributable to the volatility in global financial markets. 34 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
In the second quarter of 2020, the Company recorded a
Other Revenues Other revenues in the second quarters and first six months of both 2021 and 2020 included revenues from Simply Business and installment premium charges. Installment premium charges in both periods of 2020 were reduced by billing relief actions offered to customers as a result of COVID-19.
Claims and Expenses
Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the second quarter of 2021 were$5.05 billion ,$62 million or 1% lower than in the same period of 2020, primarily reflecting (i) lower catastrophe losses, (ii) higher net favorable prior year reserve development, (iii) lower non-catastrophe weather-related losses inBusiness Insurance and (iv) a net charge associated with COVID-19 and related economic conditions inBusiness Insurance in the second quarter of 2020, largely offset by (v) loss cost trends, (vi) higher losses in the automobile product line inPersonal Insurance due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic, (vii) higher losses in the homeowners and other product line inPersonal Insurance and (viii) higher business volumes. Catastrophe losses in the second quarter of 2021 primarily resulted from severe storms in several regions ofthe United States . Catastrophe losses in the second quarter of 2020 primarily resulted from severe storms in several regions ofthe United States and civil unrest. 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. Claims and claim adjustment expenses in the first six months of 2021 were$10.02 billion ,$119 million or 1% higher than in the same period of 2020, primarily reflecting (i) higher catastrophe losses, (ii) loss cost trends, (iii) higher business volumes, (iv) higher losses in the homeowners and other product line inPersonal Insurance and (v) higher losses in the automobile product line inPersonal Insurance due to a comparison to a low level of loss activity in the prior year period as a result of the pandemic, partially offset by (vi) higher net favorable prior year reserve development and (vii) a net charge associated with COVID-19 and related economic conditions inBusiness Insurance in the first six months of 2020. Catastrophe losses in the first six months of 2021 included the second quarter events described above, as well as winter storms and wind storms in several regions ofthe United States in the first quarter of 2021. Catastrophe losses in the first six months of 2020 included the second 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. 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 second quarters and first six months 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 and six months endedJune 30, 2021 and 2020, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and six months endedJune 30, 2021 and 2020 for significant catastrophes that occurred in 2020 and 2019, and the estimate of ultimate losses for those catastrophes atJune 30, 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. 35
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