Our 2020 Results

Travelers generated $2.7 billion of core income, an increase of 6% over the prior year, and $10.48 of core income per diluted share, an increase of 9%. Core return on equity was 11.3%, a meaningful spread over the 10-year Treasury and our cost of equity.

Our earnings and strong balance sheet enabled us to grow book value per share by 14% and adjusted book value per share by 7%, after continuing to make important investments in our business and returning more than $1.5 billion of excess capital to our shareholders through dividends and share repurchases. Notably, this year marked the 15th consecutive year in which we increased our dividend. Our ability to generate a significant profit in the current environment, while also investing in our business and returning substantial capital to our shareholders, speaks to the strength of our franchise and the value of our competitive advantages.

This year, we saw once again the power of our underwriting excellence and the successful execution of our strategy to create attractive top-line opportunities and to improve productivity and efficiency. We generated record underlying underwriting income of $2.0 billion after-tax, driven by record earned premiums of $29.0 billion and a very strong underlying combined ratio of 90.7%. Importantly, as illustrated by the chart above, the contribution of underlying underwriting income to core income was the highest in more than a decade, an indication of the high quality of our earnings. In other words, when you adjust for the things over which we have less control, such as the substantial number of catastrophes, prior year reserve development and the low interest rate environment, we delivered operating performance that far exceeds that of prior years. An important contributor to our record underlying underwriting income this year was our continued strategic focus on improving productivity and efficiency. Our strategy to grow the top line at attractive returns and improve productivity and efficiency is particularly important in the current low interest rate environment.

Underwriting Excellence

One critical component of our ability to deliver exceptional returns over time is our granular approach to underwriting. In our commercial businesses, that means execution, including the allocation of capital, on an account-by-account or class-by-class basis. In personal lines, that means a very high degree of account segmentation and the allocation of capital by product and geography. With that and our advanced data and analytics, we select the risks we write and price our products deliberately with our targeted return in mind.

We saw the benefits of this disciplined approach again this year. Perhaps the most obvious example was our direct pandemic-related underwriting losses, which were modest on an absolute basis and low relative to the rest of the industry.

However, the pandemic was not the only major event of 2020 for which we were well positioned. We estimate that due to the underwriting actions we took to manage our exposure to wildfires over the past several years in the highest risk areas of California, our losses for the five largest wildfire loss events in California this year were reduced by more than one third and were significantly lower than our market share in the affected areas. Similarly, we actively manage and maintain a disciplined approach to coastal underwriting, including thoughtful risk selection, flood sub-limits and coastal deductibles. As a result, our share of industrywide 2020 hurricane peril losses was significantly lower than our market share in the affected areas. We are also pleased that when we look at our overall property catastrophe losses over the past five years, our share of property catastrophe losses relative to total property catastrophe losses for the domestic property and casualty industry has declined significantly and has been meaningfully lower than our corresponding market share.

Underlying these impressive underwriting results is a culture that understands how to balance the art and science of decision making based on data and analytics. This culture alone is a competitive advantage, and one that we believe is hard to replicate. As I have said before, our underwriting expertise is a hallmark of our success, and evaluating risk and reward is at the heart of what we do.

Resiliency in the Face of Economic Headwinds

We remained committed to our underwriting fundamentals last year as we adapted to changes in the business and economic environment and delivered products, services and capabilities that our customers, agents and brokers value. As a property and casualty insurer, we insure the output of the economy, and, accordingly, changes in economic activity have a direct impact on our top line. We are pleased that in a year of historic economic disruption, we grew net written premiums by 2% to a record $29.7 billion. These results reflect the strength of our value proposition and the success of our marketplace strategies. Across the enterprise, we achieved significant rate gains where needed and strengthened terms and conditions where warranted, while maintaining historically high retentions.

Underlying these impressive underwriting results is a culture that understands how to balance the art and science of decision making based on data and analytics. This culture alone is a competitive advantage, and one that we believe is hard to replicate.

This marketplace execution is the result of effective leadership by our business and functional leaders and very strong performance by our underwriters in the field. As always, we are actively managing all levers of profitability available to us, including risk selection, mix of business, claim and expense initiatives, volume, reinsurance, terms and conditions, and, of course, price. We price our products with a return objective in mind – we are not passive rate takers. Our deliberate pricing strategy is also benefiting from a number of industrywide factors putting upward pressure on prices, including increased weather-related volatility, historically low interest rates and a growing recognition of higher loss trend in the liability lines. We are encouraged by the pricing environment and will continue to leverage the power of our franchise to meet our return objectives.

Importantly, we also maintained an expense ratio below 30% for 2020, even after the impacts of the pandemic, such as the premium refunds we provided to our Personal Insurance auto customers. This reflects the continued effective execution of our strategy to improve productivity and efficiency.

Investment Expertise

Much like our underwriting strategy, successfully balancing risk and reward is at the heart of our well-defined and consistent investment philosophy. Our investment portfolio is managed first and foremost to support our insurance operations and, accordingly, is positioned to meet our obligations to policyholders under a wide range of conditions. With this in mind, we emphasize risk-adjusted returns and credit quality rather than reaching for yield that is not commensurate with the underlying risk.

Our asset allocation is designed so that the predictable stream of investment income from our fixed income portfolio will provide a firm and reliable foundation for our business. That is exactly what we saw in 2020, and that is our investment philosophy at work. Our high-quality investment portfolio generated strong net investment income of $1.9 billion after-tax in 2020 – an impressive result given the impact of the disruption in the global financial markets on our alternative investment portfolio and the effect of the record low interest rates on our fixed income portfolio.

Profitable Growth

Now that I’ve shared our 2020 results, let me take a moment to put them into a broader context. We remain steadfast in our view that return on equity over time is the right way to measure our success and that any commitment to deliver an industry-leading return on equity over time also requires a strategy to grow over time. To that end, several years ago, we laid out a strategy to achieve profitable growth in the context of the forces of change we have previously identified as impacting our industry – namely, changing consumer expectations, emerging technology trends, more sophisticated data and analytics, and evolving distribution models. In light of these trends, we have established key innovation priorities and are investing in capabilities consistent with those priorities.

We successfully executed on this strategy again in 2020 despite the challenging economic and operating environment. As illustrated by the accompanying charts, since 2016, we have grown net written premiums at a compound annual rate of 4.5%, substantially outpacing both gross domestic product growth over the same period and our own growth rate of 2.4% in the prior years of the decade.

We have accomplished this growth while maintaining a stable underlying underwriting margin. In other words, we have not grown by underpricing our products or changing our risk profile. The growth has come organically from customer segments, products, geographies and producers that we know well. Over this same period, through our ongoing and relentless focus on optimizing productivity and efficiency, we have also improved our expense ratio by about two points compared to the run rate from earlier in the decade. The results of these efforts are significantly higher underlying underwriting income, meaningfully higher cash flow from operations and double-digit growth in invested assets. Those results have contributed to our ultimate objective of creating shareholder value through industry-leading return on equity over time. Our core return on equity has increased in each of the last three years and averaged 11% over that period, even after bearing the impact of the pandemic, significant catastrophe and non-catastrophe weather-related losses, a meaningful increase in social inflation and historically low interest rates.

In short, our performance this year and over recent years is the result of a sound strategy, excellence in execution and the successful achievement of our strategic objectives.

Return on Equity

Our Claim Excellence

Our claim-handling ability remains a crown jewel of our organization – it is both at the heart of our promise to our customers and a significant competitive advantage.

Our highly sophisticated claim model enables us to handle essentially 100% of our claims under nearly any foreseeable circumstance without resorting to third-party claim handlers, which produces a better experience for our customers and a more efficient outcome for us. This year was no different. Despite the challenges caused by the pandemic, we effectively responded to a record number of catastrophe events and a more than 50% increase in catastrophe claim volume as compared to the prior year. We met our objective of closing more than 90% of all claims arising out of catastrophe events within 30 days – an exceptional result given both the volume of claims and the logistical challenges posed by the pandemic.

Our claim-handling ability remains a crown jewel of our organization – it is both at the heart of our promise to our customers and a significant competitive advantage.

We also accelerated our digital transformation this year to meet customer demand for virtual claim handling during the pandemic and beyond. Consistent with our innovation priorities, our Claim organization has made significant investments in digital capabilities over the past several years. This has enabled us to seamlessly serve our customers since the start of the pandemic and take advantage of the rapid acceleration of digital adoption during the crisis, all while meeting our objective of paying what we owe – no more and no less – quickly and efficiently. This year, by leveraging our state-of-the-art digital capabilities, we handled 40% more auto appraisals and wind/hail claims and 70% more water claims virtually without the need for a live inspection, as compared to pre-pandemic levels. In addition, we expanded our workers compensation telehealth capabilities throughout all stages of the recovery journey, with usage of our telemedicine capabilities up dramatically year-over-year.  All this means a better experience for our customers and a more efficient outcome for us – a result that will pay dividends for years to come.

Consistent and Successful Long-Term Financial Strategy Delivers Shareholder Value

It is important to consider our results in the context of what we are ultimately trying to achieve. At Travelers, our simple and unwavering mission for creating shareholder value is to:

• Deliver superior returns on equity by leveraging our competitive advantages;

• Generate earnings and capital substantially in excess of our growth needs; and

• Thoughtfully rightsize capital and grow book value per share over time.

The results we deliver are due to our deliberate and consistent approach to creating shareholder value. We have been clear for many years that one of our crucial responsibilities is to produce an appropriate return on equity for our shareholders. This has meant developing and executing financial and operational plans consistent with our goal of achieving superior returns, which we defined many years ago as a mid-teens core return on equity over time. We emphasize that the objective is measured over time because we recognize that interest rates, reserve development and weather, among other factors, impact our results from year to year, and that there are years – or longer periods – and environments in which a mid-teens return is not attainable. In that regard, we established the mid-teens goal at a time when the 10-year Treasury was yielding around 5%, and in that environment, a mid-teens return was industry leading. As we have said before, our ability to achieve a mid-teens return over time going forward will depend on interest rates returning to more normal levels by historical standards. In any event, we always seek to deliver industry-leading returns over time.

Our 2020 return on equity of 10.0% and core return on equity of 11.3% again meaningfully exceeded the average return on equity for the domestic property and casualty industry of 5.1%, according to estimates from Conning, Inc., an insurance asset management firm. As shown in the chart on page 6, our return on equity has significantly outperformed the average return on equity for the industry in each of the past 10 years.

Importantly, over this 10-year period, our return on equity has also been less volatile than that of others in the property and casualty industry. The level and consistency of our return on equity over time reflect the value of our competitive advantages and the discipline with which we run our business.

Total Return to Shareholders1