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TRAVELERS COMPANIES, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the Company's financial condition
and results of operations.
FINANCIAL HIGHLIGHTS
2022 Third Quarter Consolidated Results of Operations
•Net income of$454 million , or$1.91 per share basic and$1.89 per share diluted •Net earned premiums of$8.62 billion •Catastrophe losses of$512 million ($404 million after-tax) •Net favorable prior year reserve development of$20 million ($16 million after-tax) •Combined ratio of 98.2% •Net investment income of$593 million ($505 million after-tax) •Net realized investment losses of$93 million ($72 million after-tax) •Operating cash flows of$2.48 billion
2022 Third Quarter Consolidated Financial Condition
•Total investments of$78.11 billion ; fixed maturities and short-term securities comprised 93% of total investments •Total assets of$114.32 billion •Total debt of$7.29 billion , resulting in a debt-to-total capital ratio of 26.8% (21.8% excluding net unrealized investment gains, net of tax) •Total capital returned to shareholders of$722 million , comprising$501 million of share repurchases and$221 million of dividends •Shareholders' equity of$19.91 billion •Net unrealized investment losses of$8.02 billion ($6.32 billion after-tax) •Book value per common share of$84.94 •Holding company liquidity of$1.45 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) 2022 2021 2022 2021
Revenues
Premiums $ 8,615 $ 7,829 $ 24,946 $ 22,831
Net investment income 593 771 1,937 2,290
Fee income 104 97 307 302
Net realized investment gains (losses) (93) 8 (211) 113
Other revenues 84 100 269 269
Total revenues 9,303 8,805 27,248 25,805
Claims and expenses
Claims and claim adjustment expenses 6,088 5,464 16,930
15,479
Amortization of deferred acquisition costs 1,406 1,281 4,081
3,742
General and administrative expenses 1,193 1,187 3,607 3,524 Interest expense 88 87 263 252 Total claims and expenses 8,775 8,019 24,881 22,997 Income before income taxes 528 786 2,367 2,808 Income tax expense 74 124 344 479 Net income$ 454 $ 662 $ 2,023 $ 2,329 Net income per share Basic$ 1.91 $ 2.65 $ 8.43 $ 9.24 Diluted$ 1.89 $ 2.62 $ 8.34 $ 9.16 Combined ratio Loss and loss adjustment expense ratio 70.1 % 69.2 % 67.3 % 67.2 % Underwriting expense ratio 28.1 29.4 28.7 29.6 Combined ratio 98.2 % 98.6 % 96.0 % 96.8 % 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 net income per common share are presented on a diluted basis. Overview Diluted net income per share of$1.89 in the third quarter of 2022 decreased by 28% from diluted net income per share of$2.62 in the same period of 2021. Net income of$454 million in the third quarter of 2022 decreased by 31% from net income of$662 million in the same period of 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 in the third quarter of 2022 primarily reflected the pre-tax impacts of (i) lower net investment income, (ii) net realized investment losses compared to net realized investment gains in the third quarter of 2021 and (iii) lower underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), partially offset by (iv) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2021. Catastrophe losses in the third quarters of 2022 and 2021 were$512 million and$501 million , respectively. Net favorable prior year reserve development in the third quarter of 2022 was$20 million . Net unfavorable prior year reserve development in the third quarter of 2021 was$56 million . The lower underlying underwriting margins in the third quarter of 2022 were driven byPersonal Insurance , partially offset byBond & Specialty Insurance andBusiness Insurance . Underlying underwriting margins in the third quarter of 2021 included a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the third quarter of 2022 was lower than in the same period of 2021, 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$8.34 in the first nine months of 2022 decreased by 9% from diluted net income per share of$9.16 in the same period of 2021. Net income of$2.02 billion in the first nine months of 2022 decreased by 13% from net income of$2.33 billion in the same period of 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 the same period of 2021 and (iii) lower underlying underwriting margins, partially offset by (iv) lower catastrophe losses. Catastrophe losses in the first nine months of 2022 and 2021 were$1.42 billion and$1.81 billion , respectively. Net favorable prior year reserve development in the first nine months of 2022 and 2021 was$464 million and$443 million , respectively. The lower underlying underwriting margins in the first nine months of 2022 were driven byPersonal Insurance , partially offset byBusiness Insurance andBond & Specialty Insurance . Underlying underwriting margins in the first nine months of 2021 reflected a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the first nine months of 2022 was lower than in the same period of 2021, primarily reflecting 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 and the impact of the decrease in income before income taxes. 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 and nine months endedSeptember 30, 2022 and 2021, 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 (loss) for the periods reported.
Revenues
Earned Premiums Earned premiums in the third quarter of 2022 were$8.62 billion ,$786 million or 10% higher than in the same period of 2021. Earned premiums in the first nine months of 2022 were$24.95 billion ,$2.12 billion or 9% higher than in the same period of 2021. InBusiness Insurance , earned premiums in the third quarter and first nine months of 2022 increased by 10% and 9%, respectively, over the same periods of 2021. Earned premiums inBusiness Insurance in both periods of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case impacted by COVID-19 and related economic conditions. InBond & Specialty Insurance , earned premiums in the third quarter and first nine months of 2022 increased by 9% and 10%, respectively, over the same periods of 2021. InPersonal Insurance , earned premiums in the third quarter and first nine months of 2022 increased by 11% and 10%, respectively, over the same periods of 2021. Earned premiums inBond & Specialty Insurance and Personal Insurance in both the third quarter and first nine months of 2021 were not materially impacted by COVID-19 and related economic conditions. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow. Net Investment Income The following table sets forth information regarding the Company's investments. Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2022 2021 2022 2021 Average investments (1)$ 87,315 $ 84,647 $ 86,818 $ 82,854 Pre-tax net investment income 593 771 1,937
2,290
After-tax net investment income 505 645 1,639 1,917 Average pre-tax yield (2) 2.7 % 3.6 % 3.0 % 3.7 % Average after-tax yield (2) 2.3 % 3.0 % 2.5 % 3.1 %
_________________________________________________________
(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 2022 was$593 million ,$178 million or 23% lower than in the same period of 2021. Net investment income in the first nine months of 2022 was$1.94 billion ,$353 million or 15% lower than in the same period of 2021. Net investment income from fixed maturity investments in the third quarter and first nine months of 2022 was 34 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued$534 million and$1.55 billion , respectively,$37 million and$70 million higher, respectively, than in the same periods of 2021. The increase in the third quarter of 2022 primarily resulted from a higher average level of fixed maturity investments and higher long-term average yields. The increase in the first nine months of 2022 primarily resulted from a higher average level of fixed maturity investments. Net investment income from short-term securities in the third quarter and first nine months of 2022 was$23 million and$34 million , respectively,$21 million and$28 million higher, respectively, than in the same periods of 2021. The increases in both periods of 2022 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$46 million and$385 million in the third quarter and first nine months of 2022, respectively,$235 million and$449 million lower, respectively, than in the same periods of 2021. The decline in net investment income from these portfolios in the third quarter and first nine months of 2022 compared with the same periods of 2021 primarily reflected the impact of lower returns from private equity partnerships as compared to very strong returns in the same periods of 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 the third quarter of 2022 was$104 million ,$7 million higher than in the same period of 2021. Fee income in the first nine months of 2022 was$307 million ,$5 million higher than in the same period of 2021. The National Accounts market inBusiness Insurance is the primary source of the Company's fee-based business and is discussed in theBusiness Insurance segment discussion that follows. Net Realized Investment Gains (Losses) The following table sets forth information regarding the Company's net realized investment gains (losses). Three Months Ended Nine Months Ended September 30, September 30, (in millions) 2022 2021 2022 2021 Impairment gains (losses): Fixed maturities$ (5) $ (1) $ (26) $ (1) Real estate investments (9) - (9) - Net realized investment gains (losses) on equity securities still held (25) (6) (110) 45 Other net realized investment gains (losses), including from sales (54) 15 (66) 69 Total$ (93) $ 8 $ (211) $ 113 Net realized investment losses on equity securities still held of$25 million and$110 million in the third quarter and first nine months of 2022, respectively, were driven by the impact of changes in fair value attributable to unfavorable equity markets. Net realized investment gains (losses) on equity securities still held were$(6) million and$45 million in the third quarter and first nine months of 2021, respectively. Net realized investment gains in the first nine months of 2021 were driven by the impact of changes in fair value attributable to favorable equity markets. Other Revenues Other revenues in the third quarter of 2022 were$84 million ,$16 million lower than in the same period of 2021. Other revenues in the first nine months of 2022 of$269 million were comparable with the same period of 2021. Other revenues include revenues from Simply Business, installment premium charges and other policyholder service charges. 35 -------------------------------------------------------------------------------- THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued
Claims and Expenses
Claims and Claim Adjustment Expenses Claims and claim adjustment expenses in the third quarter of 2022 were$6.09 billion ,$624 million or 11% higher than in the same period of 2021, primarily reflecting the impacts of (i) higher business volumes and (ii) loss cost trends, including elevated severity in both the automobile and homeowners and other product lines inPersonal Insurance , partially offset by (iii) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2021, (iv) lower non-catastrophe property losses in the prior year quarter inBusiness Insurance and (v) the favorable re-estimation of losses incurred for management liability coverages in the first six months of 2022 inBond & Specialty Insurance . Catastrophe losses in the third quarter of 2022 primarily resulted from Hurricanes Ian and Fiona, as well as severe storms in several regions ofthe United States . Catastrophe losses in the third quarter of 2021 primarily resulted from Hurricane Ida and severe storms in several regions ofthe United States . The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses in the third quarter of 2021 are discussed in more detail in the segment discussions that follow. Catastrophe losses and non-catastrophe weather-related losses in the third quarter of 2021 were reduced by recoveries under the Company's 2021 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty. Claims and claim adjustment expenses in the first nine months of 2022 were$16.93 billion ,$1.45 billion or 9% higher than in the same period of 2021, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, including elevated severity in the current year in both the automobile and homeowners and other product lines inPersonal Insurance , (iii) higher non-catastrophe property losses inBusiness Insurance and (iv) a comparison to a low level of loss activity in the prior year period in the automobile product line inPersonal Insurance , partially offset by (v) lower catastrophe losses. Catastrophe losses in the first nine months of 2022 included the third quarter events described above, as well as severe wind and hail storms in several regions ofthe United States in the first six months of 2022. 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. The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses in the first nine months of 2021 are discussed in more detail in the segment discussions that follow. Catastrophe losses and non-catastrophe weather-related losses in the first nine months of 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 third
quarters and first nine months of 2022 and 2021 are discussed in more detail in
note 7 of the 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, 2022 and 2021, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and nine months endedSeptember 30, 2022 and 2021 for significant catastrophes that occurred in 2021 and 2020, and the estimate of ultimate losses for those catastrophes atSeptember 30, 2022 andDecember 31, 2021 . 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 2022 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 2021 Annual Report. 36
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