Dear Shareholders,
In 2022, we delivered very strong top- and bottom-line results in the face of a challenging operating environment, proving once again that we are built to manage whatever comes our way. We generated $3.0 billion* of core income and 11.3% core return on equity despite high levels of inflation and elevated catastrophe losses of $1.5 billion after-tax.
We again benefited meaningfully from having a diversified set of businesses. Our Business Insurance and our Bond & Specialty Insurance segments posted exceptional results this past year, while our Personal Insurance segment was heavily impacted by the inflationary environment. Our underwriting and investment results, together with our strong balance sheet, enabled us to return nearly $3.0 billion of excess capital to shareholders, including more than $2.0 billion of share repurchases. At the same time as we returned capital to our shareholders, we grew adjusted book value per share and made important investments in our business. From a top-line perspective, our best-in-class marketplace strategies enabled us to achieve record net written premiums of more than $35 billion for the year, positioning us well for 2023.
Our results in 2022 cap off a decade of strong and consistent performance. We have posted a double-digit return on equity in each of the last 10 years, except for 2017, a difficult catastrophe year for the industry (with three hurricanes and wildfires in California), in which we posted a 9% return on equity. In every one of those years, our return on equity comfortably covered our cost of equity. Over the past six years as compared to the prior years in the past decade, we have doubled our rate of growth, sustained strong underlying underwriting margins and meaningfully lowered our expense ratio.
This has resulted in higher underlying underwriting income, stronger cash flows and higher levels of invested assets. These results, through different and often challenging economic and market conditions, are the product of a sound strategy and the successful achievement of our strategic objectives.
Now, let me turn to a more detailed discussion of our 2022 performance and how we are positioning Travelers for continued success.
Our 2022 Results – Excellence in Execution
Travelers generated strong core income of $3.0 billion, or $12.42 of core income per diluted share, producing an industry-leading core return on equity of 11.3%, a meaningful spread above both the 10-year Treasury and our cost of equity.
We again delivered very strong underlying underwriting income of $2.1 billion after-tax, driven by record net earned premiums and an underlying combined ratio of 92.0%. Despite the challenging environment, 2022 was the third year in a row that underlying underwriting income has exceeded $2.0 billion. Through higher business volumes and continued strong profitability, we have driven underlying underwriting income to a new, higher level and sustained it there. This result reflects the success we have had executing on our innovation strategy, and demonstrates both the quality of our underwriting and the discipline with which we run our business.
We also improved our expense ratio to a record-low 28.5% during the year, a 90-basis-point improvement compared to the prior year and a 10% improvement over the past six years. We achieved this by leveraging our investments in cutting-edge technology and workflow enhancements, and not by depriving our business of important investments. Improving operating leverage continues to be a priority for us. It gives us the flexibility to invest the gains in our strategic priorities or let the benefit fall to the bottom line.
Our cash flow from operations remained very strong at $6.5 billion in 2022. This primarily reflects the benefit of continued increases in premium volume and strong profitability. Our cash flow from operations has increased significantly over the last six years, with the average annual cash flow from operations for that period approximately 50% higher than the average for the prior years in the past decade. Strong cash flow enables us to make significant investments in our business, return excess capital to shareholders and grow our investment portfolio. Over that same six years, our investment portfolio, excluding unrealized investment gains (losses), grew by $17 billion, or 24%, to $86.7 billion at year-end.
With rates possibly “higher for longer,” net investment income from our fixed income portfolio should continue to grow and meaningfully contribute to our results going forward.
Our Data-Driven Underwriting Expertise Sets Us Apart
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.
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 risk profile, 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.
Like every aspect of our business, our focus on performance over time is core to how we manage our catastrophe exposure. Although we are unable to predict what the next event will be or where it will occur, we are taking steps every day to ensure that our portfolio of risk properly contemplates the potential for loss and that we maintain the right balance of risk and reward. While the impact of the risk-based decisions we are making today is not always evident immediately, they will continue to drive our performance over time.
Perform and Transform – A Call to Action Put to Work
For a number of years now, our employees have rallied around our Perform and Transform call to action. Perform is about delivering on our objective of industry-leading returns, and Transform is about ensuring that our competitive advantages remain relevant and differentiating into the future.
Our competitive advantages, which are meaningful and hard to replicate, fall into five general categories.
We start with risk selection, underwriting and pricing segmentation. Understanding risk, and the products and services our customers need to manage risk, has been critical to our success for decades. It is the bedrock of our business.
We also stand out in terms of product breadth and specialization. We engage in nine major lines of business through our three business segments. Our portfolio is broad, balanced and diversified.
When it comes to distribution, we have the premier position. We go to market through more than 13,000 agents and brokers. We are a top-three writer with the majority of those 13,000 agent and broker partners serviced by 86 field offices, which gives us a local presence in the markets in which we operate. We are a large, international firm, but we can operate on a local basis in the markets where we choose.
In terms of risk control, we are industry leading. We have more than 600 risk control professionals and conduct more than 120,000 risk consultations every year. Having done that for many years, we have a proprietary risk database with more than 200 million data points in it. We not only utilize this data in our risk control and risk management activities, we funnel it back into our underwriting, risk selection and pricing, which gives us a significant advantage.
And, finally, our Claim organization remains a crown jewel of our organization. It is both at the heart of the promise we make to our customers and a significant competitive advantage. Our Claim organization comprises nearly 13,000 professionals, including approximately 750 lawyers who represent our insureds and more than 500 nurses who support injured workers in our workers compensation business, helping them get back on their feet.
Underlying these competitive advantages are four key enablers that set us apart – our talent and expertise, industry-leading data and analytics, technology and financial strength. Our competitive advantages and these enablers are foundational to the success of our long-term financial strategy.
Nonetheless, we understand clearly that the world is changing, and changing quickly. Given the pace of change, a number of years ago, we were deliberate in identifying four primary forces of change that are relevant to our business: changing consumer expectations, emerging technology trends, increasingly sophisticated data and analytics, and evolving distribution models.
Based on our evaluation of how these forces of change were impacting our business, it was clear to us that an ambitious innovation agenda was going to be critical to our future success. With that in mind, we established a clear vision to guide that agenda: to be the undeniable choice for the customer and an indispensable partner for our agents and brokers.
That is the clear and simple vision that guides our innovation strategy, and we established three priorities to drive it forward.
2022 Net Written Premiums
Unique Product Breadth and Specialization
Business Insurance generated segment income of $2.5 billion and produced its best-ever underlying combined ratio of 90.9%. Business Insurance also grew its top line by 10% to a record $17.6 billion. Renewal premium change of 9.7% was a near record, while retention remained historically high. New business was also strong at $2.1 billion.
Bond & Specialty Insurance generated record segment income of more than $900 million, up 36%, and produced an outstanding combined ratio of 75.3%. Bond & Specialty Insurance grew its top line by 11% to a record $3.7 billion, including solid growth in its market-leading domestic surety business. By leveraging its domestic leadership position, Bond & Specialty Insurance also grew net written premiums in its international businesses by 7%.
Bond & Specialty Insurance also continued to make terrific progress on its transform agenda. For example, Bond & Specialty Insurance completed the development of flow/low-touch management liability underwriting capabilities to facilitate cross-sell opportunities with Business Insurance. This initiative positions Bond & Specialty Insurance’s efforts to expand its addressable management liability market and also supports Business Insurance’s strategy of One Customer Served By One Team.
Personal Insurance generated a loss of $140 million and a combined ratio of 104.9%, primarily due to the impact of industrywide inflationary pressures. Personal Insurance met a challenging environment head-on and took action to address rising loss costs. We are confident that the actions we have taken, and will continue to take, will drive improved profitability as we move through 2023 and beyond.
Personal Insurance grew its top line by 12% to a record $14.1 billion, while domestic policies in force grew 3% to a record 9 million. In Personal Insurance, top-line growth was driven by higher pricing. Renewal premium change alone contributed more than $1 billion of written premium to our portfolio over the past year. We expect renewal premium change for both Domestic Automobile and Homeowners and Other to be in the double digits throughout 2023.
Personal Insurance also continued to invest in capabilities to drive its top-tier financial performance over time. For example, Personal Insurance introduced new artificial intelligence-enabled aerial imagery insights to enhance its property underwriting and risk selection while also simplifying the quoting process for our agent and broker partners.
First, we seek to extend our advantage in risk expertise.
We have been a leading property casualty insurer over many years by being excellent at understanding risk and the products and services our customers need to manage their risk. For us, it is an imperative that we continue to maintain and strengthen this advantage.
Next, we are laser-focused on providing great experiences for our customers, distribution partners and employees. We are investing in technologies, capabilities and talent to become faster, nimbler, more digital, more mobile and more personalized.
Finally, we are highly focused on optimizing productivity and efficiency. This is not about just tightening the belt; it is about bringing a real strategic lens to the way we think about how we do what we do in an effort to do more with less.
In executing on our innovation agenda, over the past five years we have meaningfully increased our overall technology spend. At the same time, through our strategic focus on productivity and efficiency, we have significantly reduced our expense ratio. Importantly, we have also improved the mix of our technology spend, increasing our spending on strategic initiatives by nearly 70% since 2017 while holding routine but necessary expenditures about flat. Given the opportunity to invest and transform the way business is done, we think scale is going to be increasingly important in this business.
Technology Investments
The Compounding Benefits of Our Innovation Strategy
When we first articulated our innovation strategy several years ago, we made clear that it was designed in large part to position us to grow over time at leading returns.
The charts on the facing page illustrate this strategy at work and its compounding, multiyear benefit. We have doubled our rate of growth, sustained strong underlying underwriting margins and lowered our expense ratio. That has resulted in higher underlying underwriting income, stronger cash flows and higher levels of invested assets.
We have not grown by underpricing the product or by changing our risk profile. We have grown by investing in franchise value and through great execution by our colleagues in the field. Importantly, the business that we are putting on the books is coming from products, geographies, classes of business and distribution partners that we know well, which gives us great confidence in the quality of the business we are writing.
Consistent and Successful Long-Term Financial Strategy Delivers Shareholder Value
It is important to consider our strategic initiatives and financial 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 this 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 will be 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. While the 10-year Treasury rate increased during 2022, this increase will take time to earn into our fixed income portfolio, with less than 10% of the fixed income portfolio maturing each year. Our ability to achieve a mid-teens return over time going forward will depend, in part, on the interest rate environment. In any event, we always seek to deliver industry-leading returns over time.
2022 Financial Results in the Context of Our Innovation Strategy
Accelerating Net Written Premium Growth
Higher Underlying Underwriting Income (after-tax)
Higher Cash Flow from Operations
Growing Invested Assets
Improving Expense Ratio
Consistently Strong Underlying Profitability
Our 2022 return on equity of 12.2% and core return on equity of 11.3% again meaningfully exceeded the average return on equity for the domestic P&C industry of 1.6%, according to estimates from Conning, Inc., 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-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.
A Balanced Approach to Rightsizing Capital
Our strong and consistent returns over time, together with our fortress balance sheet, have enabled us to grow book value per share and adjusted book value per share at a compound annual growth rate of 3% and 6%, respectively, over the last 10 years.
During this period, we have also returned a significant amount of excess capital to our shareholders through dividends and share repurchases. Over the last 10 years, we increased our dividend each year and grew dividends per share at an average annual rate of approximately 7%.
Notably, since we began our share repurchase program in 2006, we have returned approximately $53 billion of excess capital to our shareholders, including through $40 billion of share repurchases – 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 4% during 2022 alone. If you owned Travelers stock when we began our share repurchase program in 2006, your percentage ownership has increased by approximately 300%. These percentage increases were even higher if you participated in our dividend reinvestment program.
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