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Section 1: 8-K (8-K)

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false0000086312 0000086312 2019-07-23 2019-07-23


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________
 FORM 8-K
 ______________________________________

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported): July 23, 2019
 _______________________________________________
The Travelers Companies, Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________________
 
Minnesota
 
001-10898
 
41-0518860
(State or other jurisdiction of
incorporation)
 
(Commission File Number)
 
(I.R.S. Employer
Identification No.)
485 Lexington Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)
 
(917) 778-6000
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
 _________________________________________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, without par value
 
TRV
 
New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company  
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o






Item 2.02.  Results of Operations and Financial Condition.
 
On July 23, 2019, The Travelers Companies, Inc. (the “Company”) issued a press release announcing the results of the Company’s operations for the quarter ended June 30, 2019, and the availability of the Company’s second quarter financial supplement on the Company’s web site.  The press release and the financial supplement are furnished as Exhibits 99.1 and 99.2 to this Report and are hereby incorporated by reference in this Item 2.02.
 
As provided in General Instruction B.2 of Form 8-K, the information and exhibits contained in this Form 8-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such a filing.
 
Item 9.01.  Financial Statements and Exhibits.
 
(d)                                 Exhibits.
 
Exhibit No.
 
Description
99.1
 
 
 
 
99.2
 






SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, The Travelers Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
THE TRAVELERS COMPANIES, INC.
 
 
 
 
 
 
 
 
Date:
July 23, 2019
By
/s/   CHRISTINE K. KALLA
 
 
 
Name: Christine K. Kalla
 
 
 
Executive Vice President and General Counsel


(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit


398848641_g34651mo25i001b12.gifExhibit 99.1
The Travelers Companies, Inc.
485 Lexington Avenue
New York, NY 10017-2630
www.travelers.com
NYSE: TRV

Travelers Reports Second Quarter 2019 Net Income per Diluted Share of $2.10, up 9%,
and Return on Equity of 9.0%

Second Quarter 2019 Core Income per Diluted Share of $2.02, up 12%, and Core Return on Equity of 9.2%

Second quarter net income of $557 million and core income of $537 million, up 6% and 9%, respectively.
Consolidated combined ratio of 98.4%; underlying combined ratio of 94.9%, an increase from the prior year quarter due to higher non-catastrophe weather-related losses.
Record net written premiums of $7.450 billion, up 4%, reflecting growth in all segments.
Renewal premium change in Business Insurance of 6.7% at highest level since 2014.
Total capital returned to shareholders of $593 million, including $376 million of share repurchases. Year-to-date total capital returned to shareholders of $1.218 billion, including $797 million of share repurchases.
Book value per share of $97.26, up 12% from year-end 2018. Adjusted book value per share of $90.05, up 3% from year-end 2018.
Board of Directors declared quarterly dividend per share of $0.82.

New York, July 23, 2019 — The Travelers Companies, Inc. today reported net income of $557 million, or $2.10 per diluted share, for the quarter ended June 30, 2019, compared to $524 million, or $1.92 per diluted share, in the prior year quarter. Core income in the current quarter was $537 million, or $2.02 per diluted share, compared to $494 million, or $1.81 per diluted share, in the prior year quarter. Core income increased primarily due to lower catastrophe losses and higher net investment income, partially offset by elevated non-catastrophe weather-related losses and lower net favorable prior year reserve development. Net realized investment gains were $25 million pre-tax ($20 million after-tax), compared to $36 million pre-tax ($30 million after-tax) in the prior year quarter. Per diluted share amounts benefited from the impact of share repurchases.

Consolidated Highlights
($ in millions, except for per share amounts, and after-tax, except for premiums and revenues)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
Net written premiums
 
$
7,450

 
$
7,131

 
4
 %
 
$
14,507

 
$
13,955

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
7,834

 
$
7,477

 
5

 
$
15,505

 
$
14,763

 
5

 
Net income
 
$
557

 
$
524

 
6

 
$
1,353

 
$
1,193

 
13

 
per diluted share
 
$
2.10

 
$
1.92

 
9

 
$
5.08

 
$
4.35

 
17

 
Core income
 
$
537

 
$
494

 
9

 
$
1,292

 
$
1,172

 
10

 
per diluted share
 
$
2.02

 
$
1.81

 
12

 
$
4.85

 
$
4.27

 
14

 
Diluted weighted average shares outstanding
 
263.7

 
271.1

 
(3
)
 
264.2

 
272.5

 
(3
)
 
Combined ratio
 
98.4
%
 
98.1
%
 
0.3

pts
96.1
%
 
96.8
%
 
(0.7
)
pts
Underlying combined ratio
 
94.9
%
 
93.6
%
 
1.3

pts
93.3
%
 
93.0
%
 
0.3

pts
Return on equity
 
9.0
%
 
9.2
%
 
(0.2
)
pts
11.2
%
 
10.3
%
 
0.9

pts
Core return on equity
 
9.2
%
 
8.7
%
 
0.5

pts
11.1
%
 
10.3
%
 
0.8

pts
 
 
As of
 
Change From
 
 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
 
December 31,
2018
 
June 30,
2018
Book value per share
 
$
97.26

 
$
86.84

 
$
84.51

 
12
%
 
15
%
Adjusted book value per share
 
90.05

 
87.27

 
84.93

 
3
%
 
6
%

See Glossary of Financial Measures for definitions and the statistical supplement for additional financial data.

1



“We are pleased to report solid second quarter core income of $537 million, an increase of 9% over the prior year quarter, and core return on equity of 9.2%,” said Alan Schnitzer, Chairman and Chief Executive Officer. “The increase in earnings was driven by the successful execution of our strategy to profitably grow our top line and thoughtfully manage our expenses, along with strong performance from our investment portfolio, partially offset by lower favorable prior year reserve development. While catastrophe losses were lower than in the prior year quarter, all-in weather losses were modestly higher, due to higher non-catastrophe weather-related losses which adversely impacted the underlying combined ratio of 94.9% by nearly two points compared to the prior year quarter. In addition and to a lesser degree, the change in the underlying combined ratio in the quarter was impacted by a number of favorable items, including lower large losses and improved expense leverage, partially offset by a modest impact from continuing challenges in the tort environment. In terms of capital management, we returned $593 million of excess capital to our shareholders this quarter, including $376 million through share repurchases, bringing the total capital returned to shareholders so far this year to more than $1.2 billion.
“We remain extremely pleased with our performance in the marketplace. We grew net written premiums by 4% to a record $7.5 billion, marking the tenth consecutive quarter in which we generated premium growth in all three of our business segments. In Business Insurance, we achieved renewal premium change of 6.7%, including renewal rate change of 3.6%, in both cases the highest levels in five years, while maintaining historically high levels of retention. This is the twelfth consecutive quarter of higher year-over-year renewal premium change. In Bond & Specialty Insurance, we once again achieved strong production in both Management Liability and Surety. In Personal Insurance, higher net written premiums benefited from renewal premium increases in both our Agency Automobile and Agency Home businesses.
“Our performance this quarter and year-to-date reflect both the successful execution of our long-term strategy and our relentless execution in the marketplace every day. In an environment of persistently low interest rates, ongoing uncertainty surrounding weather-related losses and a more challenging tort environment, we will continue to leverage the power of our franchise to meet our return objectives, including by selectively and thoughtfully seeking price and improved terms and conditions. With leading data and analytics in the hands of our frontline underwriters, the best talent in the industry and deep relationships with our agents and brokers, we remain well positioned to continue to generate industry-leading returns and deliver shareholder value over time.”

2



Consolidated Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
($ in millions and pre-tax, unless noted otherwise)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
Underwriting gain:
 
$
74

 
$
90

 
$
(16
)
 
$
469

 
$
348

 
$
121

 
Underwriting gain includes:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
 
123

 
186

 
(63
)
 
174

 
336

 
(162
)
 
Catastrophes, net of reinsurance
 
(367
)
 
(488
)
 
121

 
(560
)
 
(842
)
 
282

 
Net investment income
 
648

 
595

 
53

 
1,230

 
1,198

 
32

 
Other income (expense), including interest expense
 
(82
)
 
(90
)
 
8

 
(145
)
 
(162
)
 
17

 
Core income before income taxes
 
640

 
595

 
45

 
1,554

 
1,384

 
170

 
Income tax expense
 
103

 
101

 
2

 
262

 
212

 
50

 
Core income
 
537

 
494

 
43

 
1,292

 
1,172

 
120

 
Net realized investment gains after income taxes
 
20

 
30

 
(10
)
 
61

 
21

 
40

 
Net income
 
$
557

 
$
524

 
$
33

 
$
1,353

 
$
1,193

 
$
160

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
98.4
 %
 
98.1
 %
 
0.3

pts
96.1
 %
 
96.8
 %
 
(0.7
)
pts
Impact on combined ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
 
(1.8
)
pts
(2.8
)
pts
1.0

pts
(1.3
)
pts
(2.5
)
pts
1.2

pts
Catastrophes, net of reinsurance
 
5.3

pts
7.3

pts
(2.0
)
pts
4.1

pts
6.3

pts
(2.2
)
pts
Underlying combined ratio
 
94.9
 %
 
93.6
 %
 
1.3

pts
93.3
 %
 
93.0
 %
 
0.3

pts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Insurance
 
$
3,874

 
$
3,781

 
2
 %
 
$
8,037

 
$
7,775

 
3
 %
 
Bond & Specialty Insurance
 
710

 
653

 
9

 
1,297

 
1,227

 
6

 
Personal Insurance
 
2,866

 
2,697

 
6

 
5,173

 
4,953

 
4

 
Total
 
$
7,450

 
$
7,131

 
4
 %
 
$
14,507

 
$
13,955

 
4
 %
 
 
Second Quarter 2019 Results
(All comparisons vs. second quarter 2018, unless noted otherwise)

Net income of $557 million increased $33 million due to higher core income, partially offset by lower net realized investment gains. Core income of $537 million increased $43 million. Core income increased primarily due to lower catastrophe losses and higher net investment income, partially offset by a lower underlying underwriting gain and lower net favorable prior year reserve development. The benefit of higher business volumes on the underlying underwriting gain was more than offset by higher levels of non-catastrophe weather-related losses.

Underwriting results: 

The combined ratio of 98.4% increased 0.3 points due to a higher underlying combined ratio (1.3 points) and lower net favorable prior year reserve development (1.0 points), partially offset by lower catastrophe losses (2.0 points).

The underlying combined ratio of 94.9% increased 1.3 points, including a 0.6 point increase related to the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty entered into effective January 1, 2019 ("the new catastrophe reinsurance treaty"). See below for further details by segment.

Net favorable prior year reserve development occurred in all segments. Catastrophe losses primarily resulted from wind storms in several regions of the United States.

Net investment income of $648 million pre-tax ($548 million after-tax) increased 9%. Income from the fixed income investment portfolio increased due to a higher average level of fixed maturity investments, as well as higher long-term and short-term interest rates. Private equity partnership returns were higher than in the prior year quarter.
Record net written premiums of $7.450 billion increased 4%, reflecting growth in all segments.

3



Year-to-Date 2019 Results
(All comparisons vs. year-to-date 2018, unless noted otherwise)
 
Net income of $1.353 billion increased $160 million due to higher core income and higher net realized investment gains. Core income of $1.292 billion increased $120 million. Core income increased due to lower catastrophe losses and higher net investment income, partially offset by lower net favorable prior year reserve development. Net realized investment gains of $78 million pre-tax ($61 million after-tax) were higher by $53 million pre-tax ($40 million after-tax).

Underwriting results:
 
The combined ratio of 96.1% decreased 0.7 points due to lower catastrophe losses (2.2 points), partially offset by lower net favorable prior year reserve development (1.2 points) and a higher underlying combined ratio (0.3 points).

The underlying combined ratio of 93.3% increased 0.3 points, including a 0.6 point increase related to the new catastrophe reinsurance treaty. See below for further details by segment.

Net favorable prior year reserve development occurred in all segments. Catastrophe losses included the second quarter events described above, as well as winter storms and wind storms in several regions of the United States in the first quarter of 2019.
 
Net investment income of $1.230 billion pre-tax ($1.044 billion after-tax) increased 3%. Income from the fixed income investment portfolio increased due to higher long-term and short-term interest rates, as well as a higher average level of fixed maturity investments. Private equity partnership and real estate partnership returns were lower than in the prior year.

Record gross written premiums of $15.663 billion grew 5%, reflecting growth in all segments. Net written premiums of $14.507 billion increased 4%. Growth in net written premiums was impacted by the new catastrophe reinsurance treaty, the entire cost of which impacted net written premiums in the first quarter. Accordingly, the treaty did not impact net written premiums in the second quarter and will not impact net written premiums in the remaining quarters of the year.

Shareholders’ Equity
 
Shareholders’ equity of $25.321 billion increased 11% from year-end 2018, primarily due to the impact of lower interest rates on net unrealized investment gains (losses). Net unrealized investment gains included in shareholders’ equity were $2.389 billion pre-tax ($1.878 billion after-tax), compared to net unrealized investment losses of $137 million pre-tax ($113 million after-tax) at year-end 2018. Book value per share of $97.26 increased 12% from year-end 2018, also primarily due to the impact of lower interest rates on net unrealized investment gains (losses). Adjusted book value per share of $90.05 increased 3% from year-end 2018.

The Company repurchased 2.6 million shares during the second quarter at an average price of $145.87 per share for a total cost of $376 million. Capacity remaining under the existing share repurchase authorization was $2.536 billion at the end of the quarter. Also at the end of the quarter, statutory capital and surplus was $21.080 billion, and the ratio of debt-to-capital was 20.6%. The ratio of debt-to-capital excluding after-tax net unrealized investment gains included in shareholders’ equity was 21.9%, within the Company’s target range of 15% to 25%.

The Board of Directors declared a quarterly dividend of $0.82 per share. The dividend is payable on September 30, 2019 to shareholders of record at the close of business on September 10, 2019.

4




Business Insurance Segment Financial Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
($ in millions and pre-tax, unless noted otherwise)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
Underwriting gain (loss):
 
$
(55
)
 
$
32

 
$
(87
)
 
$
2

 
$
105

 
$
(103
)
 
Underwriting gain (loss) includes:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
 
71

 
84

 
(13
)
 
50

 
150

 
(100
)
 
Catastrophes, net of reinsurance
 
(211
)
 
(168
)
 
(43
)
 
(306
)
 
(306
)
 

 
Net investment income
 
481

 
440

 
41

 
908

 
886

 
22

 
Other income
 
(11
)
 
(10
)
 
(1
)
 
(6
)
 
(7
)
 
1

 
Segment income before income taxes
 
415

 
462

 
(47
)
 
904

 
984

 
(80
)
 
Income tax expense
 
64

 
77

 
(13
)
 
139

 
147

 
(8
)
 
Segment income
 
$
351

 
$
385

 
$
(34
)
 
$
765

 
$
837

 
$
(72
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
 
101.1
 %
 
98.8
 %
 
2.3

pts
99.6
 %
 
98.2
 %
 
1.4

pts
Impact on combined ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
 
(1.9
)
pts
(2.3
)
pts
0.4

pts
(0.7
)
pts
(2.1
)
pts
1.4

pts
Catastrophes, net of reinsurance
 
5.6

pts
4.6

pts
1.0

pts
4.1

pts
4.3

pts
(0.2
)
pts
Underlying combined ratio
 
97.4
 %
 
96.5
 %
 
0.9

pts
96.2
 %
 
96.0
 %
 
0.2

pts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums by market
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
 
 
Select Accounts
 
$
756

 
$
729

 
4
 %
 
$
1,541

 
$
1,502

 
3
 %
 
Middle Market
 
2,009

 
1,985

 
1

 
4,419

 
4,247

 
4

 
National Accounts
 
223

 
231

 
(3
)
 
527

 
540

 
(2
)
 
National Property and Other
 
588

 
518

 
14

 
975

 
898

 
9

 
Total Domestic
 
3,576

 
3,463

 
3

 
7,462

 
7,187

 
4

 
International
 
298

 
318

 
(6
)
 
575

 
588

 
(2
)
 
Total
 
$
3,874

 
$
3,781

 
2
 %
 
$
8,037

 
$
7,775

 
3
 %
 
 
Second Quarter 2019 Results
(All comparisons vs. second quarter 2018, unless noted otherwise)
 
Segment income for Business Insurance was $351 million after-tax, a decrease of $34 million. Segment income decreased primarily due to higher catastrophe losses, a lower underlying underwriting gain and lower net favorable prior year reserve development, partially offset by higher net investment income. The benefit of higher business volumes on the underlying underwriting gain was more than offset by a higher underlying combined ratio, as described below.

Underwriting results:

The combined ratio of 101.1% increased 2.3 points due to higher catastrophe losses (1.0 points), a higher underlying combined ratio (0.9 points) and lower net favorable prior year reserve development (0.4 points).

The underlying combined ratio of 97.4% increased 0.9 points, primarily driven by the impact in the quarter of (1) higher loss estimates in the general liability product line for primary and excess coverages and in the commercial automobile product line, including the re-estimation of losses incurred in the first quarter of 2019, (2) higher non-catastrophe weather-related losses and (3) a 0.5 point impact from the new catastrophe reinsurance treaty, partially offset by (4) a lower level of domestic large losses, primarily fire-related and (5) a lower underwriting expense ratio.

Net favorable prior year reserve development was primarily driven by better than expected loss experience in the segment's domestic operations in the workers’ compensation product line for multiple accident years, partially offset by higher than expected loss experience in the segment's domestic operations (1) in the general liability product line for primary and excess coverages for multiple accident years, including a $60 million increase to environmental reserves for accident years 2009 and prior, (2) in the commercial automobile product

5



line for recent accident years and (3) higher than expected loss experience in the segment's international operations.

Net written premiums of $3.874 billion increased 2%, benefiting from continued strong retention and higher renewal premium change.

Year-to-date 2019 Results
(All comparisons vs. year-to-date 2018, unless noted otherwise)
 
Segment income for Business Insurance was $765 million after-tax, a decrease of $72 million. Segment income decreased primarily due to lower net favorable prior year reserve development, partially offset by higher net investment income.
 
Underwriting results:

The combined ratio of 99.6% increased 1.4 points due to lower net favorable prior year reserve development (1.4 points) and a higher underlying combined ratio (0.2 points), partially offset by the impact of catastrophe losses (0.2 points).

The underlying combined ratio of 96.2% increased 0.2 points. The new catastrophe reinsurance treaty resulted in a 0.5 point increase in the underlying combined ratio.

Net favorable prior year reserve development was primarily driven by better than expected loss experience in the segment's domestic operations in (1) the workers’ compensation product line for multiple accident years and (2) the commercial property product line for recent accident years, partially offset by higher than expected loss experience in the segment's domestic operations in (3) the general liability product line for primary and excess coverages for multiple accident years, including the impact of (a) the enactment of legislation by a number of states, which extended the statute of limitations for childhood sexual molestation claims and (b) a $60 million increase to environmental reserves, both of which impacted accident years 2009 and prior, (4) the commercial automobile product line for recent accident years and (5) the commercial multi-peril product line for recent accident years.

Gross written premiums of $8.923 billion grew 5%, benefiting from the same factors as discussed above for the second quarter 2019. Net written premiums of $8.037 billion increased 3%. Growth in net written premiums was impacted by the new catastrophe reinsurance treaty.


6



Bond & Specialty Insurance Segment Financial Results
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
($ in millions and pre-tax, unless noted otherwise)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
Underwriting gain:
$
157

 
$
199

 
$
(42
)
 
$
269

 
$
343

 
$
(74
)
 
Underwriting gain includes:
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
39

 
89

 
(50
)
 
42

 
124

 
(82
)
 
Catastrophes, net of reinsurance

 
(5
)
 
5

 
(3
)
 
(5
)
 
2

 
Net investment income
58

 
57

 
1

 
114

 
115

 
(1
)
 
Other income
5

 
3

 
2

 
10

 
9

 
1

 
Segment income before income taxes
220

 
259

 
(39
)
 
393

 
467

 
(74
)
 
Income tax expense
46

 
55

 
(9
)
 
81

 
90

 
(9
)
 
Segment income
$
174

 
$
204

 
$
(30
)
 
$
312

 
$
377

 
$
(65
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
74.9
 %
 
66.5
 %
 
8.4

pts
77.9
 %
 
70.5
 %
 
7.4

pts
Impact on combined ratio
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
(6.2
)
pts
(14.8
)
pts
8.6

pts
(3.4
)
pts
(10.5
)
pts
7.1

pts
Catastrophes, net of reinsurance
0.1

pts
0.8

pts
(0.7
)
pts
0.2

pts
0.4

pts
(0.2
)
pts
Underlying combined ratio
81.0
 %
 
80.5
 %
 
0.5

pts
81.1
 %
 
80.6
 %
 
0.5

pts
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
 
Management Liability
$
403

 
$
362

 
11
 %
 
$
770

 
$
710

 
8
 %
 
Surety
244

 
235

 
4

 
428

 
420

 
2

 
Total Domestic
647

 
597

 
8

 
1,198

 
1,130

 
6

 
International
63

 
56

 
13

 
99

 
97

 
2

 
Total
$
710

 
$
653

 
9
 %
 
$
1,297

 
$
1,227

 
6
 %
 

Second Quarter 2019 Results
(All comparisons vs. second quarter 2018, unless noted otherwise)
 
Segment income for Bond & Specialty Insurance was $174 million after-tax, a decrease of $30 million. Segment income decreased primarily due to lower net favorable prior year reserve development.
 
Underwriting results:

The combined ratio of 74.9% increased 8.4 points due to lower net favorable prior year reserve development (8.6 points) and a higher underlying combined ratio (0.5 points), partially offset by lower catastrophe losses (0.7 points).

The underlying combined ratio remained very strong at 81.0%.

Net favorable prior year reserve development was driven by better than expected loss experience in domestic general liability for management liability coverages for multiple accident years.

Net written premiums of $710 million increased 9%, with contributions from both management liability and surety.

Year-to-Date 2019 Results
(All comparisons vs. year-to-date 2018, unless noted otherwise)
 
Segment income for Bond & Specialty Insurance was $312 million after-tax, a decrease of $65 million. Segment income decreased primarily due to lower net favorable prior year reserve development.


7



Underwriting results:

The combined ratio of 77.9% increased 7.4 points due to lower net favorable prior year reserve development (7.1 points) and a higher underlying combined ratio (0.5 points), partially offset by lower catastrophe losses 0.2 points.

The underlying combined ratio remained very strong at 81.1%.

Net favorable prior year reserve development was driven by better than expected loss experience in domestic general liability for management liability coverages for multiple accident years.

Net written premiums of $1.297 billion increased 6% and benefited from the same factors as discussed above for the second quarter 2019.

Personal Insurance Segment Financial Results

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
($ in millions and pre-tax, unless noted otherwise)
2019
 
2018
 
Change
 
2019
 
2018
 
Change
 
Underwriting gain (loss):
$
(28
)
 
$
(141
)
 
$
113

 
$
198

 
$
(100
)
 
$
298

 
Underwriting gain (loss) includes:
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
13

 
13

 

 
82

 
62

 
20

 
Catastrophes, net of reinsurance
(156
)
 
(315
)
 
159

 
(251
)
 
(531
)
 
280

 
Net investment income
109

 
98

 
11

 
208

 
197

 
11

 
Other income
21

 
14

 
7

 
43

 
31

 
12

 
Segment income before income taxes
102

 
(29
)
 
131

 
449

 
128

 
321

 
Income tax expense
14

 
(12
)
 
26

 
83

 
16

 
67

 
Segment income (loss)
$
88

 
$
(17
)
 
$
105

 
$
366

 
$
112

 
$
254

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Combined ratio
100.2
 %
 
104.9
 %
 
(4.7
)
pts
95.2
 %
 
101.3
 %
 
(6.1
)
pts
Impact on combined ratio
 
 
 
 
 
 
 
 
 
 
 
 
Net favorable prior year reserve development
(0.5
)
pts
(0.5
)
pts

pts
(1.6
)
pts
(1.3
)
pts
(0.3
)
pts
Catastrophes, net of reinsurance
6.1

pts
12.8

pts
(6.7
)
pts
4.9

pts
11.0

pts
(6.1
)
pts
Underlying combined ratio
94.6
 %
 
92.6
 %
 
2.0

pts
91.9
 %
 
91.6
 %
 
0.3

pts
 
 
 
 
 
 
 
 
 
 
 
 
 
Net written premiums
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
 
Agency (1)
 
 
 
 
 
 
 
 
 
 
 
 
Automobile
$
1,300

 
$
1,258

 
3
 %
 
$
2,524

 
$
2,441

 
3
 %
 
Homeowners & Other
1,258

 
1,137

 
11

 
2,095

 
1,969

 
6

 
Total Agency
2,558

 
2,395

 
7

 
4,619

 
4,410

 
5

 
Direct to Consumer
103

 
99

 
4

 
198

 
191

 
4

 
Total Domestic
2,661

 
2,494

 
7

 
4,817

 
4,601

 
5

 
International
205

 
203

 
1

 
356

 
352

 
1

 
Total
$
2,866

 
$
2,697

 
6
 %
 
$
5,173

 
$
4,953

 
4
 %
 
 
(1) Represents business sold through agents, brokers and other intermediaries, and excludes direct to consumer.

Second Quarter 2019 Results
(All comparisons vs. second quarter 2018, unless noted otherwise)
 
Segment income for Personal Insurance was $88 million after-tax, compared to a loss of $(17) million in the prior year quarter. Segment income benefited primarily from lower catastrophe losses and higher net investment income, partially offset by a lower underlying underwriting gain. The benefit of higher business volumes on the underlying underwriting gain was more than offset by higher levels of non-catastrophe weather-related losses.


8



Underwriting results:

The combined ratio of 100.2% improved 4.7 points due to lower catastrophe losses (6.7 points), partially offset by a higher underlying combined ratio (2.0 points).

The underlying combined ratio of 94.6% increased 2.0 points, primarily driven by the impacts of (1) higher non-catastrophe weather-related losses in Agency Homeowners and Other and (2) a 0.8 point impact from the new catastrophe reinsurance treaty, mostly impacting Agency Homeowners and Other, partially offset by (3) the impact of earned pricing that exceeded loss cost trends in Agency Automobile and (4) a lower underwriting expense ratio.

Net written premiums of $2.866 billion increased 6%. Agency Automobile net written premiums increased 3%, driven by renewal premium change of 5%. Agency Homeowners and Other net written premiums increased 11%, driven by renewal premium change of 7% and higher levels of new business.
 
Year-to-Date 2019 Results
(All comparisons vs. year-to-date 2018, unless noted otherwise)
 
Segment income for Personal Insurance was $366 million after-tax, an increase of $254 million. Segment income increased primarily due to lower catastrophe losses and higher net favorable prior year reserve development.
 
Underwriting results:

The combined ratio of 95.2% improved 6.1 points due to lower catastrophe losses (6.1 points) and higher net favorable prior year reserve development (0.3 points), partially offset by a higher underlying combined ratio (0.3 points).

The underlying combined ratio of 91.9% increased 0.3 points. The new catastrophe reinsurance treaty resulted in a 0.8 point increase in the underlying combined ratio.

Net favorable prior year reserve development was driven by better than expected loss experience in Agency Automobile and Agency Homeowners and Other for recent accident years.

Gross written premiums of $5.331 billion grew 6%. Net written premiums of $5.173 billion increased 4%. Growth in net written premiums was impacted by the new catastrophe reinsurance treaty.

Agency Automobile gross written premiums of $2.544 billion grew 4%, driven by renewal premium change of 5%. Net written premiums increased 3%. Growth in net written premiums was impacted by the new catastrophe reinsurance treaty.

Agency Homeowners & Other gross written premiums of $2.222 billion grew 10% driven by renewal premium change of 6% and higher levels of new business. Net written premiums increased 6%. Growth in net written premiums was impacted by the new catastrophe reinsurance treaty.

Financial Supplement and Conference Call
 
The information in this press release should be read in conjunction with the financial supplement that is available on our website at www.travelers.com. Travelers management will discuss the contents of this release and other relevant topics via webcast at 9 a.m. Eastern (8 a.m. Central) on Tuesday, July 23, 2019. Investors can access the call via webcast at http://investor.travelers.com or by dialing 1.844.895.1976 within the United States and 1.647.689.5389 outside the United States. Prior to the webcast, a slide presentation pertaining to the quarterly earnings will be available on the Company’s website.

Following the live event, an audio playback of the webcast and the slide presentation will be available on the same website.


9



About Travelers
 
The Travelers Companies, Inc. (NYSE: TRV) is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $30 billion in 2018. For more information, visit www.travelers.com.

Travelers may use its website and/or social media outlets, such as Facebook and Twitter, as distribution channels of material Company information. Financial and other important information regarding the Company is routinely accessible through and posted on our website at http://investor.travelers.com, our Facebook page at https://www.facebook.com/travelers and our Twitter account (@Travelers) at https://twitter.com/travelers. In addition, you may automatically receive email alerts and other information about Travelers when you enroll your email address by visiting the Email Notifications section at http://investor.travelers.com.

Travelers is organized into the following reportable business segments:
 
Business Insurance - Business Insurance offers a broad array of property and casualty insurance and insurance-related services to its customers, primarily in the United States, as well as in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s.

Bond & Specialty Insurance - Bond & Specialty Insurance provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to its customers in the United States and certain specialty insurance products in Canada, the United Kingdom, the Republic of Ireland and Brazil, utilizing various degrees of financially-based underwriting approaches.

Personal Insurance - Personal Insurance writes a broad range of property and casualty insurance covering individuals’ personal risks, primarily in the United States, as well as in Canada. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.
 
* * * * *
Forward-Looking Statements
 
This press release contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:

the Company’s outlook and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, renewal premium changes, underwriting margins and underlying underwriting margins, net and core income, investment income and performance, loss costs, return on equity, core return on equity and expected current returns, and combined ratios and underlying combined ratios);
share repurchase plans;
future pension plan contributions;
the sufficiency of the Company’s asbestos and other reserves;
the impact of emerging claims issues as well as other insurance and non-insurance litigation;
the cost and availability of reinsurance coverage;
catastrophe losses;
the impact of investment (including changes in interest rates), economic (including inflation, changes in tax law, changes in commodity prices and fluctuations in foreign currency exchange rates) and underwriting market conditions;
strategic and operational initiatives to improve profitability and competitiveness;
the Company’s competitive advantages;
new product offerings;
the impact of new or potential regulations imposed or to be imposed by the United States or other nations, including tariffs or other barriers to international trade; and
the impact of legislation enacted or to be enacted by states allowing victims of sexual abuse to file or proceed with claims that otherwise would have been time-barred.     


10



The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Some of the factors that could cause actual results to differ include, but are not limited to, the following:

catastrophe losses could materially and adversely affect the Company’s results of operations, its financial position and/or liquidity, and could adversely impact the Company’s ratings, the Company’s ability to raise capital and the availability and cost of reinsurance;
if actual claims exceed the Company’s claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, the Company’s financial results could be materially and adversely affected;
during or following a period of financial market disruption or an economic downturn, the Company’s business could be materially and adversely affected;
the Company’s investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses;
the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
the intense competition that the Company faces, and the impact of innovation, technological change and changing customer preferences on the insurance industry and the markets in which it operates, could harm its ability to maintain or increase its business volumes and its profitability;
disruptions to the Company’s relationships with its independent agents and brokers or the Company's inability to manage effectively a changing distribution landscape could adversely affect the Company;
the Company is exposed to, and may face adverse developments involving, mass tort claims such as those relating to exposure to potentially harmful products or substances;
the effects of emerging claim and coverage issues on the Company’s business are uncertain;
the Company may not be able to collect all amounts due to it from reinsurers, reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all and we are exposed to credit risk related to our structured settlements;
the Company is also exposed to credit risk in certain of its insurance operations and with respect to certain guarantee or indemnification arrangements that we have with third parties;
within the United States, the Company’s businesses are heavily regulated by the states in which it conducts business, including licensing, market conduct and financial supervision, and changes in regulation may reduce the Company’s profitability and limit its growth;
a downgrade in the Company’s claims-paying and financial strength ratings could adversely impact the Company’s business volumes, adversely impact the Company’s ability to access the capital markets and increase the Company’s borrowing costs;
the inability of the Company’s insurance subsidiaries to pay dividends to the Company’s holding company in sufficient amounts would harm the Company’s ability to meet its obligations, pay future shareholder dividends and/or make future share repurchases;
the Company’s efforts to develop new products, expand in targeted markets or improve business processes and workflows may not be successful and may create enhanced risks;
the Company may be adversely affected if its pricing and capital models provide materially different indications than actual results;
the Company’s business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology, particularly as its business processes become more digital;
if the Company experiences difficulties with technology, data and network security (including as a result of cyber attacks), outsourcing relationships or cloud-based technology, the Company’s ability to conduct its business could be negatively impacted;
the Company is also subject to a number of additional risks associated with its business outside the United States, such as foreign currency exchange fluctuations (including with respect to the valuation of the Company’s foreign investments and interests in joint ventures) and restrictive regulations as well as the risks and uncertainties associated with the United Kingdom’s withdrawal from the European Union;
regulatory changes outside of the United States, including in Canada, the United Kingdom, the Republic of Ireland and the European Union, could adversely impact the Company’s results of operations and limit its growth;

11



loss of or significant restrictions on the use of particular types of underwriting criteria, such as credit scoring, or other data or methodologies, in the pricing and underwriting of the Company’s products could reduce the Company’s future profitability;
acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences;
the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective;
the Company’s businesses may be adversely affected if it is unable to hire and retain qualified employees;
intellectual property is important to the Company’s business, and the Company may be unable to protect and enforce its own intellectual property or the Company may be subject to claims for infringing the intellectual property of others;
changes in federal regulation could impose significant burdens on the Company and otherwise adversely impact the Company’s results;
changes in U.S. tax laws or in the tax laws of other jurisdictions in which the Company operates could adversely impact the Company; and
the Company’s share repurchase plans depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, changes in levels of written premiums, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors.

Our forward-looking statements speak only as of the date of this press release or as of the date they are made, and we undertake no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 14, 2019, as updated by our periodic filings with the SEC.

 *****
GLOSSARY OF FINANCIAL MEASURES AND RECONCILIATIONS OF GAAP MEASURES TO NON-GAAP MEASURES
 
The following measures are used by the Company’s management to evaluate financial performance against historical results, to establish performance targets on a consolidated basis, and for other reasons as discussed below. In some cases, these measures are considered non-GAAP financial measures under applicable SEC rules because they are not displayed as separate line items in the consolidated financial statements or are not required to be disclosed in the notes to financial statements or, in some cases, include or exclude certain items not ordinarily included or excluded in the most comparable GAAP financial measure. Reconciliations of these measures to the most comparable GAAP measures also follow.

In the opinion of the Company’s management, a discussion of these measures provides investors, financial analysts, rating agencies and other financial statement users with a better understanding of the significant factors that comprise the Company’s periodic results of operations and how management evaluates the Company’s financial performance.

Some of these measures exclude net realized investment gains (losses), net of tax, and/or net unrealized investment gains (losses), net of tax, included in shareholders’ equity, which can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends.

Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by the Company’s management.
 
RECONCILIATION OF NET INCOME TO CORE INCOME AND CERTAIN OTHER NON-GAAP MEASURES
 
Core income (loss) is consolidated net income (loss) excluding the after-tax impact of net realized investment gains (losses), discontinued operations, the effect of a change in tax laws and tax rates at enactment, and cumulative effect of changes in accounting principles when applicable. Segment income (loss) is determined in the same manner as core income (loss) on a segment basis. Management uses segment income (loss) to analyze each segment’s performance and as a tool in making business decisions. Financial statement users also consider core income (loss)

12



when analyzing the results and trends of insurance companies. Core income (loss) per share is core income (loss) on a per common share basis.

Reconciliation of Net Income to Core Income less Preferred Dividends
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions, after-tax)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
557

 
$
524

 
$
1,353

 
$
1,193

Less: Net realized investment gains
 
(20
)
 
(30
)
 
(61
)
 
(21
)
Core income
 
$
537

 
$
494

 
$
1,292

 
$
1,172

 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions, pre-tax)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
665

 
$
631

 
$
1,632

 
$
1,409

Less: Net realized investment gains
 
(25
)
 
(36
)
 
(78
)
 
(25
)
Core income
 
$
640

 
$
595

 
$
1,554

 
$
1,384

 
 
 
Twelve Months Ended December 31,
($ in millions, after-tax)
 
2018
 
2017
 
2016
 
2015
 
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
Net income
 
$2,523
 
$2,056
 
$3,014
 
$3,439
 
$3,692
 
$3,673
 
$2,473
 
$1,426
 
$3,216
 
$3,622
 
$2,924
 
$4,601
 
$4,208
 
$1,622
Less: Loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(439)
Income from continuing operations
 
2,523
 
2,056
 
3,014
 
3,439
 
3,692
 
3,673
 
2,473
 
1,426
 
3,216
 
3,622
 
2,924
 
4,601
 
4,208
 
2,061
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized investment (gains) losses
 
(93)
 
(142)
 
(47)
 
(2)
 
(51)
 
(106)
 
(32)
 
(36)
 
(173)
 
(22)
 
271
 
(101)
 
(8)
 
(35)
Impact of TCJA at enactment (1)
 
 
129
 
 
 
 
 
 
 
 
 
 
 
 
Core income
 
2,430
 
2,043
 
2,967
 
3,437
 
3,641
 
3,567
 
2,441
 
1,390
 
3,043
 
3,600
 
3,195
 
4,500
 
4,200
 
2,026
Less: Preferred dividends
 
 
 
 
 
 
 
 
1
 
3
 
3
 
4
 
4
 
5
 
6
Core income, less preferred dividends
 
$2,430
 
$2,043
 
$2,967
 
$3,437
 
$3,641
 
$3,567
 
$2,441
 
$1,389
 
$3,040
 
$3,597
 
$3,191
 
$4,496
 
$4,195
 
$2,020
 (1) Tax Cuts and Jobs Act of 2017 (TCJA)

Reconciliation of Net Income per Share to Core Income per Share on a Basic and Diluted Basis
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Basic income per share
 
 

 
 

 
 

 
 

Net income
 
$
2.11

 
$
1.93

 
$
5.12

 
$
4.39

Adjustments:
 
 

 
 

 
 

 
 

Net realized investment gains, after-tax
 
(0.07
)
 
(0.10
)
 
(0.23
)
 
(0.08
)
Core income
 
$
2.04

 
$
1.83

 
$
4.89

 
$
4.31

Diluted income per share
 
 

 
 

 
 

 
 

Net income
 
$
2.10

 
$
1.92

 
$
5.08

 
$
4.35

Adjustments:
 
 

 
 

 
 

 
 

Net realized investment gains, after-tax
 
(0.08
)
 
(0.11
)
 
(0.23
)
 
(0.08
)
Core income
 
$
2.02

 
$
1.81

 
$
4.85

 
$
4.27



13



Reconciliation of Segment Income (Loss) to Total Core Income
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions, after-tax)
 
2019
 
2018
 
2019
 
2018
Business Insurance
 
$
351

 
$
385

 
$
765

 
$
837

Bond & Specialty Insurance
 
174

 
204

 
312

 
377

Personal Insurance
 
88

 
(17
)
 
366

 
112

Total segment income
 
613

 
572

 
1,443

 
1,326

Interest Expense and Other
 
(76
)
 
(78
)
 
(151
)
 
(154
)
Total core income
 
$
537

 
$
494

 
$
1,292

 
$
1,172

 
RECONCILIATION OF SHAREHOLDERS’ EQUITY TO ADJUSTED SHAREHOLDERS’ EQUITY AND CALCULATION OF RETURN ON EQUITY AND CORE RETURN ON EQUITY
 
Adjusted shareholders’ equity is shareholders’ equity excluding net unrealized investment gains (losses), net of tax, included in shareholders’ equity, net realized investment gains (losses), net of tax, for the period presented, the effect of a change in tax laws and tax rates at enactment (excluding the portion related to net unrealized investment gains (losses)), preferred stock and discontinued operations.
 
Reconciliation of Shareholders’ Equity to Adjusted Shareholders’ Equity
 
 
As of June 30,
($ in millions)
 
2019
 
2018
Shareholders’ equity
 
$
25,321

 
$
22,623

Adjustments:
 
 
 
 
Net unrealized investment (gains) losses, net of tax, included in shareholders’ equity
 
(1,878
)
 
112

Net realized investment gains, net of tax
 
(61
)
 
(21
)
Adjusted shareholders’ equity
 
$
23,382

 
$
22,714


 
 
As of December 31,
($ in millions)
 
2018
 
2017
 
2016
 
2015
 
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
Shareholders’ equity
 
$22,894
 
$23,731
 
$23,221
 
$23,598
 
$24,836
 
$24,796
 
$25,405
 
$24,477
 
$25,475
 
$27,415
 
$25,319
 
$26,616
 
$25,135
 
$22,303
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized investment (gains) losses, net of tax, included in shareholders’ equity
 
113
 
(1,112)
 
(730)
 
(1,289)
 
(1,966)
 
(1,322)
 
(3,103)
 
(2,871)
 
(1,859)
 
(1,856)
 
146
 
(620)
 
(453)
 
(327)
Net realized investment (gains) losses, net of tax
 
(93)
 
(142)
 
(47)
 
(2)
 
(51)
 
(106)
 
(32)
 
(36)
 
(173)
 
(22)
 
271
 
(101)
 
(8)
 
(35)
Impact of TCJA at enactment
 
 
287
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
 
 
 
 
 
 
 
 
 
(68)
 
(79)
 
(89)
 
(112)
 
(129)
 
(153)
Loss from discontinued operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
439
Adjusted shareholders’ equity
 
$22,914
 
$22,764
 
$22,444
 
$22,307
 
$22,819
 
$23,368
 
$22,270
 
$21,570
 
$23,375
 
$25,458
 
$25,647
 
$25,783
 
$24,545
 
$22,227

Return on equity is the ratio of annualized net income (loss) less preferred dividends to average shareholders’ equity for the periods presented. Core return on equity is the ratio of annualized core income (loss) less preferred dividends to adjusted average shareholders’ equity for the periods presented. In the opinion of the Company’s management, these are important indicators of how well management creates value for its shareholders through its operating activities and its capital management.

Average shareholders’ equity is (a) the sum of total shareholders’ equity excluding preferred stock at the beginning and end of each of the quarters for the period presented divided by (b) the number of quarters in the period presented times two. Adjusted average shareholders’ equity is (a) the sum of total adjusted shareholders’ equity at the beginning

14



and end of each of the quarters for the period presented divided by (b) the number of quarters in the period presented times two.
 
Calculation of Return on Equity and Core Return on Equity
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in millions, after-tax)
 
2019
 
2018
 
2019
 
2018
Annualized net income
 
$
2,226

 
$
2,094

 
$
2,706

 
$
2,385

Average shareholders’ equity
 
24,831

 
22,801

 
24,224

 
23,078

Return on equity
 
9.0
%
 
9.2
%
 
11.2
%
 
10.3
%
Annualized core income
 
$
2,147

 
$
1,978

 
$
2,583

 
$
2,344

Adjusted average shareholders’ equity
 
23,378

 
22,776

 
23,264

 
22,757

Core return on equity
 
9.2
%
 
8.7
%
 
11.1
%
 
10.3
%
 
Average annual core return on equity over a period is the ratio of:
a) the sum of core income less preferred dividends for the periods presented to b) the sum of: 1) the sum of the adjusted average shareholders’ equity for all full years in the period presented, and 2) for partial years in the period presented, the number of quarters in that partial year divided by four, multiplied by the adjusted average shareholders’ equity of the partial year.
 
Calculation of Average Annual Core Return on Equity from January 1, 2005 through June 30, 2019
 
 
Six Months Ended June 30,
 
Twelve Months Ended December 31,
($ in millions)
 
2019
 
2018
 
2018
 
2017
 
2016
 
2015
 
2014
 
2013
 
2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
2005
Core income, less preferred dividends
 
$1,292
 
$1,172
 
$2,430
 
$2,043
 
$2,967
 
$3,437
 
$3,641
 
$3,567
 
$2,441
 
$1,389
 
$3,040
 
$3,597
 
$3,191
 
$4,496
 
$4,195
 
$2,020
Annualized core income
 
2,583
 
2,344
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted average shareholders’ equity
 
23,264
 
22,757
 
22,814
 
22,743
 
22,386
 
22,681
 
23,447
 
23,004
 
22,158
 
22,806
 
24,285
 
25,777
 
25,668
 
25,350
 
23,381
 
21,118
Core return on equity
 
11.1%
 
10.3%
 
10.7%
 
9.0%
 
13.3%
 
15.2%
 
15.5%
 
15.5%
 
11.0%
 
6.1%
 
12.5%
 
14.0%
 
12.4%
 
17.7%
 
17.9%
 
9.6%
Average annual core return on equity for the period Jan. 1, 2005 through June 30, 2019
 
12.9%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

RECONCILIATION OF PRE-TAX UNDERWRITING GAIN EXCLUDING CERTAIN ITEMS TO NET INCOME

Underwriting gain (loss) is net earned premiums and fee income less claims and claim adjustment expenses and insurance-related expenses. In the opinion of the Company’s management, it is important to measure the profitability of each segment excluding the results of investing activities, which are managed separately from the insurance business. This measure is used to assess each segment’s business performance and as a tool in making business decisions. Pre-tax underwriting gain, excluding the impact of catastrophes and net favorable (unfavorable) prior year loss reserve development, is the underwriting gain adjusted to exclude claims and claim adjustment expenses, reinstatement premiums and assessments related to catastrophes and loss reserve development related to time periods prior to the current year. In the opinion of the Company’s management, this measure is meaningful to users of the financial statements to understand the Company’s periodic earnings and the variability of earnings caused by the unpredictable nature (i.e., the timing and amount) of catastrophes and loss reserve development. This measure is also referred to as underlying underwriting margin or underlying underwriting gain.

A catastrophe is a severe loss designated a catastrophe by internationally recognized organizations that track and report on insured losses resulting from catastrophic events, such as Property Claim Services (PCS) for events in the United States and Canada. Catastrophes can be caused by various natural events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions and other naturally occurring events, such as solar flares. Catastrophes can also be man-made, such as terrorist attacks and other intentionally destructive acts including those involving nuclear, biological, chemical and radiological events, cyber events, explosions and destruction of infrastructure. Each catastrophe has unique characteristics and catastrophes are not predictable as to timing or amount. Their effects are included in net and core income and claims and claim adjustment expense reserves upon occurrence. A catastrophe may result in the payment of reinsurance reinstatement premiums and assessments from various pools.


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The Company’s threshold for disclosing catastrophes is primarily determined at the reportable segment level. If a threshold for one segment or a combination thereof is exceeded and the other segments have losses from the same event, losses from the event are identified as catastrophe losses in the segment results and for the consolidated results of the Company. Additionally, an aggregate threshold is applied for international business across all reportable segments. The threshold for 2019 ranges from approximately $19 million to $30 million of losses before reinsurance and taxes.

Net favorable (unfavorable) prior year loss reserve development is the increase or decrease in incurred claims and claim adjustment expenses as a result of the re-estimation of claims and claim adjustment expense reserves at successive valuation dates for a given group of claims, which may be related to one or more prior years. In the opinion of the Company’s management, a discussion of loss reserve development is meaningful to users of the financial statements as it allows them to assess the impact between prior and current year development on incurred claims and claim adjustment expenses, net and core income (loss), and changes in claims and claim adjustment expense reserve levels from period to period.

Components of Net Income
 
 
Three Months Ended June 30,