Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the Company’s financial condition and results of operations.

FINANCIAL HIGHLIGHTS

2021 Third Quarter Consolidated Results of Operations

Net income of $662 million, or $2.65 per share basic and $2.62 per share diluted
Net earned premiums of $7.83 billion
Catastrophe losses of $501 million ($395 million after-tax)
Net unfavorable prior year reserve development of $56 million ($44 million after-tax)
Combined ratio of 98.6%
Net investment income of $771 million ($645 million after-tax)
Net realized investment gains of $8 million ($7 million after-tax)
Operating cash flows of $2.54 billion

2021 Third Quarter Consolidated Financial Condition

Total investments of $87.51 billion; fixed maturities and short-term securities comprised 93% of total investments
Total assets of $120.71 billion
Total debt of $7.29 billion, resulting in a debt-to-total capital ratio of 20.4% (22.0% excluding net unrealized investment gains, net of tax)
Total capital returned to shareholders of $821 million, comprising $601 million of share repurchases and $220 million of dividends
Shareholders’ equity of $28.47 billion
Net unrealized investment gains of $3.43 billion ($2.70 billion after-tax)
Book value per common share of $115.74
Holding company liquidity of $2.01 billion

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

CONSOLIDATED OVERVIEW

Consolidated Results of Operations


	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions, except ratio and per share amounts)	2021			2020			2021			2020

Revenues
Premiums	$	7,829		$	7,380		$	22,831		$	21,564
Net investment income	771			671			2,290			1,550
Fee income	97			101			302			323
Net realized investment gains (losses)	8			37			113			(48)
Other revenues	100			86			269			195
Total revenues	8,805			8,275			25,805			23,584

Claims and expenses
Claims and claim adjustment expenses	5,464			4,886			15,479			14,782
Amortization of deferred acquisition costs	1,281			1,207			3,742			3,558
General and administrative expenses	1,187			1,109			3,524			3,367
Interest expense	87			87			252			256
Total claims and expenses	8,019			7,289			22,997			21,963
Income before income taxes	786			986			2,808			1,621
Income tax expense	124			159			479			234
Net income	$	662		$	827		$	2,329		$	1,387

Net income per share
Basic	$	2.65		$	3.24		$	9.24		$	5.44
Diluted	$	2.62		$	3.23		$	9.16		$	5.41

Combined ratio
Loss and loss adjustment expense ratio	69.2		%	65.6		%	67.2		%	67.8		%
Underwriting expense ratio	29.4			29.3			29.6			30.1
Combined ratio	98.6		%	94.9		%	96.8		%	97.9		%

The following discussions of the Company’s net income and segment income are presented on an after-tax basis. Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted. Discussions of net income per common share are presented on a diluted basis.

Overview

Diluted net income per share of $2.62 in the third quarter of 2021 decreased by 19% from diluted net income per share of $3.23 in the same period of 2020. Net income of $662 million in the third quarter of 2021 decreased by 20% from net income of $827 million in the same period of 2020. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in income before income taxes in the third quarter of 2021 primarily reflected the pre-tax impacts of (i) net unfavorable prior year reserve development compared to net favorable prior year reserve development in the same period of 2020, (ii) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties) and (iii) lower net realized investment gains, partially offset by (iv) higher net investment income and (v) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"). Net unfavorable prior year reserve development in the third quarter of 2021 was $56 million, as compared to net favorable prior year reserve development in the same period of 2020 of $142 million. Catastrophe losses in the third quarters of 2021 and 2020 were $501 million and $397 million, respectively. The higher underlying underwriting margins in the third quarter of 2021 were driven by Business Insurance and Bond & Specialty Insurance, partially offset by Personal Insurance. Underlying underwriting margins in the third quarters of both 2021 and 2020 included a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the third quarter of 2021 was lower than in the same period of 2020, primarily reflecting the impact of the decrease in income before income taxes.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Diluted net income per share of $9.16 in the first nine months of 2021 increased by 69% over diluted net income per share of $5.41 in the same period of 2020. Net income of $2.33 billion in the first nine months of 2021 increased by 68% over net income of $1.39 billion in the same period of 2020. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) higher net investment income, (ii) higher net favorable prior year reserve development, (iii) higher underlying underwriting margins and (iv) net realized investment gains compared to net realized investment losses in the same period of 2020, partially offset by (v) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties). Net favorable prior year reserve development in the first nine months of 2021 and 2020 was $443 million and $171 million, respectively. Catastrophe losses in the first nine months of 2021 and 2020 were $1.81 billion and $1.58 billion, respectively. The higher underlying underwriting margins in the first nine months of 2021 were driven by Business Insurance and Bond & Specialty Insurance, partially offset by Personal Insurance. Underlying underwriting margins in the first nine months of both 2021 and 2020 reflected a net favorable impact from COVID-19 and related economic conditions. Income tax expense in the first nine months of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in income before income taxes.

For discussion regarding the impact of COVID-19 and related economic conditions on the Company's results for the year ended December 31, 2020, see “Part II—Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Annual Report. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see “Outlook” herein and “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in “Part I—Item 1A—Risk Factors” in the Company's 2020 Annual Report.

The Company has insurance operations in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s, as well as in Brazil and Colombia through joint ventures. Because these operations are conducted in local currencies other than the U.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the three months and nine months ended September 30, 2021 and 2020, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company’s net income or segment income for the periods reported.

Revenues

Earned Premiums

Earned premiums in the third quarter of 2021 were $7.83 billion, $449 million or 6% higher than in the same period of 2020. Earned premiums in the first nine months of 2021 were $22.83 billion, $1.27 billion or 6% higher than in the same period of 2020. In Business Insurance, earned premiums in the third quarter and first nine months of 2021 increased by 3% and 2%, respectively, over the same periods of 2020. Earned premiums in Business Insurance in both periods of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case impacted by COVID-19 and related economic conditions. Earned premiums in Business Insurance in both periods of 2020 were negatively impacted by reduced exposures and reductions in the Company's estimate of ultimate audit premiums receivable, in each case reflecting the impact of COVID-19 and related economic conditions, including a decrease in new business levels. In Bond & Specialty Insurance, earned premiums in the third quarter and first nine months of 2021 increased by 11% and 12%, respectively, over the same periods of 2020. Earned premiums in Bond & Specialty Insurance in both periods of 2021 and 2020 were not materially impacted by COVID-19 and related economic conditions. In Personal Insurance, earned premiums in the third quarter and first nine months of 2021 increased by 8% and 10%, respectively, over the same periods of 2020. Earned premiums in Personal Insurance in both periods of 2021 were not materially impacted by COVID-19 and related economic conditions. Earned premiums in Personal Insurance in the first nine months of 2020 were reduced by premium refunds provided to personal automobile customers, primarily in the second quarter of 2020, in response to COVID-19 and related economic conditions. Factors contributing to the changes in earned premiums in each segment are discussed in more detail in the segment discussions that follow.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Net Investment Income

The following table sets forth information regarding the Company’s investments.


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020
Average investments (1)	$	84,647		$	78,722		$	82,854		$	77,304
Pre-tax net investment income	771			671			2,290			1,550
After-tax net investment income	645			566			1,917			1,336
Average pre-tax yield (2)	3.6		%	3.4		%	3.7		%	2.7		%
Average after-tax yield (2)	3.0		%	2.9		%	3.1		%	2.3		%

(1)Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.

(2)Excludes net realized and net unrealized investment gains and losses.

Net investment income in the third quarter of 2021 was $771 million, $100 million or 15% higher than in the same period of 2020. Net investment income in the first nine months of 2021 was $2.29 billion, $740 million or 48% higher than in the same period of 2020. Net investment income from fixed maturity investments in the third quarter and first nine months of 2021 was $497 million and $1.48 billion, respectively, $5 million and $30 million lower, respectively, than in the same periods of 2020. The decreases primarily resulted from lower long-term interest rates, partially offset by a higher average level of fixed maturity investments. Net investment income from short-term securities in the third quarter and first nine months of 2021 was $2 million and $6 million, respectively, $4 million and $35 million lower, respectively, than in the same periods of 2020. The decreases in both periods of 2021 primarily resulted from lower short-term interest rates. The Company's remaining investment portfolios had net investment income of $281 million and $834 million in the third quarter and first nine months of 2021, respectively, $108 million and $807 million higher, respectively, than in the same periods of 2020. Included in other investments are private equity, hedge fund and real estate partnerships that are accounted for under the equity method of accounting and typically report their financial statement information to the Company one month to three months following the end of the reporting period. Accordingly, net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. Net investment income from these investments in the first nine months of 2020 included the impact of the disruption in global financial markets associated with COVID-19.

Fee Income

Fee income in the third quarter of 2021 was $97 million, $4 million lower than in the same period of 2020. Fee income in the first nine months of 2021 was $302 million, $21 million lower than in the same period of 2020. The National Accounts market in Business Insurance is the primary source of the Company’s fee-based business and is discussed in the Business Insurance segment discussion that follows.

Net Realized Investment Gains (Losses)

The following table sets forth information regarding the Company’s net realized investment gains (losses).


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Credit impairment gains (losses):
Fixed maturities	$	(1)	$	4	$	(1)	$	(18)
Other investments	—		—		—		(40)
Net realized investment gains (losses) on equity securities still held	(6)		19		45		(14)
Other net realized investment gains, including from sales	15		14		69		24
Total	$	8	$	37	$	113	$	(48)

Net realized investment gains (losses) on equity securities still held of $(6) million and $45 million in the third quarter and first nine months of 2021, respectively. Net realized investment gains for the first nine months of 2021 were driven by the impact of changes in fair value attributable to favorable equity markets. Net realized investment gains (losses) on equity securities still held of $19 million and $(14) million in the third quarter and first nine months of 2020 were driven by the impact of changes in

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

fair value attributable to the disruption in global financial markets associated with the global pandemic beginning in March 2020.

In the second quarter of 2020, the Company recorded a $40 million credit impairment loss from the other-than-temporary

impairment of the carrying value of a joint venture investment included in other investments.

Other Revenues

Other revenues in the third quarters and first nine months of both 2021 and 2020 included revenues from Simply Business and installment premium charges. Installment premium charges in the first nine months of 2020 were reduced by billing relief actions offered to customers as a result of COVID-19.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in the third quarter of 2021 were $5.46 billion, $578 million or 12% higher than in the same period of 2020, primarily reflecting the impacts of (i) net unfavorable prior year reserve development compared to net favorable prior year reserve development in the same period of of 2020, (ii) higher catastrophe losses, (iii) loss cost trends, (iv) higher losses in the automobile product line in Personal Insurance due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic and (v) higher business volumes, partially offset by (vi) lower losses in the homeowners and other product line in Personal Insurance due to a comparison to a high level of loss activity in the prior year quarter and (vii) a lower level of property losses in Business Insurance. Catastrophe losses in the third quarter of 2021 primarily resulted from Hurricane Ida and severe storms in several regions of the United States. Catastrophe losses in the third quarter of 2020 primarily resulted from the derecho windstorm in the midwestern region of the United States, the Glass wildfire in California, Tropical Storm Isaias, Hurricane Laura and additional wildfires in the western United States. The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses are discussed in more detail in the segment discussions that follow.

Claims and claim adjustment expenses in the first nine months of 2021 were $15.48 billion, $697 million or 5% higher than in the same period of 2020, primarily reflecting the impacts of (i) higher catastrophe losses, (ii) loss cost trends, (iii) higher business volumes, (iv) higher losses in the automobile product line in Personal Insurance due to a comparison to a low level of loss activity in the prior year period as a result of the pandemic and (v) higher losses in the homeowners and other product line in Personal Insurance, partially offset by (vi) higher net favorable prior year reserve development and (vii) a net favorable impact associated with COVID-19 and related economic conditions in Business Insurance and Bond & Specialty Insurance compared to a net charge in the prior year period. Catastrophe losses in the first nine months of 2021 included the third quarter events described above, as well as winter storms and severe wind and hail storms in several regions of the United States in the first six months of 2021. Catastrophe losses in the first nine months of 2020 included the third quarter events described above, as well as tornado activity in Tennessee and other wind storms and winter storms in several regions of the United States in the first quarter of 2020 and severe storms in several regions of the United States and civil unrest in the second quarter of 2020. The impacts of COVID-19 and related economic conditions on claims and claim adjustment expenses are discussed in more detail in the segment discussions that follow.

Factors contributing to net prior year reserve development during the third quarters and first nine months of 2021 and 2020 are discussed in more detail in note 7 of notes to the unaudited consolidated financial statements.

Significant Catastrophe Losses

The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in the three months and nine months ended September 30, 2021 and 2020, the amount of net unfavorable (favorable) prior year reserve development recognized in the three months and nine months ended September 30, 2021 and 2020 for significant catastrophes that occurred in 2020 and 2019, and the estimate of ultimate losses for those catastrophes at September 30, 2021 and December 31, 2020. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes. The Company's threshold for disclosing catastrophes is primarily determined at the reportable segment level and for 2021 ranged from $20 million to $30 million of losses before reinsurance and taxes. For the Company’s definition of a catastrophe, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— Consolidated Overview” in the Company’s 2020 Annual Report.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


		Losses Incurred/Unfavorable (Favorable) Prior Year Reserve Development
		Three Months Ended September 30,				Nine Months Ended September 30,
	Estimated Ultimate Losses
(in millions, pre-tax and net of reinsurance) (1)	2021		2020		2021		2020	September 30, 2021	December 31, 2020
						'



















2019
PCS Serial Number:
33 — Severe wind storms		(3)		1		(5)		8	253	258
61 — Severe wind storms and tornadoes		(3)		1		(11)		12	106	117

2020
PCS Serial Number:
16 — Tennessee tornado activity		(7)		(14)		(10)		157	141	151
19 — Severe storms		(4)		12		(15)		133	119	134
20 — Severe storms		(6)		(10)		(20)		179	145	165
33 — Civil unrest		1		16		(1)		107	99	100
44 — Tropical Storm Isaias		(7)		147		(21)		147	119	140
46 — Midwest derecho		2		206		(8)		206	204	212
68 — California wildfire - Glass fire		(1)		132		(9)		132	136	145

2021
PCS Serial Number:
15 — Winter storms		1		n/a		214		n/a	214	n/a
17 — Winter storms		13		n/a		508		n/a	508	n/a
29 — Severe wind storms		(28)		n/a		123		n/a	123	n/a
60 — Hurricane Ida		425		n/a		425		n/a	425	n/a

(1) Amounts are reported pre-tax and net of recoveries under all applicable reinsurance treaties, except for the Company's 2021, 2020 and 2019 Underlying Property Aggregate Catastrophe Excess-of-Loss Treaties, the terms of which are described in "Part I—Item 1—Business" in the Company's 2020 Annual Report. Those treaties covered the accumulation of certain property losses arising from one or multiple occurrences (both catastrophe and non-catastrophe events) for the period January 1, 2021 through and including December 31, 2021, the period January 1, 2020 through and including December 31, 2020 and the period January 1, 2019 through and including December 31, 2019, respectively. As a result, the benefits from those treaties are not included in the table above as the allocation of the treaty's benefit to each identified catastrophe changes each time there are additional events or changes in estimated losses from any covered event.

n/a: not applicable.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in the third quarter of 2021 was $1.28 billion, $74 million or 6% higher than in the same period of 2020. Amortization of deferred acquisition costs in the first nine months of 2021 was $3.74 billion, $184 million or 5% higher than in the same period of 2020. The increases in both periods of 2021 were generally consistent with the increases in earned premiums. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

General and Administrative Expenses

General and administrative expenses in the third quarter of 2021 were $1.19 billion, $78 million or 7% higher than in the same period of 2020. General and administrative expenses in the first nine months of 2021 were $3.52 billion, $157 million or 5% higher than in the same period of 2020. The increases in both periods of 2021 primarily reflected the impact of costs associated with higher business volumes. The benefit of lower net expenses related to COVID-19 and related economic conditions in the first nine months of 2021 was higher than in the same period of 2020. General and administrative expenses are discussed in more detail in the segment discussions that follow.

Interest Expense

Interest expense in the third quarter and first nine months of 2021 was $87 million and $252 million, respectively, compared with $87 million and $256 million, respectively, in the same periods of 2020.

Income Tax Expense

Income tax expense in the third quarter of 2021 was $124 million, $35 million or 22% lower than in the same period of 2020, primarily reflecting the $200 million decrease in income before income taxes in the third quarter of 2021. Income tax expense in the first nine months of 2021 was $479 million, $245 million or 105% higher than in the same period of 2020, primarily reflecting the impact of the $1.19 billion increase in income before income taxes in the first nine months of 2021.

The Company’s effective tax rate was 16% in both the third quarters of 2021 and 2020. The Company's effective tax rate was 17% and 14% in the first nine months of 2021 and 2020, respectively. The effective tax rates were lower than the statutory rate of 21% in all periods, primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision.

Combined Ratio

The combined ratio of 98.6% in the third quarter of 2021 was 3.7 points higher than the combined ratio of 94.9% in the same period of 2020. The loss and loss adjustment expense ratio of 69.2% in the third quarter of 2021 was 3.6 points higher than the loss and loss adjustment expense ratio of 65.6% in the same period of 2020. The underwriting expense ratio of 29.4% for the third quarter of 2021 was 0.1 points higher than the underwriting expense ratio of 29.3% in the same period of 2020.

Catastrophe losses in the third quarters of 2021 and 2020 accounted for 6.4 points and 5.3 points, respectively, of the combined ratio. Net unfavorable prior year reserve development in the third quarter of 2021 accounted for 0.8 points of the combined ratio. Net favorable prior year reserve development in the third quarter of 2020 provided 1.9 points of benefit to the combined ratio. The combined ratio excluding prior year reserve development and catastrophe losses (“underlying combined ratio”) in the third quarter of 2021 was 0.1 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends in Business Insurance and Bond & Specialty Insurance, (ii) lower losses in the homeowners and other product line in Personal Insurance due to a comparison to a high level of loss activity in the prior year quarter and (iii) a lower level of property losses in Business Insurance, largely offset by (iv) higher losses in the automobile product line in Personal Insurance due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic.

The combined ratio of 96.8% in the first nine months of 2021 was 1.1 points lower than the combined ratio of 97.9% in the same period of 2020. The loss and loss adjustment expense ratio of 67.2% for the first nine months of 2021 was 0.6 points lower than the loss and loss adjustment expense ratio of 67.8% in the same period of 2020. The underwriting expense ratio of 29.6% for the first nine months of 2021 was 0.5 points lower than the underwriting expense ratio of 30.1% in the same period of 2020.

Catastrophe losses in the first nine months of 2021 and 2020 accounted for 7.9 points and 7.3 points, respectively, of the combined ratio. Net favorable prior year reserve development in the first nine months of 2021 and 2020 provided 1.9 points and 0.8 points of benefit, respectively, to the combined ratio. The underlying combined ratio in the first nine months of 2021 was 0.6 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends in Business Insurance and Bond & Specialty Insurance, (ii) a net favorable impact associated with COVID-19 and related economic conditions in Business Insurance and Bond & Specialty Insurance compared to a net charge in the prior year period and (iii) a lower expense ratio, partially offset by (iv) higher losses in the homeowners and other product line in Personal Insurance and (v) higher losses in the automobile product line in Personal Insurance due to a comparison to a low level of loss activity (net of premium refunds) in the prior year period as a result of the pandemic.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

The combined ratio continues to be impacted by the tort environment, including more aggressive attorney involvement in insurance claims.

Written Premiums

Consolidated gross and net written premiums were as follows:


	Gross Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Business Insurance	$	4,453	$	4,230	$	13,585	$	13,151
Bond & Specialty Insurance	984		803		2,737		2,323
Personal Insurance	3,439		3,210		9,558		8,672
Total	$	8,876	$	8,243	$	25,880	$	24,146


	Net Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Business Insurance	$	4,021	$	3,833	$	12,126	$	11,800
Bond & Specialty Insurance	894		754		2,471		2,151
Personal Insurance	3,409		3,184		9,367		8,512
Total	$	8,324	$	7,771	$	23,964	$	22,463

Gross and net written premiums in the third quarter of 2021 increased by 8% and 7%, respectively, over the same period of 2020. Gross and net written premiums in the first nine months of 2021 both increased by 7% over the same period of 2020. Gross and net written premiums in Business Insurance in both periods of 2020 were negatively impacted by reduced exposures, reflecting the impact of COVID-19 and related economic conditions, including a decrease in new business levels. Gross and net written premiums in Bond & Specialty Insurance in both periods of 2020 were negatively impacted by lower surety volumes, primarily due to COVID-19 and related economic conditions. Gross and net written premiums in Personal Insurance in both periods of 2021 and in the third quarter of 2020 were not materially impacted by COVID-19 and related economic conditions. Gross and net written premiums in Personal Insurance in the first nine months of 2020 were negatively impacted by premium refunds primarily provided in the second quarter of 2020 to personal automobile customers in response to COVID-19 and related economic conditions. Factors contributing to the changes in gross and net written premiums in each segment are discussed in more detail in the segment discussions that follow.

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MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

RESULTS OF OPERATIONS BY SEGMENT

Business Insurance

Results of Business Insurance were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020

Revenues
Earned premiums	$	3,970		$	3,841		$	11,649		$	11,440
Net investment income	575			498			1,713			1,131
Fee income	90			95			282			305
Other revenues	69			58			179			125
Total revenues	4,704			4,492			13,823			13,001

Total claims and expenses	4,040			4,088			12,007			12,358

Segment income before income taxes	664			404			1,816			643
Income tax expense	106			39			298			47
Segment income	$	558		$	365		$	1,518		$	596

Loss and loss adjustment expense ratio	67.0		%	71.8		%	67.8		%	72.8		%
Underwriting expense ratio	30.5			30.5			30.9			31.0
Combined ratio	97.5		%	102.3		%	98.7		%	103.8		%

Overview

Segment income in the third quarter of 2021 was $558 million, $193 million or 53% higher than the same period of 2020. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins, (ii) lower net unfavorable prior year reserve development and (iii) higher net investment income, partially offset by (iv) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties). Net unfavorable prior year reserve development in the third quarters of 2021 and 2020 was $108 million and $220 million, respectively. Catastrophe losses in the third quarters of 2021 and 2020 were $181 million and $97 million, respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) earned pricing that exceeded loss cost trends, (ii) higher business volumes, (iii) a favorable impact associated with COVID-19 and related economic conditions and (iv) a lower level of property losses. Income tax expense in the third quarter of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in segment income before income taxes.

Segment income in the first nine months of 2021 was $1.52 billion, $922 million or 155% higher than segment income of $596 million in the same period of 2020. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher net investment income, (ii) higher underlying underwriting margins and (iii) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2020, partially offset by (iv) higher catastrophe losses (including recoveries under the Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties). Net favorable prior year reserve development in the first nine months of 2021 was $99 million, as compared to net unfavorable prior year reserve development in the first nine months of 2020 of $215 million. Catastrophe losses in the first nine months of 2021 and 2020 were $836 million and $669 million, respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) earned pricing that exceeded loss cost trends, (ii) a favorable impact associated with COVID-19 and related economic conditions and (iii) higher business volumes. Income tax expense in the first nine months of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in income before income taxes.

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MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Revenues

Earned Premiums

Earned premiums in the third quarter of 2021 were $3.97 billion, $129 million or 3% higher than in the same period of 2020. Earned premiums in the first nine months of 2021 were $11.65 billion, $209 million or 2% higher than in the same period of 2020. Earned premiums in both periods of 2021 were negatively impacted by lower net written premiums in the preceding twelve months due to a modest reduction in exposures and a decrease in new business volume, in each case impacted by COVID-19 and related economic conditions. Earned premiums in both periods of 2020 were negatively impacted by reduced exposures and reductions in the Company's estimate of ultimate audit premiums receivable, in each case reflecting the impact of COVID-19 and related economic conditions, including a decrease in new business levels.

Net Investment Income

Net investment income in the third quarter of 2021 was $575 million, $77 million or 15% higher than in the same period of 2020. Net investment income in the first nine months of 2021 was $1.71 billion, $582 million or 51% higher than in the same period of 2020. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the increases in the Company’s consolidated net investment income in the third quarter and first nine months of 2021 compared with the same periods of 2020. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2020 Annual Report for a discussion of the Company’s net investment income allocation methodology.

Fee Income

National Accounts is the primary source of fee income due to revenue from its large deductible policies and service businesses, which include risk management, claims administration, loss control and risk management information services provided to third parties, as well as policy issuance and claims management services to workers' compensation residual market pools. Fee income in the third quarter of 2021 was $90 million, $5 million or 5% lower than in the same period of 2020. Fee income in the first nine months of 2021 was $282 million, $23 million or 8% lower than in the same period of 2020. The decrease in the third quarter of 2021 and first nine months of 2021 compared to the same periods of 2020 reflected lower claim volume under administration and lower serviced premium volume from the workers' compensation residual market pool.

Other Revenues

Other revenues in the third quarter of 2021 were $69 million, $11 million higher than in the same period of 2020. Other revenues in the first nine months of 2021 were $179 million, $54 million higher than in the same period of 2020. The increase in both periods primarily reflected growth in revenues from Simply Business. Other revenues also included installment premium charges and other policyholder service charges.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in the third quarter of 2021 were $2.70 billion, $101 million or 4% lower than in the same period of 2020, primarily reflecting the impacts of (i) reduced exposures, including the impact of COVID-19 and related economic conditions, (ii) lower net unfavorable prior year reserve development and (iii) a lower level of property losses, partially offset by (iv) higher catastrophe losses and (v) loss cost trends. Claims and claim adjustment expenses in the third quarters of both 2021 and 2020 included comparable favorable loss activity related to the impact of COVID-19 and related economic conditions. Catastrophe losses and non-catastrophe weather-related losses in the third quarters of 2021 and 2020 were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties.

Claims and claim adjustment expenses in the first nine months of 2021 were $8.03 billion, $445 million or 5% lower than in the same period of 2020, primarily reflecting the impacts of (i) reduced exposures, including the impact of COVID-19 and related economic conditions and (ii) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2020, partially offset by (iii) higher catastrophe losses and (iv) loss cost trends. Claims and claim adjustment expenses in the first nine months of both 2021 and 2020 included comparable favorable loss activity related to the impact of COVID-19 and related economic conditions. Catastrophe losses and non-catastrophe weather-related losses in the first nine months of 2021 and 2020 were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in the third quarter of 2021 was $653 million, $20 million or 3% higher than the same period of 2020. Amortization of deferred acquisition costs in the first nine months of 2021 was $1.92 billion, $31 million or 2% higher than the same period of 2020. The changes in both periods of 2021 were generally consistent with the changes in earned premiums.

General and Administrative Expenses

General and administrative expenses in the third quarter of 2021 were $684 million, $33 million or 5% higher than in the same period of 2020. General and administrative expenses in the first nine months of 2021 were $2.06 billion, $63 million or 3% higher than in the same period of 2020. The increases in both periods of 2021 were primarily in support of business growth. General and administrative expenses in the third quarters and first nine months of both 2021 and 2020 included the benefit of lower travel-related expenses attributable to COVID-19 and related economic conditions. General and administrative expenses in the third quarter and first nine months of 2020 also included an increased allowance for expected credit losses on premiums receivable attributable to COVID-19 and related economic conditions.

Income Tax Expense

Income tax expense in the third quarter of 2021 was $106 million, $67 million higher than the same period of 2020, primarily reflecting the impact of the $260 million increase in income before income taxes. Income tax expense in the first nine months of 2021 was $298 million, $251 million higher than in the same period of 2020, primarily reflecting the impact of the $1.17 billion increase in income before income taxes.

Combined Ratio

The combined ratio of 97.5% in the third quarter of 2021 was 4.8 points lower than the combined ratio of 102.3% in the same period of 2020. The loss and loss adjustment expense ratio of 67.0% in the third quarter of 2021 was 4.8 points lower than the loss and loss adjustment expense ratio of 71.8% in the same period of 2020. The underwriting expense ratio of 30.5% for the third quarter of 2021 was level with the underwriting expense ratio in the same period of 2020.

Catastrophe losses in the third quarters of 2021 and 2020 accounted for 4.6 points and 2.5 points, respectively, of the combined ratio. Net unfavorable prior year reserve development in the third quarters of 2021 and 2020 accounted for 2.7 points and 5.8 points of the combined ratio. The underlying combined ratio in the third quarter of 2021 was 3.8 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends, (ii) a favorable impact associated with COVID-19 and related economic conditions and (iii) a lower level of property losses.

The combined ratio of 98.7% in the first nine months of 2021 was 5.1 points lower than the combined ratio of 103.8% in the same period of 2020. The loss and loss adjustment expense ratio of 67.8% in the first nine months of 2021 was 5.0 points lower than the loss and loss adjustment expense ratio of 72.8% in the same period of 2020. The underwriting expense ratio of 30.9% for the first nine months of 2021 was 0.1 points lower than the underwriting expense ratio of 31.0% in the same period of 2020.

Catastrophe losses in the first nine months of 2021 and 2020 accounted for 7.2 points and 5.8 points, respectively, of the combined ratio. Net favorable prior year reserve development in the first nine months of 2021 provided 0.9 points of benefit to the combined ratio. Net unfavorable prior year reserve development in the first nine months of 2020 accounted for 1.9 points of the combined ratio. The underlying combined ratio in the first nine months of 2021 was 3.7 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends and (ii) a favorable impact associated with COVID-19 and related economic conditions compared to a net charge in the same period of 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Written Premiums

Business Insurance’s gross and net written premiums by market were as follows:


	Gross Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Domestic:
Select Accounts	$	688	$	661	$	2,166	$	2,218
Middle Market	2,400		2,258		7,208		6,934
National Accounts	321		335		1,132		1,162
National Property and Other	794		745		2,107		1,940
Total Domestic	4,203		3,999		12,613		12,254
International	250		231		972		897
Total Business Insurance	$	4,453	$	4,230	$	13,585	$	13,151


	Net Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Domestic:
Select Accounts	$	685	$	658	$	2,140	$	2,191
Middle Market	2,252		2,131		6,723		6,499
National Accounts	228		239		731		755
National Property and Other	638		602		1,730		1,615
Total Domestic	3,803		3,630		11,324		11,060
International	218		203		802		740
Total Business Insurance	$	4,021	$	3,833	$	12,126	$	11,800

Gross and net written premiums in the third quarter of 2021 both increased by 5% over the same period of 2020. Gross and net written premiums in the first nine months of 2021 both increased by 3% over the same period of 2020.

Select Accounts. Net written premiums of $685 million in the third quarter of 2021 increased by 4% over the same period of 2020. Net written premiums of $2.14 billion in the first nine months of 2021 decreased by 2% from the same period of 2020. Retention rates remained strong in the third quarter and first nine months of 2021. Renewal premium changes in the third quarter and first nine months of 2021 remained positive and were higher than in the same periods of 2020. New business premiums in the third quarter of 2021 increased over the same period of 2020. New business premiums in the first nine months of 2021 decreased from the same period of 2020.

Middle Market. Net written premiums of $2.25 billion in the third quarter of 2021 increased by 6% over the same period of 2020. Net written premiums of $6.72 billion in the first nine months of 2021 increased by 3% over the same period of 2020. Retention rates remained strong in the third quarter and first nine months of 2021. Renewal premium changes in the third quarter and first nine months of 2021 remained positive and were higher than in the same periods of 2020. New business premiums in the third quarter of 2021 decreased from the same period of 2020. New business premiums in the first nine months of 2021 increased over the same period of 2020.

National Accounts. Net written premiums of $228 million in the third quarter of 2021 decreased by 5% from the same period of 2020. Net written premiums of $731 million in the first nine months of 2021 decreased by 3% from the same period of 2020. Retention rates remained strong in the third quarter and first nine months of 2021. Renewal premium changes in the third quarter of 2021 were positive, compared with negative in the same period of 2020. Renewal premium changes in the first nine months of 2021 were positive and higher than in the same period of 2020. New business premiums in the third quarter of 2021 decreased from the same period of 2020. New business premiums in the first nine months of 2021 increased over the same period of 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

National Property and Other. Net written premiums of $638 million in the third quarter of 2021 increased by 6% over the same period of 2020. Net written premiums of $1.73 billion in the first nine months of 2021 increased by 7% over the same period of 2020. Retention rates remained strong in the third quarter and first nine months of 2021 and increased over the same periods of 2020. Renewal premium changes in the third quarter and first nine months of 2021 remained positive and were lower than in the same periods of 2020. New business premiums in the third quarter and first nine months of 2021 decreased from the same periods of 2020.

International. Net written premiums of $218 million in the third quarter of 2021 increased by 7% over the same period of 2020. Net written premiums of $802 million in the first nine months of 2021 increased by 8% over the same period of 2020. The increases in both periods of 2021 were primarily driven by changes in foreign currency exchange rates and the Company's operations at Lloyd's.

Bond & Specialty Insurance

Results of Bond & Specialty Insurance were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020

Revenues
Earned premiums	$	806		$	723		$	2,325		$	2,083
Net investment income	63			58			186			155
Other revenues	5			7			17			17
Total revenues	874			788			2,528			2,255

Total claims and expenses	657			649			1,907			1,879

Segment income before income taxes	217			139			621			376
Income tax expense	43			24			123			67
Segment income	$	174		$	115		$	498		$	309

Loss and loss adjustment expense ratio	46.3		%	54.0		%	46.2		%	53.6		%
Underwriting expense ratio	34.8			35.3			35.2			36.1
Combined ratio	81.1		%	89.3		%	81.4		%	89.7		%

Overview

Segment income in the third quarter of 2021 was $174 million, $59 million or 51% higher than segment income of $115 million in the same period of 2020. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins and (ii) net favorable prior year reserve development compared to no net prior year reserve development in the same period of 2020. Net favorable prior year reserve development in the third quarter of 2021 was $22 million. Catastrophe losses in the third quarters of 2021 and 2020 were $3 million and $2 million, respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) a lower level of losses related to COVID-19 and related economic conditions, (ii) higher business volumes and (iii) earned pricing that exceeded loss cost trends. Income tax expense in the third quarter of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in segment income before income taxes.

Segment income in the first nine months of 2021 was $498 million, $189 million or 61% higher than segment income of $309 million in the same period of 2020. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins, (ii) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2020 and (iii) higher net investment income, partially offset by (iv) higher catastrophe losses. Net favorable prior year reserve development in the first nine months of 2021 was $81 million, as compared to net unfavorable prior year reserve development in the first nine months of 2020 of $33 million. Catastrophe losses in the first nine months of 2021 and 2020 were $30 million and $10 million, respectively. The higher underlying underwriting margins primarily reflected the impacts of (i) earned pricing that exceeded loss cost trends, (ii) higher business volumes and (iii) a lower level of losses associated with COVID-19 and related economic conditions. Income tax

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

expense in the first nine months of 2021 was higher than in the same period of 2020, primarily reflecting the impact of the increase in segment income before income taxes.

Revenues

Earned Premiums

Earned premiums in the third quarter of 2021 were $806 million, $83 million or 11% higher than in the same period of 2020. Earned premiums in the first nine months of 2021 were $2.33 billion, $242 million or 12% higher than in the same period of 2020. The increases in both periods of 2021 primarily reflected the increase in net written premiums over the preceding twelve months. Earned premiums in both periods of 2021 and 2020 were not materially impacted by COVID-19 and related economic conditions.

Net Investment Income

Net investment income in the third quarter of 2021 was $63 million, $5 million or 9% higher than in the same period of 2020. Net investment income in the first nine months of 2021 was $186 million, $31 million or 20% higher than in the same period of 2020. Included in Bond & Specialty Insurance are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the “Net Investment Income” section of “Consolidated Results of Operations” herein for a discussion of the increase in the Company’s consolidated net investment income in the third quarter of 2021 compared with the same period of 2020. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2020 Annual Report for a discussion of the Company’s net investment income allocation methodology.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in the third quarter of 2021 were $375 million, $17 million or 4% lower than in the same period of 2020, primarily reflecting the impact of (i) net favorable prior year reserve development compared with no net prior year reserve development in the same period of 2020 and (ii) a lower level of losses related to COVID-19 and related economic conditions, partially offset by (iii) higher business volumes.

Claims and claim adjustment expenses in the first nine months of 2021 were $1.08 billion, $38 million or 3% lower than in the same period of 2020, primarily reflecting the impact of (i) net favorable prior year reserve development compared to net unfavorable prior year reserve development in the same period of 2020 and (ii) a lower level of losses associated with COVID-19 and related economic conditions, partially offset by (iii) higher business volumes and (iv) higher catastrophe losses.

Factors contributing to net favorable prior year reserve development during the third quarter and first nine months of 2021 and net unfavorable prior year reserve development during the first nine months of 2020 are discussed in more detail in note 7 of notes to the unaudited consolidated financial statements.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in the third quarter of 2021 was $147 million, $14 million or 11% higher than in the same period of 2020. Amortization of deferred acquisition costs in the first nine months of 2021 was $423 million, $38 million or 10% higher than in the same period of 2020. The increases in both periods of 2021 were generally consistent with the increases in earned premiums.

General and Administrative Expenses

General and administrative expenses in the third quarter of 2021 were $135 million, $11 million or 9% higher than in the same period of 2020. General and administrative expenses in the first nine months of 2021 were $400 million, $28 million or 8% higher than in the same period of 2020. The increases in both periods of 2021 primarily reflected the impacts of higher business volumes. The benefit of lower travel-related expenses related to COVID-19 and related economic conditions in the first nine months of 2021 was higher compared to the benefit in the same period of 2020.

Income Tax Expense

Income tax expense in the third quarter of 2021 was $43 million, $19 million or 79% higher than in the same period of 2020, primarily reflecting the impact of the $78 million increase in segment income before income taxes. Income tax expense in the first nine months of 2021 was $123 million, $56 million or 84% higher than in the same period of 2020, primarily reflecting the impact of the $245 million increase in segment income before income taxes.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Combined Ratio

The combined ratio of 81.1% in the third quarter of 2021 was 8.2 points lower than the combined ratio of 89.3% in the same period of 2020. The loss and loss adjustment expense ratio of 46.3% in the third quarter of 2021 was 7.7 points lower than the loss and loss adjustment expense ratio of 54.0% in the same period of 2020. The underwriting expense ratio of 34.8% in the third quarter of 2021 was 0.5 points lower than the underwriting expense ratio of 35.3% in the same period of 2020.

Net favorable prior year reserve development in the third quarter of 2021 provided 2.6 points of benefit to the combined ratio. There was no net prior year reserve development in the third quarter of 2020. Catastrophe losses in the third quarters of 2021 and 2020 accounted for 0.3 points of the combined ratio. The underlying combined ratio in the third quarter of 2021 was 5.6 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) a lower level of losses related to COVID-19 and related economic conditions, (ii) earned pricing that exceeded loss cost trends and (iii) a lower expense ratio.

The combined ratio of 81.4% in the first nine months of 2021 was 8.3 points lower than the combined ratio of 89.7% in the same period of 2020. The loss and loss adjustment expense ratio of 46.2% in the first nine months of 2021 was 7.4 points lower than the loss and loss adjustment expense ratio of 53.6% in the same period of 2020. The underwriting expense ratio of 35.2% in the first nine months of 2021 was 0.9 points lower than the underwriting expense ratio of 36.1% in the same period of 2020.

Net favorable prior year reserve development in the first nine months of 2021 provided 3.5 points of benefit to the combined ratio. Net unfavorable prior year reserve development in the first nine months of 2020 accounted for 1.5 points of the combined ratio. Catastrophe losses in the first nine months of 2021 and 2020 accounted for 1.3 points and 0.5 points, respectively, of the combined ratio. The underlying combined ratio in the first nine months of 2021 was 4.1 points lower than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends, (ii) a lower level of losses associated with COVID-19 and related economic conditions and (iii) a lower expense ratio.

Written Premiums

The Bond & Specialty Insurance segment’s gross and net written premiums were as follows:


	Gross Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020

Domestic:
Management Liability	$	608	$	503	$	1,663	$	1,407
Surety	252		219		726		697
Total Domestic	860		722		2,389		2,104
International	124		81		348		219
Total Bond & Specialty Insurance	$	984	$	803	$	2,737	$	2,323


	Net Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020

Domestic:
Management Liability	$	532	$	467	$	1,473	$	1,306
Surety	241		208		673		643
Total Domestic	773		675		2,146		1,949
International	121		79		325		202
Total Bond & Specialty Insurance	$	894	$	754	$	2,471	$	2,151

Gross and net written premiums in the third quarter of 2021 increased by 23% and 19%, respectively, over the same period of 2020. Gross and net written premiums in the first nine months of 2021 increased by 18% and 15%, respectively, over the same period of 2020. Gross and net written premiums in both periods of 2020 were negatively impacted by lower surety volumes, primarily due to COVID-19 and related economic conditions.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Domestic. Net written premiums of $773 million in the third quarter of 2021 increased by 15% over the same period of 2020. Net written premiums of $2.15 billion in the first nine months of 2021 increased by 10% over the same period of 2020. Excluding the surety line of business, for which the following are not relevant measures, retention rates remained strong in the third quarter and first nine months of 2021 but declined from the same periods of 2020. Renewal premium changes in the third quarter and first nine months of 2021 remained positive and were higher than in the same periods of 2020. New business premiums in the third quarter and first nine months of 2021 decreased from the same periods of 2020.

International. Net written premiums of $121 million and $325 million in the third quarter and first nine months of 2021, respectively, increased by 53% and 61%, respectively, over the same periods of 2020. The increases in both periods of 2021 were primarily driven by increases in the United Kingdom and Canada, including the impact of changes in foreign currency exchange rates.

Personal Insurance

Results of Personal Insurance were as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2021			2020			2021			2020

Revenues
Earned premiums	$	3,053		$	2,816		$	8,857		$	8,041
Net investment income	133			115			391			264
Fee income	7			6			20			18
Other revenues	26			21			73			53
Total revenues	3,219			2,958			9,341			8,376

Total claims and expenses	3,227			2,459			8,809			7,448

Segment income (loss) before income taxes	(8)			499			532			928
Income tax expense (benefit)	(6)			107			99			190
Segment income (loss)	$	(2)		$	392		$	433		$	738

Loss and loss adjustment expense ratio	78.2		%	60.0		%	71.8		%	64.5		%
Underwriting expense ratio	26.4			26.4			26.5			27.2
Combined ratio	104.6		%	86.4		%	98.3		%	91.7		%

Overview

The segment loss in the third quarter of 2021 was $2 million, compared with segment income of $392 million in the same period of 2020. The segment loss before income taxes primarily reflected the pre-tax impacts of (i) lower net favorable prior year reserve development and (ii) lower underlying underwriting margins. Catastrophe losses in the third quarters of 2021 and 2020 were $317 million and $298 million, respectively. Net favorable prior year reserve development in the third quarters of 2021 and 2020 was $30 million and $362 million, respectively. The lower underlying underwriting margins primarily reflected the impacts of (i) higher losses in the automobile product line due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic, partially offset by (ii) lower losses in the homeowners and other product line due to a comparison to a high level of loss activity in the prior year quarter and (iii) higher business volumes. The segment recorded a modest income tax benefit in the third quarter of 2021 compared to income tax expense in the same period of 2020, primarily reflecting the impact of the decrease in income before income taxes.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Segment income in the first nine months of 2021 was $433 million, $305 million or 41% lower than segment income of $738 million in the same period of 2020. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower underlying underwriting margins and (ii) lower net favorable prior year reserve development, partially offset by (iii) higher net investment income. Net favorable prior year reserve development in the first nine months of 2021 and 2020 was $263 million and $419 million, respectively. Catastrophe losses in the first nine months of 2021 and 2020 were $945 million and $905 million, respectively. The lower underlying underwriting margins primarily reflected the impacts of (i) higher losses in the automobile product line due to a comparison to a low level of loss activity (net of premium refunds) in the prior year period as a result of the pandemic and (ii) higher losses in the homeowners and other product line, partially offset by (iii) higher business volumes. Income tax expense in the first nine months of 2021 was lower than in the same period of 2020, primarily reflecting the impact of the decrease in segment income before income taxes.

Revenues

Earned Premiums

Earned premiums in the third quarter of 2021 were $3.05 billion, $237 million or 8% higher than in the same period of 2020. Earned premiums in the first nine months of 2021 were $8.86 billion, $816 million or 10% higher than in the same period of 2020. The increases in both periods of 2021 primarily reflected the increase in net written premiums over the preceding twelve months. Net written and earned premiums in both periods of 2021 were not materially impacted by COVID-19 and related economic conditions. Net written and earned premiums in the first nine months of 2020 were reduced by premium refunds provided primarily in the second quarter of 2020 to personal automobile customers in response to COVID-19 and related economic conditions.

Net Investment Income

Net investment income in the third quarter of 2021 was $133 million, $18 million or 16% higher than in the same period of 2020. Net investment income in the first nine months of 2021 was $391 million, $127 million or 48% higher than in the same period of 2020. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion herein for a description of the factors contributing to the increases in the Company’s consolidated net investment income in the third quarter and first nine months of 2021 compared with the same periods of 2020. In addition, refer to note 2 of notes to the consolidated financial statements in the Company’s 2020 Annual Report for a discussion of the Company’s net investment income allocation methodology.

Other Revenues

Other revenues in the third quarters and first nine months of 2021 and 2020 primarily consisted of installment premium charges. Installment premium charges in both periods of 2021 were higher than in the same periods of 2020, primarily attributed to the impact of billing relief actions offered to customers as a result of COVID-19 in 2020.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in the third quarter of 2021 were $2.39 billion, $696 million or 41% higher than in the same period of 2020, primarily reflecting the impacts of (i) lower net favorable prior year reserve development, (ii) higher losses in the automobile product line due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic, (iii) higher business volumes, (iv) loss cost trends and (v) higher catastrophe losses, partially offset by (vi) lower losses in the homeowners and other product line due to a comparison to a high level of loss activity in the prior year quarter. Catastrophe losses and non-catastrophe weather-related losses, in the third quarters of 2021 and 2020, were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties.

Claims and claim adjustment expenses in the first nine months of 2021 were $6.37 billion, $1.18 billion or 23% higher than in the same period of 2020, primarily reflecting the impacts of (i) higher losses in the automobile product line due to a comparison to a low level of loss activity in the prior year period as a result of the pandemic, (ii) higher losses in the homeowners and other product line, (iii) lower net favorable prior year reserve development, (iv) higher business volumes, (v) loss cost trends and (vi) higher catastrophe losses. Catastrophe losses and non-catastrophe weather-related losses, in the first nine months of 2021 and 2020, were reduced by recoveries under the Company's Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance treaties.

Factors contributing to net favorable prior year reserve development during the third quarter and first nine months of 2021 and 2020 are discussed in more detail in note 7 of notes to the unaudited consolidated financial statements.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in the third quarter of 2021 was $481 million, $40 million or 9% higher than in the same period of 2020. Amortization of deferred acquisition costs in the first nine months of 2021 was $1.40 billion, $115 million or 9% higher than in the same period of 2020. The increases in both periods of 2021 were generally consistent with the increases in earned premiums before the impact of premium refunds referred to above.

General and Administrative Expenses

General and administrative expenses in the third quarter of 2021 were $360 million, $32 million or 10% higher than in the same period of 2020. General and administrative expenses in the first nine months of 2021 were $1.05 billion, $66 million or 7% higher than in the same period of 2020. The increases in both periods of 2021 primarily reflected the impacts of higher business volumes and variability in expenses. The totals in the first nine months of 2020 included an increased allowance for expected credit losses on premiums receivable due to the impact of COVID-19 and related economic conditions.

Income Tax Expense (Benefit)

The income tax benefit in the third quarter of 2021 was $6 million, compared with income tax expense of $107 million in same period of 2020, primarily reflecting the impact of the $507 million decrease in segment income before income taxes. Income tax expense in the first nine months of 2021 was $99 million, $91 million or 48% lower than in the same period of 2020, primarily reflecting the $396 million decrease in segment income before income taxes.

Combined Ratio

The combined ratio of 104.6% in the third quarter of 2021 was 18.2 points higher than the combined ratio of 86.4% in the same period of 2020. The loss and loss adjustment expense ratio of 78.2% in the third quarter of 2021 was 18.2 points higher than the loss and loss adjustment expense ratio of 60.0% in the same period of 2020. The underwriting expense ratio of 26.4% for the third quarter of 2021 was level with the underwriting expense ratio in the same period of 2020.

Catastrophe losses in the third quarters of 2021 and 2020 accounted for 10.4 points and 10.5 points, respectively, of the combined ratio. Net favorable prior year reserve development in the third quarters of 2021 and 2020 provided 1.0 points and 12.8 points, respectively, of benefit to the combined ratio. The underlying combined ratio in the third quarter of 2021 was 6.5 points higher than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) higher losses in the automobile product line due to a comparison to a low level of loss activity in the prior year quarter as a result of the pandemic, partially offset by (ii) lower losses in the homeowners and other product line due to a comparison to a high level of loss activity in the prior year quarter.

The combined ratio of 98.3% in the first nine months of 2021 was 6.6 points higher than the combined ratio of 91.7% in the same period of 2020. The loss and loss adjustment expense ratio of 71.8% in the first nine months of 2021 was 7.3 points higher than the loss and loss adjustment expense ratio of 64.5% in the same period of 2020. The underwriting expense ratio of 26.5% in the first nine months of 2021 was 0.7 points lower than the underwriting expense ratio of 27.2% in the same period of 2020.

Catastrophe losses in the first nine months of 2021 and 2020 accounted for 10.6 points and 11.3 points, respectively, of the combined ratio. Net favorable prior year reserve development in the first nine months of 2021 and 2020 provided 3.0 points and 5.2 points, respectively, of benefit to the combined ratio. The underlying combined ratio in the first nine months of 2021 was 5.1 points higher than the 2020 ratio on the same basis, primarily reflecting the impacts of (i) higher losses in the automobile product line due to a comparison to a low level of loss activity (net of premium refunds) in the prior year period as a result of the pandemic and (ii) higher losses in the homeowners and other product line.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Written Premiums

Personal Insurance’s gross and net written premiums were as follows:


	Gross Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020

Domestic:
Automobile	$	1,535	$	1,490	$	4,394	$	4,043
Homeowners and Other	1,713		1,537		4,629		4,124
Total Domestic	3,248		3,027		9,023		8,167
International	191		183		535		505
Total Personal Insurance	$	3,439	$	3,210	$	9,558	$	8,672


	Net Written Premiums
	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020

Domestic:
Automobile	$	1,529	$	1,484	$	4,371	$	4,021
Homeowners and Other	1,698		1,524		4,476		3,999
Total Domestic	3,227		3,008		8,847		8,020
International	182		176		520		492
Total Personal Insurance	$	3,409	$	3,184	$	9,367	$	8,512

Gross and net written premiums in the third quarter of 2021 both increased by 7% over the same period of 2020. Gross and net written premiums in the first nine months of 2021 both increased by 10% over the same period of 2020. Gross and net written premiums in the first nine months of 2020 were negatively impacted by premium refunds provided primarily in the second quarter of 2020 to personal automobile customers in response to COVID-19 and related economic conditions.

Domestic

Automobile net written premiums of $1.53 billion and $4.37 billion in the third quarter and first nine months of 2021, respectively, increased by 3% and 9%, respectively, over the same periods of 2020. Net written premiums in the first nine months of 2020 were negatively impacted by premium refunds provided primarily in the second quarter of 2020 to personal automobile customers in response to COVID-19 and related economic conditions. Retention rates remained strong in the third quarter and first nine months of 2021. Renewal premium changes in the third quarter and first nine months of 2021 were not significant and were lower than in the same periods of 2020. New business premiums in the third quarter and first nine months of 2021 increased over the same periods of 2020.

Homeowners and Other net written premiums of $1.70 billion and $4.48 billion in the third quarter and first nine months of 2021, respectively, increased by 11% and 12%, respectively, over the same periods of 2020. Retention rates remained strong in the third quarter and first nine months of 2021. Renewal premium changes in the third quarter and first nine months of 2021 remained positive and were higher than in the same periods of 2020. New business premiums in the third quarter and first nine months of 2021 increased over the same periods of 2020.

For its Domestic business, Personal Insurance had approximately 8.8 million and 8.3 million active policies at September 30, 2021 and 2020, respectively.

International

International net written premiums of $182 million and $520 million in the third quarter and first nine months of 2021, respectively, increased by 3% and 6%, respectively, over the same periods of 2020, primarily driven by changes in foreign currency exchange rates.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

For its International business, Personal Insurance had approximately 480,000 and 495,000 active policies at September 30, 2021 and 2020, respectively.

Interest Expense and Other


	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2021		2020		2021		2020
Income (loss)	$	(75)	$	(74)	$	(216)	$	(219)

The Income (loss) for Interest Expense and Other in the third quarters of 2021 and 2020 was $(75) million and $(74) million, respectively. Pre-tax interest expense for the third quarter of both 2021 and 2020 was $87 million. After-tax interest expense for the third quarter of both 2021 and 2020 was $69 million. The Income (loss) for Interest Expense and Other in the first nine months of 2021 and 2020 was $(216) million and $(219) million, respectively. Pre-tax interest expense in the first nine months of 2021 and 2020 was $252 million and $256 million, respectively. After-tax interest expense in the first nine months of 2021 and 2020 was $199 million and $202 million, respectively.

ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims. Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the focus by plaintiffs on defendants, such as manufacturers of talcum powder, who were not traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Company’s asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.

The Company continues to be involved in disputes, including litigation, with a number of policyholders, some of whom are in bankruptcy, over coverage for asbestos-related claims. Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company, but which could result in settlements for larger amounts than originally anticipated. Although the Company has seen a reduction in the overall risk associated with these disputes, it remains difficult to predict the ultimate cost of these claims. As in the past, the Company will continue to pursue settlement opportunities.

In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers’ conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. It is possible that other direct actions against insurers, including the Company, could be filed in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions.

Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder with open claims at least annually. Among the factors the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

In the third quarter of 2021, the Company completed its annual in-depth asbestos claim review, including a review of policyholders with open claims and litigation cases for potential product and "non-product" liability, and noted the continuation of the following trends:

a high level of litigation activity in certain jurisdictions involving individuals alleging serious asbestos-related illness, primarily involving mesothelioma claims;
while overall payment patterns have been generally stable, there has been an increase in severity for certain policyholders due to the high level of litigation activity; and
a moderate level of asbestos-related bankruptcy activity.

Both the number of policyholders with open asbestos claims and gross asbestos-related payments decreased slightly when compared to 2020. Payments on behalf of these policyholders continue to be influenced by a high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily mesothelioma, continue to target defendants who were not traditionally primary targets of asbestos litigation.

The Company’s quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders and the assumed reinsurance component of reserves, as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves, and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment.

The completion of these reviews and analyses in the third quarters of 2021 and 2020 resulted in $225 million and $295 million increases, respectively, to the Company’s net asbestos reserves. In both 2021 and 2020, the reserve increases were primarily driven by increases in the Company’s estimate of projected settlement and defense costs related to a broad number of policyholders. The increase in the estimate of projected settlement and defense costs primarily resulted from payment trends that continue to be higher than previously anticipated due to the continued high level of mesothelioma claim filings and the impact of the current litigation environment surrounding those claims discussed above. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company’s overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company’s overall view of the current underlying asbestos environment is essentially unchanged from recent periods, and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.

Net asbestos paid loss and loss expenses in the first nine months of 2021 and 2020 were $155 million and $167 million, respectively. Net asbestos reserves were $1.41 billion at both September 30, 2021 and September 30, 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

The following table displays activity for asbestos losses and loss expenses and reserves:


(at and for the nine months ended September 30, in millions)	2021		2020
Beginning reserves:
Gross	$	1,668	$	1,601
Ceded	(330)		(322)
Net	1,338		1,279

Incurred losses and loss expenses:
Gross	287		362
Ceded	(62)		(67)
Net	225		295

Paid loss and loss expenses:
Gross	178		190
Ceded	(23)		(23)
Net	155		167

Foreign exchange and other:
Gross	—		(1)
Ceded	—		1
Net	—		—

Ending reserves:
Gross	1,777		1,772
Ceded	(369)		(365)
Net	$	1,408	$	1,407

See “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of the alleged storage, emissions or disposal of toxic substances, frequently under policies issued prior to the mid-1980s. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. For example, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under these statutes may be joint and several with other responsible parties. The Company has also been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions pertaining to environmental claims have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders.

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. Conventional actuarial methods are not used to estimate these reserves.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. These policyholders continue to present smaller exposures, are involved in fewer hazardous waste sites and are lower tier defendants than policyholders presenting such claims in the past. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims as well as the costs associated with coverage litigation on environmental matters have been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. The Company increased its environmental reserves by $9 million and $61 million in the third quarter and first nine months of 2021, respectively, and $4 million and $38 million in the third quarter and first nine months of 2020, respectively. Net environmental paid loss and loss expenses in the first nine months of 2021 and 2020 were $55 million and $45 million, respectively. Net environmental reserves were $313 million and $314 million at September 30, 2021 and September 30, 2020, respectively.

UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES

As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation:

the risks and lack of predictability inherent in complex litigation;
a further increase in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated;
the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements;
the role of any umbrella or excess policies we have issued;
the resolution or adjudication of disputes concerning coverage for asbestos and environmental claims in a manner inconsistent with our previous assessment of these disputes;
the number and outcome of direct actions against us;
future developments pertaining to our ability to recover reinsurance for asbestos and environmental claims;
any impact on asbestos defendants we insure due to the bankruptcy of other asbestos defendants;
the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers; and
uncertainties arising from the insolvency or bankruptcy of policyholders.

Changes in the legal, regulatory and legislative environment may impact the future resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. Changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims, could affect the settlement of asbestos and environmental claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

INVESTMENT PORTFOLIO

The Company’s invested assets at September 30, 2021 were $87.51 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a thoughtful investment philosophy that focuses on appropriate risk-adjusted returns. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt and taxable U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

The carrying value of the Company’s fixed maturity portfolio at September 30, 2021 was $77.04 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both September 30, 2021 and December 31, 2020. Below investment grade securities represented 1.5% and 1.8% of the total fixed maturity investment portfolio at September 30, 2021 and December 31, 2020, respectively. The weighted average effective duration of fixed maturities and short-term securities was 4.3 (4.5 excluding short-term securities) at September 30, 2021 and 3.8 (4.0 excluding short-term securities) at December 31, 2020.

Obligations of States, Municipalities and Political Subdivisions

The Company’s fixed maturity investment portfolio at September 30, 2021 and December 31, 2020 included $35.76 billion and $36.36 billion, respectively, of securities that are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at September 30, 2021 and December 31, 2020 were $4.10 billion and $3.54 billion, respectively, of pre-refunded bonds, which are bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee. All of the Company’s holdings of securities issued by Puerto Rico and related entities have either been pre-refunded and therefore are defeased by U.S. Treasury securities or have FHA guarantees subject to federal appropriation.

The Company bases its investment decision on the underlying credit characteristics of the municipal security. The weighted average credit rating of the municipal bond portfolio was "Aaa/Aa1" at both September 30, 2021 and December 31, 2020.

Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities

The Company’s fixed maturity investment portfolio at September 30, 2021 and December 31, 2020 included $1.82 billion and $2.36 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company’s investment strategy generally favors securities that reduce this risk within expected interest rate ranges. Included in the totals at September 30, 2021 and December 31, 2020 were $929 million and $1.24 billion, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $886 million and $1.12 billion at September 30, 2021 and December 31, 2020, respectively. Approximately 58% and 65% of the Company’s CMO holdings at September 30, 2021 and December 31, 2020, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The weighted average credit rating of the $370 million and $396 million of non-guaranteed CMO holdings was "Aal" at both September 30, 2021 and December 31, 2020. The weighted average credit rating of all of the above securities was "Aaa/Aa1" at both September 30, 2021 and December 31, 2020. For further discussion regarding the Company’s investments in residential CMOs, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Investment Portfolio” in the Company’s 2020 Annual Report.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Equity Securities, Real Estate and Short-Term Investments

See note 1 of notes to the consolidated financial statements in the Company’s 2020 Annual Report for further information about these invested asset classes.

Other Investments

The Company also invests in private equity, hedge fund and real estate partnerships, and joint ventures. Also included in other investments are non-public common and preferred equities and derivatives. These asset classes have historically provided a higher return than investments in fixed maturities but are subject to more volatility. At September 30, 2021 and December 31, 2020, the carrying value of the Company’s other investments was $4.20 billion and $3.43 billion, respectively.

Investments in private equity, hedge fund and real estate partnerships are accounted for under the equity method of accounting and typically report their financial statement information to the Company one to three months following the end of the reporting period. Accordingly, net investment income from these other investments is generally reflected in the Company's financial statements on a quarter lag basis.

CATASTROPHE REINSURANCE COVERAGE

The Company's normal renewals and changes to its catastrophe reinsurance coverage occur in January and July each year. The changes effective in January are discussed in the "Catastrophe Reinsurance" section of "Part I—Item 1—Business" in the Company's 2020 Annual Report, and changes effective in July are discussed in the "Catastrophe Reinsurance Coverage" section of "Part I—Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.

The Company is party to an Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty, which covers the accumulation of certain property losses arising from one or multiple occurrences for the period January 1, 2021 through and including December 31, 2021. The treaty provides for up to $350 million part of $500 million of coverage, subject to a $1.9 billion retention (i.e., for every dollar of loss between $1.9 billion and $2.4 billion, this treaty provides for 70 cents of coverage), of aggregate qualifying losses. Qualifying losses are subject to a $5 million event deductible per occurrence. Coverage for, and contributions to the $1.9 billion retention from, hurricanes and/or tropical storms, earthquakes and wildfires are limited to $250 million per event. The treaty covers property perils for PCS events in North America and all waters contiguous thereto. The treaty excludes losses arising from communicable disease and most losses arising from cyber and terrorism, including nuclear, biological, chemical or radiological. At September 30, 2021, the Company had aggregate qualifying losses of $2.0 billion under this treaty, and accordingly the Company has recognized a benefit of $95 million provided by this treaty. At September 30, 2021, this treaty provides for up to $255 million part of $364 million of remaining coverage, subject to the terms of this treaty described above.

The Company is also party to an Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty, which covers the accumulation of certain property losses arising from one or multiple occurrences for the period January 1, 2020 through and including December 31, 2020. The treaty provides for up to $280 million part of $500 million of coverage, subject to a $1.55 billion retention (i.e., for every dollar of loss between $1.55 billion and $2.05 billion, this treaty provides for 56 cents of coverage), of aggregate qualifying losses. Qualifying losses are subject to a $5 million franchise deductible per occurrence, so that qualifying catastrophic events at or greater than $5 million count toward the aggregate retention from dollar one. Coverage for, and contributions to the $1.55 billion retention from, hurricanes and/or tropical storms and earthquakes are limited to $250 million per event. The treaty covers property perils for PCS events in North America and all waters contiguous thereto. The treaty excludes most losses arising from cyber and terrorism, including nuclear, biological, chemical or radiological. In the three months ended September 30, 2020, the Company recognized the full benefit of $280 million provided by this treaty, and, accordingly, the Company accelerated the recognition of the remaining unearned ceded earned premium related to this treaty.

The Company regularly reviews its catastrophe reinsurance coverage and may adjust such coverage in the future.

REINSURANCE RECOVERABLES

For a description of the Company’s reinsurance recoverables, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance Recoverables” in the Company’s 2020 Annual Report.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

The following table summarizes the composition of the Company’s reinsurance recoverables:


(in millions)	September 30, 2021		December 31, 2020
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses	$	3,762	$	3,731
Gross structured settlements	2,921		2,964
Mandatory pools and associations	1,788		1,801
Gross reinsurance recoverables	8,471		8,496
Allowance for estimated uncollectible reinsurance	(142)		(146)
Net reinsurance recoverables	$	8,329	$	8,350

Net reinsurance recoverables at September 30, 2021 decreased by $21 million from December 31, 2020.

OUTLOOK

The following discussion provides outlook information for certain key drivers of the Company’s results of operations and capital position.

Premiums. The Company’s earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the term of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations. Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.

Overall, the Company expects that retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards during the remainder of 2021 and into 2022.

Property and casualty insurance market conditions are expected to remain competitive during the remainder of 2021 and into 2022 for new business. In each of the Company’s business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time. In periods of meaningful decreases in new business, despite its negative impact on underwriting gains over time, the impact of lower new business levels may positively impact the combined ratio for a period of time.

Underwriting Gain/Loss. The Company’s underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins. Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss activity; changes in current period loss estimates resulting from prior period loss development; changes in loss trend, including as a result of COVID-19 and related economic conditions; changes in business mix; changes in reinsurance coverages and/or costs; premium adjustments; and variability in expenses and assessments.

Catastrophe losses and non-catastrophe weather-related losses are inherently unpredictable from period to period. The Company’s results of operations could be adversely impacted if significant catastrophe and non-catastrophe weather-related losses were to occur.

On average for the ten-year period ended December 31, 2020, the Company experienced approximately 44% of its annual catastrophe losses during the second quarter, primarily arising out of severe wind and hail storms, including tornadoes. Hurricanes, wildfires and winter storms tend to happen at other times of the year and can also have a material impact on the Company's results of operations. Catastrophe losses incurred in a particular quarter in any given year may differ materially from historical experience. In addition, most of the Company's reinsurance programs renew on January 1 or July 1 of each year, and, therefore, any changes to the cost or coverage terms of such programs will be effective after such dates.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Over much of the past decade, the Company’s results have included significant amounts of net favorable prior year reserve development driven by better than expected loss experience. However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes in future periods higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.

It is possible that changes in economic conditions and steps taken by federal, state and/or local governments and the Federal Reserve could lead to higher or lower inflation than the Company anticipated, which could in turn lead to an increase or decrease in the Company’s loss costs and the need to strengthen or reduce claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that require a relatively longer period of time to finalize and settle claims for a given accident year and, accordingly, are relatively more inflation sensitive. Labor shortages, higher costs of used vehicles and parts, and increased demand and decreased supply for raw materials are adversely impacting severity in our auto and property businesses and may continue to do so in future quarters. For a further discussion, see “Part I—Item 1A—Risk Factors—If actual claims exceed our 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/tort, regulatory and economic environments in which the Company operates, our financial results could be materially and adversely affected” in the Company's 2020 Annual Report.

Economic conditions and therefore the Company’s results of operations may be impacted by a variety of other factors as well, many of which could continue to be affected by COVID-19, such as the pace of the reopening of the economy, financial market volatility, supply chain disruptions, extraordinary monetary and fiscal policy measures, fluctuations in interest rates and foreign currency exchange rates, changes in tariffs or other international trade regulations, the United Kingdom's withdrawal from the European Union, the political and regulatory environment, changes to the U.S. Federal budget, a shutdown of the U.S. government, the failure by the U.S. government to raise the debt ceiling and further potential changes in tax laws.

Investment Portfolio. The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration. The weighted average effective duration of fixed maturities and short-term securities was 4.3 (4.5 excluding short-term securities) at September 30, 2021. From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At September 30, 2021, the Company had no open U.S. Treasury futures contracts. The Company continually evaluates its investment alternatives and mix. Currently, the majority of the Company’s investments are comprised of a widely diversified portfolio of high-quality, liquid, taxable U.S. government, tax-exempt and taxable U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

The Company also invests much smaller amounts in equity securities; real estate; private equity, hedge fund and real estate partnerships; and joint ventures. These investment classes have the potential for higher returns but also the potential for higher degrees of risk, including less stable rates of return and less liquidity.

Approximately 29% of the fixed maturity portfolio is expected to mature over the next three years (including the early redemption of bonds, assuming interest rates (including credit spreads) do not rise significantly by applicable call dates). As a result, the overall yield on and composition of its portfolio could be meaningfully impacted by the types of investments available for reinvestment with the proceeds of maturing bonds.

Net investment income is a material contributor to the Company’s results of operations. Based on the impact of expected lower reinvestment yields on fixed income investments, partially offset by our current expectations for slightly higher levels of fixed income investments, the Company expects that after-tax net investment income from that portfolio will be approximately $425 million to $435 million in the fourth quarter of 2021, and the Company also currently expects that after-tax net investment income from that portfolio will be approximately $420 million to $430 million for each quarter of 2022. This expectation could be impacted by disruptions in global financial markets. Included in other investments are private equity, hedge fund and real estate partnerships that are accounted for under the equity method of accounting and typically report their financial statement information to the Company one month to three months following the end of the reporting period. Accordingly, net investment income or loss from these other investments is generally reflected in the Company's financial statements on a quarter lag basis. Net investment income from these other investments was particularly strong for the nine months ended September 30, 2021 reflecting strong global financial market performance. The Company’s net investment income in future periods from its non-fixed income investment portfolio will be impacted, positively or negatively, by the performance of global financial markets.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

The Company had net pre-tax realized investment gains of $113 million in the first nine months of 2021. Changes in global financial markets could result in net realized investment gains or losses in the Company’s investment portfolio.

The Company had a net pre-tax unrealized investment gain of $3.43 billion ($2.70 billion after-tax) in its fixed maturity investment portfolio at September 30, 2021. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders’ equity, and a declining interest rate environment would have the opposite effects. Additionally, disruptions in global financial markets could also impact the market value of the Company’s investment portfolio. The Company's investment portfolio has benefited from certain tax exemptions (primarily those related to interest from municipal bonds) and certain other tax laws, including, but not limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits). Changes in these laws could adversely impact the value of the Company's investment portfolio. See "Our businesses are heavily regulated by the states and countries in which we conduct business, including licensing, market conduct and financial supervision, and changes in regulation, including higher tax rates, may reduce our profitability and limit our growth" included in “Part I—Item 1A—Risk Factors” in the Company’s 2020 Annual Report.

For further discussion of the Company’s investment portfolio, see “Investment Portfolio.” For a discussion of the risks to the Company’s business during or following a financial market disruption and risks to the Company’s investment portfolio, see the risk factors entitled “During or following a period of financial market disruption or an economic downturn, our business could be materially and adversely affected” and “Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses” included in “Part I—Item 1A—Risk Factors” in the Company’s 2020 Annual Report. For a discussion of the risks to the Company’s investments from foreign currency exchange rate fluctuations, see the risk factor entitled “We are subject to additional risks associated with our business outside the United States” included in “Part I—Item 1A—Risk Factors” in the Company’s 2020 Annual Report and see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk-Foreign Currency Exchange Rate Risk” in the Company’s 2020 Annual Report.

Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders, subject to the considerations described below. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. The Company also expects that to the extent that it continues to grow premium volumes, the level of capital to support the Company's financial strength ratings will also increase, and accordingly, the amount of capital returned to shareholders relative to earnings would be somewhat less than it otherwise would have been absent the growth in premium volumes. The timing and actual number of shares to be repurchased in the future will depend on a variety of additional 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, changes in tax laws and other factors. For information regarding the Company’s common share repurchases in 2021, see “Liquidity and Capital Resources” herein.

As a result of the Company’s business outside of the United States, primarily in Canada, the United Kingdom (including Lloyd’s), the Republic of Ireland and in Brazil through a joint venture, the Company’s capital is also subject to the effects of changes in foreign currency exchange rates. Strengthening of the U.S. dollar in comparison to other currencies could result in a reduction in shareholders’ equity, while a weakening of the U.S. dollar in comparison to other currencies could result in an increase in shareholders' equity. For additional discussion of the Company’s foreign exchange market risk exposure, see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in the Company’s 2020 Annual Report.

Many of the statements in this “Outlook” section and in “Liquidity and Capital Resources” are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them. See “—Forward-Looking Statements.” For a discussion of potential risks and uncertainties that could impact the Company’s results of operations or financial position, see “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations" herein and “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Annual Report, in each case as updated by the Company's periodic filings with the SEC.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the first nine months of 2021. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company's liquidity and capital resources, see “The impact of COVID-19 and related risks could materially affect our results of operations, financial position and/or liquidity” included in “Part I—Item 1A—Risk Factors” in the Company's 2020 Annual Report.

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed.

Operating Company Liquidity. The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities. The Company believes that cash flows from operating activities are sufficient to meet the future liquidity requirements of its insurance subsidiaries. Additionally, investment maturities provide a significant level of available liquidity without requiring the sale of investment securities. For further discussion of operating company liquidity, see “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in the Company’s 2020 Annual Report.

Holding Company Liquidity. TRV’s liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan. At September 30, 2021, TRV held total cash and short-term invested assets in the United States aggregating $2.01 billion and having a weighted average maturity of 50 days. TRV has established a holding company liquidity target equal to its estimated annual pre-tax interest expense and common shareholder dividends (currently approximately $1.19 billion). TRV’s holding company liquidity of $2.01 billion at September 30, 2021 exceeded this target, and it is the opinion of the Company’s management that these assets are sufficient to meet TRV’s current liquidity requirements.

TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company’s foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company’s financial position or liquidity at September 30, 2021.

TRV has a shelf registration statement filed with the Securities and Exchange Commission (SEC) that expires on June 10, 2022 which permits it to issue securities from time to time. TRV also has a $1.0 billion line of credit facility with a syndicate of financial institutions that expires on June 4, 2023. At September 30, 2021, the Company had $100 million of commercial paper outstanding. TRV is not reliant on its commercial paper program to meet its operating cash flow needs. The Company has no senior notes or junior subordinated debentures maturing until April 2026, at which time $200 million of senior notes will mature.

The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $249 million to provide a portion of the capital needed to support its obligations at Lloyd’s at September 30, 2021. If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may have to seek alternative means of supporting its obligations at Lloyd’s, which could include utilizing holding company funds on hand.

Operating Activities

Net cash provided by operating activities in the first nine months of 2021 and 2020 was $5.58 billion and $4.62 billion, respectively. The increase in cash flows in the first nine months of 2021 primarily reflected the impacts of higher levels of cash received for premiums, partially offset by higher levels of payments for claims and claim adjustments expenses, as well as higher commissions paid. Cash received for premiums in the prior year period was adversely impacted by premium refunds provided in the second quarter of 2020 to personal automobile customers in response to COVID-19 and related economic conditions. Cash paid for claims and claim adjustments expenses in the prior year period benefited from $366 million of subrogation recoveries from PG&E related to the 2017 and 2018 California wildfires received in the third quarter of 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

Investing Activities

Net cash used in investing activities in the first nine months of 2021 and 2020 was $4.42 billion and $3.98 billion, respectively. The Company’s consolidated total investments at September 30, 2021 increased by $3.08 billion, or 4% from year-end 2020, primarily reflecting the impacts of (i) net cash flows provided by operating activities, partially offset by (ii) a decrease in net unrealized gains on investments at September 30, 2021 as compared with December 31, 2020, due to the impact of higher interest rates during the first nine months of 2021, and (iii) net cash used in financing activities.

Financing Activities

Net cash used in financing activities in the first nine months of 2021 and 2020 was $1.06 billion and $552 million, respectively. The totals in both 2021 and 2020 reflected common share repurchases and dividends paid to shareholders, partially offset by the net proceeds from the issuance of debt and employee stock option exercises. Common share repurchases in the first nine months of 2021 and 2020 were $1.40 billion and $471 million, respectively.

Dividends. Dividends paid to shareholders were $655 million and $643 million in the first nine months of 2021 and 2020, respectively. The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s financial position, earnings, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints and other factors as the Board of Directors deems relevant. Dividends will be paid by the Company only if declared by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. On October 19, 2021, the Company announced that it declared a regular quarterly dividend of $0.88 per share, payable December 31, 2021 to shareholders of record on December 10, 2021.

Share Repurchases. The Company’s Board of Directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. The Company also expects that to the extent that it continues to grow premium volumes, the level of capital to support the Company's financial strength ratings will also increase, and accordingly, the amount of capital returned to shareholders relative to earnings would be somewhat less than it otherwise would have been absent the growth in premium volumes. The timing and actual number of shares to be repurchased in the future will 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. During the three and nine months ended September 30, 2021, the Company repurchased 3.8 million and 8.8 million common shares under its share repurchase authorizations for a total cost of $600 million and $1.36 billion, respectively. The average cost per share repurchased was $155.57 and $153.93, respectively. On April 20, 2021, the Board of Directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity to the $805 million of capacity remaining at that date. At September 30, 2021, the Company had $4.81 billion of capacity remaining under its share repurchase authorizations.

Capital Structure. The following table summarizes the components of the Company’s capital structure at September 30, 2021 and December 31, 2020.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued


(in millions)	September 30, 2021		December 31, 2020
Debt:
Short-term	$	100	$	100
Long-term	7,254		6,504
Net unamortized fair value adjustments and debt issuance costs	(64)		(54)
Total debt	7,290		6,550

Shareholders’ equity:
Common stock and retained earnings, less treasury stock	27,308		26,699
Accumulated other comprehensive income	1,166		2,502
Total shareholders’ equity	28,474		29,201
Total capitalization	$	35,764	$	35,751

On June 8, 2021, the Company issued $750 million aggregate principal amount of 3.05% senior notes that will mature on June 8, 2051. The Company intends to use the net proceeds of the notes for general corporate purposes. See note 9 of notes to the unaudited consolidated financial statements for further discussion regarding the terms of the senior notes.

The following table provides a reconciliation of total capitalization presented in the foregoing table to total capitalization excluding net unrealized gains on investments, net of taxes, included in shareholders' equity.


(dollars in millions)	September 30, 2021			December 31, 2020
Total capitalization	$	35,764		$	35,751
Less: net unrealized gains on investments, net of taxes, included in shareholders' equity	2,699			4,074
Total capitalization excluding net unrealized gains on investments, net of taxes, included in shareholders' equity	$	33,065		$	31,677
Debt-to-total capital ratio	20.4		%	18.3		%
Debt-to-total capital ratio excluding net unrealized gains on investments, net of taxes, included in shareholders' equity	22.0		%	20.7		%

The debt-to-total capital ratio excluding net unrealized gains on investments, net of taxes, included in shareholders’ equity, is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes, included in shareholders’ equity. Net unrealized gains and losses on investments can be significantly impacted by both interest rate movements and other economic factors. Accordingly, in the opinion of the Company’s management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company’s financial leverage position. The Company’s ratio of debt-to-total capital excluding after-tax net unrealized investment gains included in shareholders’ equity of 22.0% at September 30, 2021 was within the Company’s target range of 15% to 25%.

RATINGS

Ratings are an important factor in assessing the Company’s competitive position in the insurance industry. The Company receives ratings from the following major rating agencies: A.M. Best Company (A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s Corp. (S&P). There have been no rating agency actions taken with respect to the Company since July 20, 2021, the date on which the Company's Form 10-Q for the quarter ended June 30, 2021 was filed with the SEC. For additional discussion of ratings, see “Part I—Item 1—Business—Ratings” in the Company’s 2020 Annual Report.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS, Continued

CRITICAL ACCOUNTING ESTIMATES

For a description of the Company’s critical accounting estimates, refer to “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in the Company’s 2020 Annual Report. The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, and impairments of investments, goodwill and other intangible assets. Except as shown in the table below, there have been no material changes to the Company’s critical accounting estimates since December 31, 2020.

Claims and Claim Adjustment Expense Reserves

The table below displays the Company’s gross claims and claim adjustment expense reserves by product line. Because establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates and the application of judgment, currently established claims and claim adjustment expense reserves may change. The Company reflects adjustments to the reserves in the results of operations in the period the estimates are changed. These changes in estimates could result in income statement charges that could be material to the Company’s operating results in future periods. In particular, a portion of the Company’s gross claims and claim adjustment expense reserves (totaling $2.13 billion at September 30, 2021) are for asbestos and environmental claims and related litigation. Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the summary table below. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current reserves by an amount that could be material to the Company’s future operating results. Asbestos and environmental reserves are discussed separately; see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves” in this report.

Gross claims and claim adjustment expense reserves by product line were as follows:


	September 30, 2021						December 31, 2020
(in millions)	Case		IBNR		Total		Case		IBNR		Total
General liability	$	5,373	$	8,866	$	14,239	$	5,267	$	8,098	$	13,365
Commercial property	1,141		481		1,622		1,006		366		1,372
Commercial multi-peril	2,471		2,511		4,982		2,354		2,311		4,665
Commercial automobile	2,602		2,315		4,917		2,551		2,231		4,782
Workers’ compensation	10,220		9,492		19,712		10,271		9,514		19,785
Fidelity and surety	178		413		591		215		317		532
Personal automobile	2,025		1,613		3,638		1,901		1,514		3,415
Personal homeowners and other	1,030		1,473		2,503		901		1,168		2,069
International and other	2,514		2,077		4,591		2,565		1,960		4,525
Property-casualty	27,554		29,241		56,795		27,031		27,479		54,510
Accident and health	10		—		10		11		—		11
Claims and claim adjustment expense reserves	$	27,564	$	29,241	$	56,805	$	27,042	$	27,479	$	54,521

The $2.28 billion increase in gross claims and claim adjustment expense reserves since December 31, 2020 primarily reflected the impacts of (i) catastrophe losses in the first nine months of 2021, (ii) loss cost trends for the current accident year and (iii) reduced claim settlement activity largely due to the disruptions in the judicial system related to COVID-19.

FUTURE APPLICATION OF ACCOUNTING STANDARDS

See note 1 of notes to the unaudited consolidated financial statements contained in this quarterly report and in the Company’s 2020 Annual Report for a discussion of recently issued accounting pronouncements.

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

This report 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,” “views,” “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);
the impact of COVID-19 and related economic conditions, including the potential impact on the Company's investments;
the impact of legislative or regulatory actions or court decisions taken in response to COVID-19 or otherwise;
share repurchase plans;
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;
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 and innovation agenda;
new product offerings; and
the impact of developments in the tort environment, such as increased attorney involvement in insurance claims.

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:

Insurance-Related Risks

high levels of catastrophe losses, including as a result of factors such as increased concentrations of insured exposures in catastrophe-prone areas, 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/tort, regulatory and economic environments in which the Company operates, the Company’s financial results could be materially and adversely affected;
the Company’s business could be harmed because of its potential exposure to asbestos and environmental claims and related litigation;
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; and
the effects of emerging claim and coverage issues on the Company’s business are uncertain, and court decisions or legislative changes that take place after the Company issues its policies can result in an unexpected increase in the number of claims and have a material adverse impact on the Company's results of operations.

Financial, Economic and Credit Risks

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 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 the Company is exposed to credit risk related to its structured settlements;

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS, Continued

the Company is exposed to credit risk in certain of its insurance operations and with respect to certain guarantee or indemnification arrangements that it has with third parties;
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; and
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.

Business and Operational Risks

the impact of COVID-19 and related risks could materially affect the Company's results of operations, financial position and/or liquidity, including with respect to revenues, claims and claim adjustment expenses, general and administrative expenses, investments, inflation, adverse legislative and/or regulatory action, operational disruptions and heightened cyber security risks and foreign currency exchange rate changes;
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’s efforts to develop new products, expand in targeted markets, improve business processes and workflows or make acquisitions 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;
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; and
the Company is subject to additional risks associated with its business outside the United States.

Technology and Intellectual Property Risks

if, as a result of cyber attacks or otherwise, the Company experiences difficulties with technology, data and network security, outsourcing relationships or cloud-based technology, the Company’s ability to conduct its business could be negatively impacted;
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; and
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.

Regulatory and Compliance Risks

the Company's businesses are heavily regulated by the states and countries in which it conducts business, including licensing, market conduct and financial supervision, and changes in regulation, including higher tax rates, may reduce the Company's profitability and limit its growth; and
the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.

In addition, 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, changes in tax laws and other factors, including the ongoing level of uncertainty related to COVID-19.

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update forward-looking statements. For a more detailed discussion of these factors, see the information under the captions “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS, Continued

Results of Operations" herein and “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2020 Annual Report, in each case as updated by the Company's periodic filings with the SEC.

WEBSITE AND SOCIAL MEDIA DISCLOSURE

The Company 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 posted on and accessible through the Company’s website at http://investor.travelers.com, its Facebook page at https://www.facebook.com/travelers and its Twitter account (@Travelers) at https://twitter.com/Travelers. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Notifications” section under the “Investor Toolkit” section at http://investor.travelers.com.

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