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. In addition, the allocation between fixed income and alternative investments is designed such that when the market is challenging for our alternative investment portfolio, we still have a shot at reaching our target returns, and when the alternative portfolio has a strong year, we will benefit from the upside.

 

Our performance over the past two years is a perfect illustration of how effective this disciplined investment strategy is in managing through very different and volatile market conditions. In 2020, we saw record low interest rates (the 10-year Treasury hit a stunning low of 0.318%), and we experienced significant volatility in the equity markets that negatively impacted the returns from our alternative investment portfolio. Nonetheless, we delivered strong 2020 net investment income of $1.9 billion after-tax, contributing to a strong core return on equity of 11.3%. In 2021, the alternative investment portfolio benefited from the recovery in the equity markets, and the same disciplined strategy and well-constructed portfolio delivered net investment income of $2.5 billion after-tax, contributing to an industry-leading core return on equity of 13.7%.

 

Strategy, not serendipity, drove these strong results throughout two very different economic and market environments – that is the value of our thoughtful and disciplined approach.

 

Underwriting Expertise

Underwriting excellence is of course key to our success, and there is nothing more critical to underwriting excellence than a culture that values strong performance over time and understands how to balance the art and science of decision making based on data and analytics. This culture alone is a significant competitive advantage, and one that we believe is very hard to replicate.

 

A critical component of our culture is our granular approach to underwriting. In our commercial businesses, that means execution on an account-by-account or class-by-class basis. In personal lines, it means a very high degree of segmentation by account, product and geography. With that and our advanced data and analytics, we thoughtfully select the risks we write and price our products deliberately with our target return in mind.

 

Given the elevated frequency and severity of catastrophes in recent years, including once again in 2021, I will take a moment to highlight the work we have done over the last several years in terms of the strategic management of our catastrophe exposure.

 

Underwriting excellence is of course key to our success, and there’s nothing more critical to underwriting excellence than a culture that values strong performance over time and understands how to balance the art and science of decision making based on data and analytics.

 

Consistent with our general approach of recognizing, assessing and addressing trends rapidly, we have taken decisive action in anticipation of continued elevated weather frequency and severity. Our efforts started with talent. We have added experts in data science, meteorology, geophysics and environmental engineering, among others, to our catastrophe management organization. We have also established dedicated teams for each catastrophe peril, with the goal of developing industry-leading scientific and underwriting expertise.

 

We have incorporated the learnings into our product development, risk selection, pricing, capital allocation and claim response. The insights we have developed have enabled us to supplement standard vendor catastrophe models with our own sophisticated, peril-by-peril view. This gives us a refined, granular view of catastrophe risk, incorporating proprietary variables, such as complex roof characteristics, tree and brush density and location intelligence down to the parcel level. These variables are incorporated into our product development, enhancing our segmentation. They are also integrated into proprietary algorithms that we use at the point of sale to inform risk selection and decisions about terms and conditions.

 

Taken together, these efforts have enabled us to manage our exposure to catastrophes more effectively, and, while there is always the potential for us to have outsized exposure to an event, the positive impact on our results this year and in recent years is evident. In 2021, our share of both wildfire and hurricane peril losses was several percentage points lower than our market share in the affected areas. Over the past five years, our share of property casualty losses relative to total domestic P&C industry losses has declined significantly compared to the five years prior to that and has been meaningfully lower than our corresponding market share.

 

Investing in Technology Drives Value – Today and in the Future

The innovation and technology investments we have made in recent years are not only transforming Travelers into the insurance company of the future, they are driving our financial results today. Our scale, profitability and cash flow all support our ability to invest well over $1 billion annually on technology, and we are confident that these ongoing strategic investments will continue to drive successful top- and bottom-line results going forward.

 

These efforts touch every aspect of our work by digitizing the value chain, leveraging cloud technology, leaning into artificial intelligence for everything from simple automation to deep machine learning, tapping into new data sources and building increasingly accurate predictive models. Technology affords meaningful opportunities to transform the way the business of insurance is done, and scale will be an increasingly important differentiator in our industry.

 

Through our focus on optimizing productivity and efficiency, we have been able to meaningfully increase our overall technology spend over the last five years, while at the same time significantly reducing our expense ratio. Importantly, over that period, we have improved the mix of our technology spend. We have increased our spending on strategic technology initiatives by 50%, while reducing routine but necessary expenditures. In 2021, our leading Claim organization completed a strategic, three-year plan that we call “right touch.” That effort resulted in more than $125 million of annual run rate savings, which is reflected in our results.

 

In addition to creating efficiencies for us, investments in digital capabilities over the past few years have enabled us to improve the customer experience. Our timing was good: pre-pandemic we anticipated a higher rate of digital adoption, and when the pandemic accelerated the trend, we were prepared to meet the need. We are now using virtual claim handling capabilities on a significant majority of both auto appraisals and wind/hail claims, all without the need for inspection by a Travelers claim professional. We are also handling significantly more water claims virtually as compared to pre-pandemic levels. In other words, we are delivering great experiences for our customers and a more efficient outcome for our shareholders.

 

Throughout Travelers, we see a lot of benefit and opportunity from artificial intelligence. As one example, we have successfully deployed high-resolution aerial imagery, coupled with proprietary deep machine learning, to accelerate damage assessments and claim resolutions in the wake of catastrophes. After the recent wildfires in Colorado, we were able to serve some customers before they even had a chance to return to their homes. In severe wind events, our latest models can identify the extent of exterior property damage with a high degree of accuracy. These are some of the capabilities we use to meet our objective of closing 90% of all claims arising out of catastrophe events within 30 days, and exclusively with a Travelers claim professional instead of also relying on an independent adjuster.

 

The innovation and technology investments we have made in recent years are not only transforming Travelers into the insurance company of the future, they are driving our financial results today.

 

Other initiatives across the company leverage technology, data and models to support decision making. We have more than 60 million data records related to businesses, individuals and distributors, including virtually every business in the U.S. These records are curated into well-designed, proprietary data products. We leverage this with more than 2,000 external data sets, including high-resolution aerial imagery covering substantially all property exposures in the U.S. All of this data fuels our more than 1,000 advanced analytical models. Our models support risk selection and segmentation, pricing, reserving, claim response and more. Our data and analytics advantage, augmented by the latest technology, is significant and difficult to replicate.

 

Powering all of these efforts is our exceptional workforce. We start with world-class expertise in traditional insurance-related disciplines and enhance that with leading computer data and industrial engineers, design professionals, behavioral scientists, AI experts, roboticists, specialized health care professionals and more.

 

Investing in Our Employees

Just as we bring a long-term perspective to managing other aspects of our business, we view our human capital management through a long-term lens. At Travelers, our people are our greatest asset. Our employees collectively drive our performance and fuel our ambitious innovation agenda. Their talent and expertise are critical to maintaining meaningful and differentiating competitive advantages in a rapidly evolving business landscape.

 

Powering all of these efforts is our exceptional workforce. We start with world-class expertise in traditional insurance-related disciplines and enhance that with leading computer data and industrial engineers, design professionals, behavioral scientists, AI experts, roboticists, specialized health care professionals and more.

 

Our average tenure and voluntary turnover rates demonstrate the power of our culture and the attachment our employees have to the organization. We are proud that the average tenure at Travelers is an impressive 12 years. For our approximately 600 most senior leaders, the average tenure is more than 20 years. In a competitive labor market, our two-year average global voluntary turnover rate is consistent with our turnover rate prior to the pandemic. While, like many businesses, we experienced elevated attrition during 2021, our recruiting efforts have been very successful – we hired more people than we lost. In other words, more people chose to join Travelers than to leave for another job elsewhere. We take seriously our responsibility to make sure that Travelers is an employer of choice for the best talent in our industry.

 

Diversity and inclusion have long been business imperatives for us and are a critical part of our human capital management strategy. We continue to refine our efforts and focus on ensuring an equitable and inclusive work environment for all our employees. Diverse experiences and viewpoints yield greater insights and better outcomes, enable new ideas and spark innovation, raise the bar on both individual and team performance, and sharpen our focus on our customers. That is why we have deliberate recruiting, retention and development practices tailored to deepen diverse talent pools and broaden advancement opportunities. We are steadily making progress, as evidenced by the fact that we once again increased the number of women and people of color in management positions this year, progress that we have achieved each year since we began tracking this data in 2006.

 

We also have a number of longer-term initiatives underway that are designed to raise awareness about insurance as an attractive career opportunity, such as Travelers EDGE®, our signature college-to-career pipeline program. These initiatives are already working to create a more diverse pipeline of talent for Travelers and attract a broader group of individuals to the P&C insurance industry.

 

Consistent and Successful Long-Term Financial Strategy Delivers Shareholder Value

It is important to consider our financial results and our strategic initiatives 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 the macroeconomic environment, loss cost trends, weather, and geopolitical and 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 mid-teens was simply the quantification of what qualified as an industry-leading return in that environment. 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 2021 return on equity of 12.7% and core return on equity of 13.7% again meaningfully exceeded the average return on equity for the domestic P&C industry of 4.6%, according to estimates from Conning, a global investment management firm and insurance research provider.  As shown in the chart below, our return on equity has significantly outperformed the average return on equity for the industry in each of the past 10 years.

 

Importantly, these industry-leading returns on an absolute basis are even more impressive on a risk-adjusted basis when you take into account our industry-leading (low) volatility. 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.

Notably, since we began our share repurchase program in 2006, we have returned nearly $50 billion of excess capital to our shareholders, including through nearly $38 billion of share repurchases, which is well in excess of the market capitalization of the company at that time. Just by virtue of our share repurchase program, your percentage ownership of Travelers increased 5% during 2021 alone. If you owned Travelers stock when we began our share repurchase program in 2006, your percentage ownership has increased by nearly 300%. These percentage increases were even higher if you participated in our dividend reinvestment program.

 

Our capital management strategy has been an important driver of shareholder value creation over time. Our first objective for the capital we generate is to reinvest it in our business – organically and inorganically – to create shareholder value. For example, as we continue to grow our top line, as we have for the past few years, we will retain more capital to support that growth. Also, we continue to invest in everything from talent to technology to further our ambitious innovation agenda and advance our strategic objectives.

 

Having said that, we are disciplined stewards of our shareholders’ capital. To the extent that we generate capital that we cannot reinvest consistent with our objective of generating industry-leading returns over time, we will manage it the same way we have for more than a decade – by returning it to our shareholders through dividends and share repurchases. By returning excess capital to our investors, we give them the ability to allocate their investment dollars as they see fit, including by investing in companies with different growth profiles or capital needs, thereby efficiently allocating capital across the economy. Over time, that efficient allocation of capital in the marketplace contributes to a stronger economy.

 

Total Shareholder Return

Ultimately, it is the success of our strategy – with all its component parts – that drives our total return to shareholders over time. These unprecedented times are an important reminder that we have a well-established track record of managing the company to create value over the long term, through periods of weather volatility; through anticipated and unanticipated developments impacting loss trends; and through both foreseeable and unforeseeable economic cycles and more extreme economic, geopolitical and other conditions. With that in mind, the graph below compares our returns since the 2008 financial crisis to the returns for the Dow 30, the S&P 500 and the S&P 500 Financials.