THE TRAVELERS COMPANIES The following is a discussion and analysis of the Company's financial condition and results of operations.
FINANCIAL HIGHLIGHTS
2021 Third Quarter Consolidated Results of Operations
•Net income of$662 million , or$2.65 per share basic and$2.62 per share diluted •Net earned premiums of$7.83 billion •Catastrophe losses of$501 million ($395 million after-tax) •Net unfavorable prior year reserve development of$56 million ($44 million after-tax) •Combined ratio of 98.6% •Net investment income of$771 million ($645 million after-tax) •Net realized investment gains of$8 million ($7 million after-tax) •Operating cash flows of$2.54 billion
2021 Third Quarter Consolidated Financial Condition
•Total investments of$87.51 billion ; fixed maturities and short-term securities comprised 93% of total investments •Total assets of$120.71 billion •Total debt of$7.29 billion , resulting in a debt-to-total capital ratio of 20.4% (22.0% excluding net unrealized investment gains, net of tax) •Total capital returned to shareholders of$821 million , comprising$601 million of share repurchases and$220 million of dividends •Shareholders' equity of$28.47 billion •Net unrealized investment gains of$3.43 billion ($2.70 billion after-tax) •Book value per common share of$115.74 •Holding company liquidity of$2.01 billion 32 --------------------------------------------------------------------------------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) 2021 2020 2021 2020
Revenues
Premiums $ 7,829 $ 7,380 $ 22,831 $ 21,564
Net investment income 771 671 2,290 1,550
Fee income 97 101 302 323
Net realized investment gains (losses) 8 37 113 (48)
Other revenues 100 86 269 195
Total revenues 8,805 8,275 25,805 23,584
Claims and expenses
Claims and claim adjustment expenses 5,464 4,886 15,479 14,782
Amortization of deferred acquisition costs 1,281 1,207 3,742
3,558
General and administrative expenses 1,187 1,109 3,524 3,367 Interest expense 87 87 252 256 Total claims and expenses 8,019 7,289 22,997 21,963 Income before income taxes 786 986 2,808 1,621 Income tax expense 124 159 479 234 Net income$ 662 $ 827 $ 2,329 $ 1,387 Net income per share Basic$ 2.65 $ 3.24 $ 9.24 $ 5.44 Diluted$ 2.62 $ 3.23 $ 9.16 $ 5.41 Combined ratio Loss and loss adjustment expense ratio 69.2 % 65.6 % 67.2 % 67.8 % Underwriting expense ratio 29.4 29.3 29.6 30.1 Combined ratio 98.6 % 94.9 % 96.8 % 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$2.62 in the third quarter of 2021 decreased by 19% from diluted net income per share of$3.23 in the same period of 2020. Net income of$662 million in the third quarter of 2021 decreased by 20% from net income of$827 million in the same period of 2020. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in income before income taxes in the third quarter of 2021 primarily reflected the pre-tax impacts of (i) net unfavorable prior year reserve development compared to net favorable prior year reserve development in the same period of 2020, (ii) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties) and (iii) lower net realized investment gains, partially offset by (iv) higher net investment income and (v) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"). Net unfavorable prior year reserve development in the third quarter of 2021 was$56 million , as compared to net favorable prior year reserve development in the same period of 2020 of$142 million . Catastrophe losses in the third quarters of 2021 and 2020 were$501 million and$397 million , respectively. The higher underlying underwriting margins in the third quarter of 2021 were driven byBusiness Insurance andBond & Specialty Insurance , partially offset byPersonal Insurance . Underlying underwriting margins in the third quarters of both 2021 and 2020 included a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the third quarter of 2021 was lower than in the same period of 2020, primarily reflecting the impact of the decrease in income before income taxes. 33 --------------------------------------------------------------------------------
THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued Diluted net income per share of$9.16 in the first nine months of 2021 increased by 69% over diluted net income per share of$5.41 in the same period of 2020. Net income of$2.33 billion in the first nine months of 2021 increased by 68% over net income of$1.39 billion in the same period of 2020. 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) higher net investment income, (ii) higher net favorable prior year reserve development, (iii) higher underlying underwriting margins and (iv) net realized investment gains compared to net realized investment losses in the same period of 2020, partially offset by (v) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties). Net favorable prior year reserve development in the first nine months of 2021 and 2020 was$443 million and$171 million , respectively. Catastrophe losses in the first nine months of 2021 and 2020 were$1.81 billion and$1.58 billion , respectively. The higher underlying underwriting margins in the first nine months of 2021 were driven byBusiness Insurance andBond & Specialty Insurance , partially offset byPersonal Insurance . Underlying underwriting margins in the first nine months of both 2021 and 2020 reflected a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the first nine 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 nine months endedSeptember 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 third quarter of 2021 were$7.83 billion ,$449 million or 6% higher than in the same period of 2020. Earned premiums in the first nine months of 2021 were$22.83 billion ,$1.27 billion or 6% higher than in the same period of 2020. InBusiness Insurance , earned premiums in the third quarter and first nine months of 2021 increased by 3% and 2%, respectively, over 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 impacted 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 the third quarter and first nine months of 2021 increased by 11% and 12%, respectively, 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 third quarter and first nine months of 2021 increased by 8% and 10%, 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 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. 34 -------------------------------------------------------------------------------- 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 Nine Months Ended September 30, September 30, (dollars in millions) 2021 2020 2021 2020 Average investments (1)$ 84,647 $ 78,722 $ 82,854 $ 77,304 Pre-tax net investment income 771 671 2,290
1,550
After-tax net investment income 645 566 1,917 1,336 Average pre-tax yield (2) 3.6 % 3.4 % 3.7 % 2.7 % Average after-tax yield (2) 3.0 % 2.9 % 3.1 % 2.3 %
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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 2021 was$771 million ,$100 million or 15% higher than in the same period of 2020. Net investment income in the first nine months of 2021 was$2.29 billion ,$740 million or 48% higher than in the same period of 2020. Net investment income from fixed maturity investments in the third quarter and first nine months of 2021 was$497 million and$1.48 billion , respectively,$5 million and$30 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 third quarter and first nine months of 2021 was$2 million and$6 million , respectively,$4 million and$35 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$281 million and$834 million in the third quarter and first nine months of 2021, respectively,$108 million and$807 million higher, respectively, than 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. Net investment income from these investments in the first nine months of 2020 included the impact of the disruption in global financial markets associated with COVID-19. Fee Income Fee income in the third quarter of 2021 was$97 million ,$4 million lower than in the same period of 2020. Fee income in the first nine months of 2021 was$302 million ,$21 million lower than in the same period of 2020. The National Accounts market inBusiness Insurance is the primary source of the Company's fee-based business and is discussed in theBusiness Insurance segment discussion that follows. Net Realized Investment Gains (Losses) The following table sets forth information regarding the Company's net realized investment gains (losses). Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2021 2020 2021 2020 Credit impairment gains (losses): Fixed maturities$ (1) $ 4 $ (1) $ (18) Other investments - - - (40) Net realized investment gains (losses) on equity securities still held (6) 19 45 (14) Other net realized investment gains, including from sales 15 14 69 24 Total$ 8 $ 37 $ 113 $ (48) Net realized investment gains (losses) on equity securities still held of$(6) million and$45 million in the third quarter and first nine months of 2021, respectively. Net realized investment gains for the first nine 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$19 million and$(14) million in the third quarter and first nine months of 2020 were driven by the impact of changes in 35 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
fair value attributable to the disruption in global financial markets associated
with the global pandemic beginning in
In the second quarter of 2020, the Company recorded a$40 million credit impairment loss from the other-than-temporary impairment of the carrying value of a joint venture investment included in other investments. Other Revenues Other revenues in the third quarters and first nine months of both 2021 and 2020 included revenues from Simply Business and installment premium charges. Installment premium charges in the first nine months 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 third quarter of 2021 were$5.46 billion ,$578 million or 12% higher than in the same period of 2020, primarily reflecting the impacts of (i) net unfavorable prior year reserve development compared to net favorable prior year reserve development in the same period of of 2020, (ii) higher catastrophe losses, (iii) loss cost trends, (iv) 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 and (v) higher business volumes, partially offset by (vi) lower losses in the homeowners and other product line inPersonal Insurance due to a comparison to a high level of loss activity in the prior year quarter and (vii) a lower level of property losses inBusiness Insurance . Catastrophe losses in the third quarter of 2021 primarily resulted from Hurricane Ida and severe storms in several regions ofthe United States . 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 . 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 nine months of 2021 were$15.48 billion ,$697 million or 5% higher than in the same period of 2020, primarily reflecting the impacts of (i) higher catastrophe losses, (ii) loss cost trends, (iii) higher business volumes, (iv) 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 and (v) higher losses in the homeowners and other product line inPersonal Insurance , partially offset by (vi) higher net favorable prior year reserve development and (vii) a net favorable impact associated with COVID-19 and related economic conditions inBusiness Insurance andBond & Specialty Insurance compared to a net charge in the prior year period. Catastrophe losses in the first nine months of 2021 included the third quarter events described above, as well as winter storms and severe wind and hail storms in several regions ofthe United States in the first six months of 2021. 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. 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 prior year reserve development during the third quarters and first nine 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 nine months endedSeptember 30, 2021 and 2020, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and nine months endedSeptember 30, 2021 and 2020 for significant catastrophes that occurred in 2020 and 2019, and the estimate of ultimate losses for those catastrophes atSeptember 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. 36
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