•Net income of $2.70 billion, or $10.56 per share basic and $10.52 per share diluted
•Net favorable prior year reserve development of $351 million ($276 million after-tax)
•Total investments of $84.42 billion; fixed maturities and short-term securities comprise 94% of total investments
Diluted net income per share of $10.52 in 2020 increased by 6% over diluted net income per share of $9.92 in 2019. Net income of $2.70 billion in 2020 increased by 3% over net income of $2.62 billion in 2019. 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 underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") and (ii) net favorable prior year reserve development in 2020, compared to net unfavorable prior year reserve development in 2019, partially offset by (iii) higher catastrophe losses, (iv) lower net investment income and (v) lower net realized investment gains. Catastrophe losses in 2020 and 2019 were $1.61 billion and $886 million, respectively. Net favorable prior year reserve development in 2020 was $351 million, compared to net unfavorable prior year reserve development of $60 million in 2019. The higher underlying underwriting margins in 2020 were driven by Personal Insurance and Business Insurance, partially offset by Bond & Specialty Insurance. Income tax expense in 2020 was higher than in 2019, primarily reflecting the impact of the increase in income before income taxes.
•Claims and claim adjustment expenses in Business Insurance included modestly lower loss estimates in certain product lines, primarily commercial automobile, partially offset by modestly higher loss estimates in certain other product lines, primarily workers' compensation and commercial property. Claims and claim adjustment expenses in Bond & Specialty Insurance were negatively impacted by higher loss estimates for management liability coverages. Claims and claim adjustment expenses in Personal Insurance were favorably impacted by lower loss estimates in the automobile product line, largely due to the impact of a decrease in miles driven.
In addition to the foregoing impacts on its underwriting margins, the Company also experienced the following impacts of COVID-19 and related economic conditions:
•Other income was negatively impacted by declines in installment premium charges attributable to the impact of billing relief actions offered to customers.
For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see "Outlook" and "Part I-Item 1A - Risk Factors."
Earned premiums in 2020 were $29.04 billion, $772 million or 3% higher than in 2019. In Business Insurance, earned premiums in 2020 were comparable with 2019. Earned premiums in Business Insurance in 2020 were negatively impacted by a modest reduction in exposures and a decrease in new business volume, as well as reductions in the Company's estimate of ultimate audit premiums receivable, in each case impacted by COVID-19 and related economic conditions. In Bond & Specialty Insurance, earned premiums in 2020 increased by 10% over 2019. Earned premiums in Bond & Specialty Insurance in 2020 were not materially impacted by COVID-19 and related economic conditions. In Personal Insurance, earned premiums in 2020 increased by 5% over 2019. Earned premiums in Personal Insurance in 2020 were reduced by premium refunds provided to personal automobile customers in response to COVID-19 and related economic conditions. Factors contributing to the levels of earned premiums in each segment in 2020 as compared with 2019 are discussed in more detail in the segment discussions that follow.
(1)Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.
Other net realized investment gains in 2020 included $67 million of net realized investment gains related to fixed maturity investments, $17 million of net realized investment losses related to equity securities sold and $18 million of net realized investment losses related to other investments. Other net realized investment gains in 2019 included $59 million of net realized investment gains related to fixed maturity investments, $12 million of net realized investment gains related to equity securities sold and $15 million of net realized investment losses related to foreign currency translation and other investments.
Claims and claim adjustment expenses in 2020 were $19.12 billion, comparable with 2019, primarily reflecting (i) lower losses in the automobile product line in Personal Insurance due to a decrease in miles driven attributable to COVID-19 and related economic conditions, (ii) net favorable prior year reserve development as compared with net unfavorable prior year reserve development in 2019 and (iii) lower non-catastrophe weather-related losses in Personal Insurance, largely offset by (iv) higher catastrophe losses, (v) loss cost trends, (vi) higher loss estimates for management liability coverages in Bond & Specialty Insurance, primarily due to the impact of COVID-19 and related economic conditions, and (vii) higher business volumes. Catastrophes in 2020 primarily resulted from the derecho windstorm in the midwestern region of the United States, the Glass wildfire in California, Tropical Storm Isaias, Hurricanes Zeta and Laura, additional wildfires in the western United States, tornado activity in Tennessee, other severe wind storms and winter storms in several regions of the United States and civil unrest. Catastrophes in 2019 primarily resulted from Hurricane Dorian and several winter, wind and hail storms throughout the United States. Catastrophe and non-catastrophe weather-related losses, including losses from wildfires, in 2020 were reduced by the full $280 million of recoveries available under the Company's 2020 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty. Catastrophe and non-catastrophe weather-related losses in 2019 were reduced by $135 million of recoveries available under the Company's 2019 Underlying Property Aggregate Catastrophe Excess-of-Loss Reinsurance Treaty.
•that is designated a catastrophe by internationally recognized organizations that track and report on insured losses resulting from catastrophic events, such as Property Claim Services (PCS) for events in the United States and Canada; and
•for which the Company’s estimates of its ultimate losses before reinsurance and taxes exceed a pre-established dollar threshold.
The Company’s threshold for disclosing catastrophes is primarily determined at the reportable segment level. If a threshold for one segment or a combination thereof is exceeded and the other segments have losses from the same event, losses from the event are identified as catastrophe losses in the segment results and for the consolidated results of the Company. Additionally, an aggregate threshold is applied for International business across all reportable segments. The threshold for 2020 ranged from approximately $20 million to $30 million of losses before reinsurance and taxes.
The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in 2020, 2019 and 2018, the amount of net unfavorable (favorable) prior year reserve development recognized in 2020 and 2019 for catastrophes that occurred in 2019 and 2018, and the estimate of ultimate losses for those catastrophes at December 31, 2020, 2019 and 2018. 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.
(1) Amounts are reported pre-tax and net of recoveries under all applicable reinsurance treaties, except for the Company's 2020 and 2019 Underlying Property Aggregate Catastrophe Excess-of-Loss Treaties. 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, 2020 through and including December 31, 2020, and the period January 1, 2019 through and including December 31, 2019, respectively. As a result, the benefit from those treaties are not included in the table as the allocation of the treaties' benefit to each identified catastrophe changes each time there are additional events or changes in estimated losses from any covered event.
Interest expense in 2020 and 2019 was $339 million and $344 million, respectively.
The Company’s effective tax rate was 17% and 16% in 2020 and 2019, respectively. The effective tax rates in both years were lower than the statutory rate of 21%, primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision.
Catastrophe losses in 2020 and 2019 accounted for 5.5 points and 3.1 points, respectively, of the combined ratio. Net favorable prior year reserve development in 2020 provided 1.2 points of benefit to the combined ratio. Net unfavorable prior year reserve development in 2019 accounted for 0.2 points of the combined ratio. The combined ratio excluding prior year reserve development and catastrophe losses ("underlying combined ratio") in 2020 was 2.5 points lower than the 2019 ratio on the same basis, primarily reflecting (i) lower losses in the automobile product line in Personal Insurance due to a decrease in miles driven attributable to COVID-19 and related economic conditions (net of premium refunds provided to personal automobile customers), (ii) earned pricing that exceeded loss cost trends in Business Insurance and (iii) lower non-catastrophe weather-related losses in Personal Insurance, partially offset by (iv) higher loss estimates for management liability coverages in Bond & Specialty Insurance, primarily due to the impact of COVID-19 and related economic conditions.
Gross and net written premiums in 2020 both increased by 2% over 2019. Gross and net written premiums in Business Insurance in 2020 both decreased by 1% from 2019. Gross and net written premiums in Business Insurance in 2020 were negatively impacted by a modest reduction in exposures and a decrease in new business volume, both impacted by COVID-19 and related economic conditions. Gross and net written premiums in Bond & Specialty Insurance in 2020 increased by 9% and 8%, respectively, over 2019, primarily driven by increases in the management liability product line. Gross and net written premiums in Bond & Specialty Insurance in 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 2020 both increased by 5% over 2019, primarily driven by increases in the homeowners and other product line. Gross and net written premiums in Personal Insurance in 2020 were negatively impacted by premium refunds provided 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.
Segment income in 2020 was $1.31 billion, $83 million or 6% lower than segment income of $1.39 billion in 2019. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower net investment income and (ii) higher catastrophe losses, partially offset by (iii) lower net unfavorable prior year reserve development and (iv) higher underlying underwriting margins. Net unfavorable prior year reserve development in 2020 and 2019 was $91 million and $258 million, respectively. Catastrophe losses in 2020 and 2019 were $645 million and $470 million, respectively. The higher underlying underwriting margins were impacted by earned pricing that exceeded loss cost trends. COVID-19 and related economic conditions had a modest net unfavorable impact on underlying underwriting margins. Income tax expense in 2020 was lower than in 2019, primarily reflecting the impact of the decrease in segment income before income taxes.
Other revenues in 2020 were $176 million, $21 million or 14% higher than in 2019, primarily reflecting growth in revenues from Simply Business. Other revenues also included installment premium charges and other policyholder service charges.
Claims and claim adjustment expenses in 2020 were $10.80 billion, $159 million or 1% lower than in 2019, primarily reflecting the impacts of (i) reduced exposures, including the impact of COVID-19 and related economic conditions, and also including a decrease in new business levels and (ii) lower net unfavorable prior year reserve development, partially offset by (iii) loss cost trends and (iv) higher catastrophe losses (net of recoveries under the property aggregate catastrophe reinsurance treaties discussed above).
Select Accounts. Net written premiums of $2.82 billion in 2020 decreased by 3% from 2019. Retention rates remained strong in 2020. Renewal premium changes in 2020 remained positive but were lower than in 2019. New business premiums in 2020 decreased from 2019.
National Accounts. Net written premiums of $996 million in 2020 decreased by 5% from 2019. Net written premiums in 2019 included a benefit related to a transaction to close out prior year liabilities with a former customer. Retention rates remained strong in 2020. Renewal premium changes in 2020 remained positive and were comparable to 2019. New business premiums in 2020 decreased from 2019.
International. Net written premiums of $1.02 billion in 2020 decreased by 5% from 2019, primarily driven by decreases in the Company's operations in Canada and at Lloyd's.
Segment income in 2020 was $473 million, $145 million or 23% lower than segment income of $618 million in 2019. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower underlying underwriting margins, (ii) net unfavorable prior year reserve development of $1 million in 2020 compared to net favorable prior year reserve development of $65 million in 2019 and (iii) lower net investment income. Catastrophe losses in 2020 and 2019 were $11 million and $5 million, respectively. The lower underlying underwriting margins reflected the impacts of higher loss estimates for management liability coverages, primarily due to the impact of COVID-19 and related economic conditions, partially offset by higher business volumes. Income tax expense in 2020 was lower than in 2019, primarily reflecting the impact of the decrease in segment income before income taxes.
Earned premiums in 2020 were $2.82 billion, $258 million or 10% higher than in 2019, primarily reflecting an increase in net written premiums over the preceding twelve months. Earned premiums in 2020 were not materially impacted by COVID-19 and related economic conditions.
segment and not allocated among all business segments. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion for a description of the factors contributing to the decrease in the Company’s consolidated net investment income in 2020 as compared with the 2019. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company’s net investment income allocation methodology.
Claims and claim adjustment expenses in 2020 were $1.46 billion, $370 million or 34% higher than in 2019, primarily reflecting the impacts of (i) higher loss estimates for management liability coverages, primarily due to the impact of COVID-19 and related economic conditions, (ii) an insignificant amount of net unfavorable prior year reserve development in 2020 compared to net favorable prior year reserve development in 2019 and (iii) higher business volumes.
General and administrative expenses in 2020 were $500 million, $17 million or 4% higher than in 2019, primarily reflecting the impact of higher business volumes, partially offset by lower travel-related expenses attributable to COVID-19 and related economic conditions.
Income tax expense in 2020 was $107 million, $44 million or 29% lower than in 2019, primarily reflecting the impact of the $189 million decrease in income before income taxes in 2020.
Domestic. Net written premiums in 2020 were $2.61 billion, $143 million or 6% higher than in 2019. Excluding the surety line of business, for which the following are not relevant measures, retention rates remained strong in 2020. Renewal premium changes in 2020 remained positive and were higher than in 2019. New business premiums in 2020 decreased from 2019.
Earned premiums in 2020 were $10.93 billion, $520 million or 5% higher than in 2019, primarily reflecting an increase in net written premiums over the preceding twelve months, partially offset by the impact of premium refunds provided to personal automobile customers in response to COVID-19 and related economic conditions.
Other revenues in all years presented included installment premium charges. Installment premium charges in 2020 were lower than in 2019, primarily attributable to the impact of billing relief actions offered to customers as a result of COVID-19.
Net favorable prior year reserve development in 2020 primarily resulted from subrogation recoveries related to wildfires in California in 2017 and 2018. Factors contributing to net favorable prior year reserve development during the years ended December 31, 2020, 2019 and 2018 are discussed in more detail in note 8 of notes to the consolidated financial statements.
General and administrative expenses in 2020 were $1.31 billion, $94 million or 8% higher than in 2019. The increase in 2020 included higher contingent commissions and an increased allowance for expected credit losses on premiums receivable, in each case primarily due to the impact of COVID-19 and related economic conditions, as well as the impact of higher business volumes.
The combined ratio of 89.7% in 2020 was 4.5 points lower than the combined ratio of 94.2% in 2019. The loss and loss adjustment expense ratio of 62.8% in 2020 was 5.2 points lower than the loss and loss adjustment expense ratio of 68.0% in 2019. The underwriting expense ratio of 26.9% in 2020 was 0.7 points higher than the underwriting expense ratio of 26.2% in 2019.
Catastrophe losses accounted for 8.8 points and 4.0 points of the combined ratio in 2020 and 2019, respectively. Net favorable prior year reserve development in 2020 and 2019 provided 4.1 points and 1.3 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2020 was 6.5 points lower than the 2019 ratio on the same basis, primarily reflecting the impacts of lower losses in the automobile product line due to a decrease in miles driven attributable to COVID-19 and related economic conditions (net of premium refunds provided to personal automobile customers) and lower non-catastrophe weather-related losses in the homeowners and other product line.
Gross and net written premiums in the segment's Domestic Agency Automobile and Direct-to-Consumer product lines, as well as in the segment's International operations, were negatively impacted by premium refunds provided to personal automobile customers in response to COVID-19 and related economic conditions.
Domestic Agency gross and net written premiums in 2020 both increased by 6% over 2019.
Domestic Agency Automobile net written premiums of $5.08 billion in 2020 were 1% lower than in 2019. Retention rates remained strong in 2020. Renewal premium changes in 2020 remained positive but were lower than in 2019. New business premiums in 2020 increased over 2019.
International net written premiums in 2020 were 8% lower than in 2019, primarily driven by declines in the automobile product line.
For its Direct-to-Consumer and International business, Personal Insurance had approximately 841,000 and 869,000 active policies at December 31, 2020 and 2019, respectively.
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.
claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to 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 2020, 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;
Net asbestos paid loss and loss expenses in 2020, 2019 and 2018 were $237 million, $224 million and $225 million, respectively. Approximately 1%, 4% and 9% of total net paid losses in 2020, 2019 and 2018, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company’s liability.
In 2020, 2019 and 2018, the Company increased its net environmental reserves by $54 million, $76 million and $55 million, respectively. Net environmental paid loss and loss expenses in 2020, 2019 and 2018 were $69 million, $90 million and $80 million, respectively. Net environmental reserves were $307 million, $321 million and $334 million at December 31, 2020, 2019 and 2018, respectively.
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 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 carrying value of the Company’s fixed maturity portfolio at December 31, 2020 was $74.00 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 December 31, 2020 and 2019. Below investment grade securities represented 1.8% and 2.1% of the total fixed maturity investment portfolio at December 31, 2020 and 2019, respectively. The weighted average effective duration of fixed maturities and short-term securities was 3.8 (4.0 excluding short-term securities) at December 31, 2020 and 4.0 (4.3 excluding short-term securities) at December 31, 2019.
The carrying values of investments in fixed maturities classified as available for sale at December 31, 2020 and 2019 were as follows:
The following table shows the geographic distribution of the $32.82 billion of municipal bonds at December 31, 2020 that were not pre-refunded:
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 December 31, 2020.
At December 31, 2020 and 2019, the Company held commercial mortgage-backed securities (including FHA project loans) of $1.42 billion and $1.51 billion, respectively. For more information regarding the Company’s investments in commercial mortgage-backed securities, see note 3 of notes to the consolidated financial statements.
The Company has, from time to time, engaged in securities lending activities from which it generates net investment income by lending certain of its investments to other institutions for short periods of time. At December 31, 2020 and 2019, the Company had $139 million and $404 million of securities on loan, respectively, as part of a tri-party lending agreement. The average monthly balance of securities on loan during 2020 and 2019 was $254 million and $368 million, respectively. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest. The Company did not incur any investment losses in its securities lending program for the years ended December 31, 2020 and 2019.
The net unrealized investment gains (losses) that were included in shareholders' equity were as follows:
Net unrealized investment gains included in shareholders’ equity at December 31, 2020 increased by $1.83 billion over December 31, 2019, primarily due to a decline in interest rates during 2020. Equity securities, which include public common and non-redeemable preferred stocks, are reported at fair value with changes in fair value recognized in net income.
At December 31, 2020 and 2019, below investment grade securities comprised 1.8% and 2.1%, respectively, of the fair value of the Company’s fixed maturity investment portfolio. Included in below investment grade securities at December 31, 2020 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $199 million and a fair value of $192 million, resulting in a net pre-tax unrealized investment loss of $7 million. These securities in an unrealized loss position represented less than 1% of both the amortized cost and fair value of the fixed maturity portfolio at December 31, 2020 and accounted for approximately 64% of the total gross pre-tax unrealized investment loss in the fixed maturity portfolio at December 31, 2020.
(2) The percentage of common equity is calculated by dividing (a) indicated loss amounts in dollars by (b) total common equity excluding net unrealized investment gains and losses, net of taxes, included in shareholders’ equity. Net unrealized investment gains and losses can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. Accordingly, the Company’s management uses the percentage of common equity calculated on this basis as a metric to evaluate the potential impact of a single hurricane or single earthquake on the Company’s financial position for purposes of making underwriting and reinsurance decisions.
For more information about the Company’s exposure to catastrophe losses, see “Item 1A - Risk Factors-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 our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance” and “Item 1A - Risk Factors- We may be adversely affected if our pricing and capital models provide materially different indications than actual results.”
Severe weather events over the last two decades underscore the unpredictability of future climate trends, and changing climate conditions could add to the frequency and severity of natural disasters and create additional uncertainty as to future trends and exposures. The insurance industry experienced increased catastrophe losses due to a number of potential causal factors, including, in addition to weather/climate variability, more people living in high-risk areas, population growth in areas with weaker enforcement of building codes, urban expansion and an increase in the average size of a house. For example, hurricane activity has impacted areas further inland than previously experienced by the Company, and demographic changes have resulted in larger populations located in coastal areas which historically have been subject to severe storms and related storm surge, thus expanding the Company’s potential for losses from hurricanes. Additionally, both the frequency and severity of tornadoes and hail storms in the United States have been more volatile during the last decade. The frequency and severity of wildfire losses have been elevated in more recent years, due in part to record droughts in western states that some climate studies suggest are likely to increase over time, as well as demographic changes in areas prone to wildfires. Moreover, the Company’s catastrophe models may be less reliable due to the increased unpredictability in frequency and severity of severe weather events, emerging trends in climate conditions, inadequate reflection of regulatory changes and the other factors mentioned above. Accordingly, the Company may be subject to increased losses from catastrophes and other weather-related events.
•Changing climate conditions could also impact the creditworthiness of issuers of securities in which the Company invests. For example, water supply adequacy could impact the creditworthiness of bond issuers with significant assets or business activities in the Southwestern United States, and more frequent and/or severe hurricanes could impact the creditworthiness of issuers with significant assets or business activities in the Southeastern United States, among other areas. See “Item 1A - Risk Factors-Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced or low returns or material realized or unrealized losses.”
•Increased regulation adopted in response to potential changes in climate conditions may impact the Company and its customers, including state insurance regulations that could impact the Company’s ability to manage property exposures in areas vulnerable to significant climate driven losses. For example, one state passed legislation that restricted a carrier's ability to cancel or non-renew certain policies within or adjacent to declared state of emergency zip codes. If the Company is unable to implement risk-based pricing, modify policy terms or reduce exposures to the extent necessary to address rising losses related to catastrophes and smaller scale weather events (should those increased losses occur), its business may be adversely affected. See “Item 1 - Business-U.S. State and Federal Regulation-Regulatory and Legislative Responses to Catastrophes.” In addition, climate change regulation could increase the Company’s customers’ costs of doing business. For example, insureds faced with carbon management regulatory requirements may have less available capital for investment in loss prevention and safety features which
may, over time, increase loss exposures. Increased regulation may also result in reduced economic activity, which would decrease the amount of insurable assets and businesses.
Net reinsurance recoverables at December 31, 2020 increased by $115 million from December 31, 2019, primarily reflecting the impacts of catastrophe losses in 2020, partially offset by a lower level of recoverables from mandatory pools and associations and the $53 million increase in the allowance for estimated uncollectible reinsurance from the cumulative effect of adoption of updated accounting guidance for credit losses at January 1, 2020.
The following table presents the Company’s top five reinsurer groups by reinsurance recoverable at December 31, 2020 (in millions). Also included is the A.M. Best rating of the Company's predominant reinsurer from each such reinsurer group at February 11, 2021:
At December 31, 2020, the Company held $1.01 billion of collateral in the form of letters of credit, funds and trust agreements held to fully or partially collateralize certain reinsurance recoverables.
Included in net reinsurance recoverables are amounts related to structured settlements, which are annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers’ compensation claims comprise a significant portion. In cases where the Company did not receive a release from the claimant, the amount due from the life insurance company related to the structured settlement is included in the Company’s consolidated balance sheet as a reinsurance recoverable and the related claim cost is included in the liability for claims and claim adjustment expense reserves, as the Company retains the contingent liability to the claimant. If it is expected that the life insurance company is not able to
(1) On October 23, 2016, Genworth Financial (Genworth) announced that they entered into a definitive agreement under which China Oceanwide Holdings Group Co., Ltd. agreed to acquire all of the outstanding shares of Genworth. On March 7, 2017, Genworth stockholders adopted the merger agreement. On January 4, 2021, the parties announced that although the merger agreement remains in effect, they have not extended the closing deadline of December 31, 2020, and either party is able to terminate the merger agreement at any time.
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.
As a result of COVID-19, economic conditions in the United States and other countries around the world have deteriorated significantly. The decreased levels of economic activity, together with the related premium refund programs, have negatively impacted premium volumes in 2020. The Company expects this impact will persist into 2021, but the degree of the impact will depend on the extent and duration of the challenging economic circumstances and could be material. As a result of the impact of the pandemic on the Company’s earned premiums, the Company has experienced, and may continue to experience in the near term, an adverse impact on the underwriting expense ratio.
Property and casualty insurance market conditions are expected to remain competitive during 2021 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, including variability in losses attributable to COVID-19 and related economic conditions; 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.
It is possible that changes in economic conditions and steps taken by federal, state and/or local governments and the Federal Reserve in response to COVID-19 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. 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.”
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 3.8 (4.0 excluding short-term securities) at December 31, 2020. 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 December 31, 2020, 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
The Company also invests much smaller amounts in equity securities, real estate, and 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.
The Company had net pre-tax realized investment gains of $2 million in 2020. Changes in global financial markets due to the continuing impact of COVID-19 could result in net realized investment gains or losses in the Company’s investment portfolio.
Statement of Income for the years ended December 31, 2020, 2019 and 2018
Statement of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
We have audited the accompanying consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedules as listed in the accompanying index to consolidated financial statements and schedules (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the claims and claim adjustment expense reserves represent the Company’s estimate of the ultimate liability for unpaid losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported as of the balance sheet date. The Company's claims and claim adjustment expense reserves balance at December 31, 2020 was $54.5 billion.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s reserving process for claims and claim adjustment expense reserves. This included controls related to the actuarial analyses and the determination of the Company’s estimate of the claims and claim adjustment expense reserves. We involved actuarial professionals with specialized skills and knowledge who assisted in:
•Evaluating the Company’s estimates by performing independent analyses of claims and claim adjustment expense reserves for certain lines of business;
•Assessing the Company's internally prepared actuarial analyses in comparison to the Company's internal experience and related industry trends for selected other lines of business; and
The consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates. All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2019 and 2018 financial statements to conform to the 2020 presentation.
In January 2016, the Financial Accounting Standards Board (FASB) issued updated guidance to address the recognition, measurement, presentation and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair value to be measured at fair value with any changes in fair value recognized in net income. Equity securities that do not have readily determinable fair values may be measured at estimated fair value or cost less impairment, if any, adjusted for subsequent observable price changes, with changes in the carrying value recognized in net income. Additionally, the updated guidance eliminated the available-for-sale balance sheet classification for equity investments. The updated guidance was effective for the quarter ended March 31, 2018 and early application of certain of the provisions in the updated guidance was allowed. The Company adopted the updated guidance for the quarter ended March 31, 2018 and elected to report changes in the fair value of equity investments in net realized investment gains (losses). The adoption of this guidance resulted in the recognition of $22 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that increased retained earnings as of January 1, 2018 and decreased accumulated other comprehensive income (AOCI) by the same amount.
In February 2018, the FASB issued updated guidance that allows a reclassification from AOCI to retained earnings of the stranded tax effects that occurred due to the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA). The updated guidance was effective for the quarter ended March 31, 2019, with early adoption allowed, and was required to be applied retrospectively to each period in which there are items impacted by the TCJA remaining in AOCI or at the beginning of the period of adoption. The Company adopted the updated guidance effective January 1, 2018 and elected to reclassify the income tax effects of the TCJA from AOCI to retained earnings as of January 1, 2018. This reclassification resulted in an increase in retained earnings of $24 million as of January 1, 2018 and a decrease in AOCI by the same amount.
In February 2016, the FASB issued updated guidance on the accounting for leases that requires lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months and retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease).
In March 2020, the Securities and Exchange Commission (SEC) issued Release No. 33-10762 to adopt amendments to the financial disclosure requirements related to certain debt securities, including registered debt securities issued by a wholly-owned, operating subsidiary that are fully and unconditionally guaranteed by the parent company. Prior to the amendments, a parent guarantor was required to provide condensed consolidating financial information for so long as the guaranteed securities were outstanding, regardless of whether the subsidiary issuer could have suspended its public reporting obligations under the applicable SEC requirements with respect to the securities. In accordance with the amended requirements, a parent guarantor
may cease providing the condensed consolidating financial information if the corresponding subsidiary issuer’s public reporting obligation is suspended.
The Company adopted the updated guidance for the quarter ended March 31, 2020 and applied the guidance prospectively. The adoption of the updated guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
Equity securities, which include public common and non-redeemable preferred stocks, are reported at fair value with changes in fair value recognized in net income.
Short-term securities have an original maturity of less than one year and are carried at amortized cost, which approximates fair value.
Some of the factors considered in assessing impairment of fixed maturity investments due to credit-related factors include: (1) the extent to which the fair value has been less than amortized cost; (2) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices; (3) the likelihood of the recoverability of principal and interest; and (4) whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value.
For non-structured fixed maturities (U.S. Treasury securities, obligations of U.S. government and government agencies and authorities, obligations of states, municipalities and political subdivisions, debt securities issued by foreign governments and certain corporate debt), the estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate by the Company. The Company determines the undiscounted recovery value by allocating the estimated value of the issuer to the Company’s assessment of the priority of claims. The present value of the cash flows is determined by applying the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment) and an estimated recovery time frame. Generally, that time frame for securities for which the issuer is in bankruptcy is 12 months. For securities for which the issuer is financially troubled but not in bankruptcy, that time frame is generally 24 months. Included in the present value calculation are expected principal and interest payments; however, for securities for which the issuer is classified as bankrupt or in default, the present value calculation assumes no interest payments and a single recovery amount.
The Company has, from time to time, engaged in securities lending activities from which it generates net investment income by lending certain of its investments to other institutions for short periods of time. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest. This collateral is held by a third-party custodian, and the Company has the right to access the collateral only in the event that the institution borrowing the Company’s securities is in default under the lending agreement (i.e., the Company is not permitted to re-pledge or sell any such collateral). Therefore, the Company does not recognize the receipt of the collateral held by the third-party custodian or the obligation to return the collateral. The loaned securities remain a recorded asset of the Company. The Company accepts only cash as collateral for securities on loan and restricts the manner in which that cash is invested.
As a result of the reviews performed for the years ended December 31, 2020, 2019 and 2018, the Company determined that the estimated fair value substantially exceeded the respective carrying value of its reporting units for those years and that goodwill was not impaired. The Company also determined during its reviews for each year that its other indefinite-lived intangible assets and finite-lived intangible assets were not impaired.
Included in other liabilities in the consolidated balance sheet is the Company’s estimate of its liability for guaranty fund and other insurance-related assessments. The liability for expected state guaranty fund and other premium-based assessments is recognized as the Company writes or becomes obligated to write or renew the premiums on which the assessments are expected to be based. The liability for loss-based assessments is recognized as the related losses are incurred. At December 31, 2020 and 2019, the Company had a liability of $178 million and $184 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $10 million and $13 million, respectively. The liability for such assessments and the related recoverables are not discounted for the time value of money. The loss-based assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers’ compensation claimants and the recoveries are expected to occur over the same period of time.
Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in premium balances receivable. Premium balances receivable are reported net of an allowance for expected credit losses. The allowance is based upon the Company’s ongoing review of amounts outstanding, historical loss data, including delinquencies and write-offs, current and forecasted economic conditions and other relevant factors. Credit risk is partially mitigated by the Company’s ability to cancel the policy if the policyholder does not pay the premium. However, the impact of extended payment terms and non-cancellation concessions granted to customers as a result of the novel coronavirus COVID-19 and related economic conditions is also considered in the Company's evaluation of the allowance.
Other revenues also include revenues from noninsurance subsidiaries (other than fee income) for insurance-related services and on-line insurance brokerage services and is recognized as the service is provided to the customer.
Business Insurance offers a broad array of property and casualty insurance and insurance-related services to its customers, primarily in the United States, as well as in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s. Business Insurance is organized as follows:
•Select Accounts provides small businesses with property and casualty insurance products and services, including commercial multi-peril, workers’ compensation, commercial automobile, general liability and commercial property.
•National Accounts provides large companies with casualty insurance products and services, including workers’ compensation, commercial automobile and general liability, generally utilizing loss-sensitive products, on both a bundled and unbundled basis, as well as risk management, claims administration and other insurance-related services. National Accounts also includes the Company’s commercial residual market business, which primarily offers workers’ compensation claims, policy management and other administrative services related to the involuntary market.
•National Property and Other provides traditional and customized commercial property insurance programs to large and mid-sized customers through National Property. National Property and Other also provides insurance coverage for the commercial trucking industry through Northland Transportation, and serves small- to medium-sized agricultural businesses, including farms, ranches and other agricultural-related operations through Agribusiness. National Property and Other also includes commercial property and general liability policies for small, difficult to place specialty classes of commercial business primarily on an excess and surplus lines basis through Northfield, and also offers tailored property and casualty insurance programs on an admitted basis for customers with common risk characteristics or coverage requirements through National Programs.
Business Insurance also includes Simply Business, a leading provider of small business insurance policies primarily in the United Kingdom, and Business Insurance Other, which primarily comprises the Company’s asbestos and environmental liabilities, and the assumed reinsurance and certain other runoff operations.
Bond & Specialty Insurance provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to its customers in the United States and certain specialty insurance products in Canada, the United Kingdom, the Republic of Ireland and Brazil (through a joint venture, as described below), utilizing various degrees of financially-based underwriting approaches. The range of coverages includes performance, payment and commercial surety bonds for construction and general commercial enterprises; fidelity insurance for private companies, not-for-profit organizations and financial institutions; management liability coverages including directors’ and officers’ liability, employment practices liability, fiduciary liability and cyber risk for public corporations, private companies, not-for-profit organizations and financial institutions; professional liability coverage for a variety of professionals including, among others, lawyers and design professionals; and in the United States only, property, workers’ compensation, auto and general liability for financial institutions.
Bond & Specialty Insurance surety business in Brazil and Colombia is conducted through Junto Holding Brasil S.A. (Junto) and Junto Holding Latam S.A. in Brazil. The Company owns 49.5% of both Junto, a market leader in surety coverages in Brazil, and Junto Holding Latam S.A., which owns a majority interest in JMalucelli Travelers Seguros S.A., a Colombian surety
provider. These joint venture investments are accounted for using the equity method and are included in “other investments” on the consolidated balance sheet.
Personal Insurance writes a broad range of property and casualty insurance covering individuals’ personal risks, primarily in the United States, as well as in Canada. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.
Homeowners and Other policies provide protection against losses to dwellings and contents from a variety of perils (excluding flooding) as well as coverage for personal liability. The Company writes homeowners insurance for dwellings, condominiums and tenants, and rental properties. The Company also writes coverage for boats and yachts and valuable personal items such as jewelry, and also writes coverages for umbrella liability, identity fraud, and weddings and special events.
The following tables summarize the components of the Company’s revenues, income, net written premiums and total assets by reportable business segments.
(1)Segment revenues for reportable business segments exclude net realized investment gains (losses) and revenues included in "interest expense and other." Segment income for reportable business segments equals net income excluding the after-tax impact of net realized investment gains (losses) and income (loss) from "interest expense and other."
(1) The primary component of Interest Expense and Other was after-tax interest expense of $268 million, $272 million and $278 million in 2020, 2019 and 2018, respectively.
(1) The primary components of other assets at both December 31, 2020 and 2019, were accrued over-funded benefit plan assets related to the Company's qualified domestic pension plan and other intangible assets.
The Company’s fixed maturity investment portfolio at December 31, 2020 and 2019 included $2.36 billion and $3.28 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs). Included in the totals at December 31, 2020 and 2019 were $1.24 billion and $1.52 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 $1.12 billion and $1.76 billion at December 31, 2020 and 2019, respectively. Approximately 65% and 54% of the Company’s CMO holdings at December 31, 2020 and 2019, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The weighted average credit rating of the $396 million and $816 million of non-guaranteed CMO holdings at December 31, 2020 and 2019, respectively, was “Aa1” and “Aaa/Aa1,” respectively. The weighted average credit rating of all of the above securities was "Aaa/Aa1” at both December 31, 2020 and 2019.
Future minimum rental income on operating leases relating to the Company’s real estate properties is expected to be $115 million, $101 million, $75 million, $58 million and $38 million for 2021, 2022, 2023, 2024 and 2025, respectively, and $75 million for 2026 and thereafter.
The Company’s short-term securities consist of Aaa-rated registered money market funds, U.S. Treasury securities, high-quality commercial paper (primarily A1/P1) and high-quality corporate securities purchased within a year to their maturity with a combined average of 45 days to maturity at December 31, 2020. The amortized cost of these securities, which totaled $5.51 billion and $4.94 billion at December 31, 2020 and 2019, respectively, approximated their fair value.
The Company is a passive investor in limited partner equity interests issued by third party VIEs. These include certain of the Company’s investments in private equity limited partnerships, hedge funds and real estate partnerships where the Company is not related to the general partner. These investments are generally accounted for under the equity method and reported in the Company’s consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary. These equity interests generally cannot be redeemed. Distributions from these investments are received by the Company as a result of liquidation of the underlying investments of the funds and/or as income distribution. The Company’s maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company’s consolidated balance sheet and any unfunded commitment. The Company considers an investment in a VIE in which it has a 20% or greater equity interest as a significant VIE. Neither the Company’s carrying amounts nor the unfunded commitments related to these significant VIE’s are material individually or in the aggregate.
The following tables summarize, for all fixed maturities classified as available for sale in an unrealized loss position at December 31, 2020 and 2019, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1, in determining whether a credit loss impairment exists.
Credit impairment charges included in net realized investment gains in the consolidated statement of income were as follows:
The following table presents a reconciliation of the beginning and ending balances of the allowance for credit losses on fixed maturities classified as available for sale:
(1)Credit impairment charges recognized in net realized investment gains for the twelve months ended December 31, 2020 included $13 million of credit losses on fixed maturity securities which the Company intends to sell. An allowance for expected credit losses was not previously recorded for these securities.
At December 31, 2020 and 2019, other than U.S. Treasury securities and obligations of U.S. government and government agencies and authorities, the Company was not exposed to any concentration of credit risk of a single issuer greater than 5% of the Company’s shareholders’ equity.
Changes in net unrealized gains (losses) on investment securities that are included as a separate component of other comprehensive income (loss) were as follows:
The Company also sells a small amount of U.S. equity index put option contracts that are settled for cash upon their expiration or when they are rolled over. Net realized investment gains and losses related to these derivatives in 2020, 2019 and 2018 were not significant.
The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions. The level in the fair value hierarchy within which the fair value measurement is reported is based on the lowest level input that is significant to the measurement in its entirety. The three levels of the hierarchy are as follows:
•Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from third party, nationally recognized pricing services. When quoted market prices are unavailable, the Company utilizes these pricing services to determine an estimate of fair value. The fair value estimates provided from these pricing services are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level
3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm’s length transaction.
While the vast majority of the Company’s fixed maturities are included in Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued by the pricing service and estimates the fair value of these bonds using either another internal pricing matrix, a present value income approach, or a broker quote (collectively, the other methodologies). The other methodologies include some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information available in the estimation of fair value, the Company includes the fair value estimates for bonds that are valued using the other methodologies in Level 3.
The Company has a put/call option that was entered into in connection with a business acquisition that allows the Company to acquire the remaining shares of the acquired company at a future date. The fair value of the put/call at December 31, 2020 and 2019 was $5 million and $8 million, respectively, and was determined using an internal model and is based on the acquired company's financial performance, adjusted for a risk margin and discounted to present value. The Company includes the fair value estimate of the put/call in Level 3.
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2020 and 2019.
(1)Includes impairments on investments held at the end of the period as well as amortization on fixed maturities.
The following table presents the balances of reinsurance recoverables, net of the allowance for estimated uncollectible reinsurance, at January 1, 2020 and December 31, 2020, and the changes in the allowance for estimated uncollectible reinsurance for the twelve months ended December 31, 2020.
The Company’s consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) the Company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the Company, at a cost, from losses in excess of the amount it is prepared to accept and to protect the Company’s capital. Reinsurance is placed on both a quota-share and excess-of-loss basis. Ceded reinsurance arrangements do not discharge the Company as the primary insurer, except for instances where the primary policy or policies have been novated, such as in certain structured settlement agreements.
Included in reinsurance recoverables are amounts related to involuntary reinsurance arrangements. The Company is required to participate in various involuntary reinsurance arrangements through assumed reinsurance, principally with regard to residual market mechanisms in workers’ compensation and automobile insurance, as well as homeowners’ insurance in certain coastal areas. In addition, the Company provides services for several of these involuntary arrangements (mandatory pools and associations) under which it writes such residual market business directly, then cedes 100% of this business to the mandatory
pool. Such participations and servicing arrangements are arranged to mitigate credit risk to the Company, as any ceded balances are jointly backed by all the pool members.
The deductible for any calendar year is equal to 20% of the insurer’s direct earned premiums for covered lines for the preceding calendar year. The Company’s estimated deductible under the program is $2.61 billion for 2021. The annual cap limits the amount of aggregate subject losses for all participating insurers to $100 billion. Once subject losses have reached the $100 billion aggregate during a program year, participating insurers will not be liable under the program for additional covered terrorism losses for that program year. There have been no terrorism-related losses that have triggered program coverage since the program was established. Given that the law establishing the program remains untested, there is substantial uncertainty as to how it will be applied if an act of terrorism is certified under the program. In addition, application of the program to a specific event will depend upon whether the government has designated such event as a covered event. It is also possible that future legislative action could change or eliminate the program. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company’s own reinsurance program, future losses from acts of terrorism, particularly involving nuclear, biological, chemical or radiological events, could be material to the Company’s operating results, financial position and/or liquidity in future periods. In addition, the Company may not have sufficient resources to respond to claims arising from a high frequency of high severity natural catastrophes and/or of man-made catastrophic events involving conventional means. While the Company seeks to manage its exposure to man-made catastrophic events involving conventional means, the Company may not have sufficient resources to respond to claims arising out of one or more man-made catastrophic events involving nuclear, biological, chemical or radiological means.
The following table presents the carrying amount of the Company’s goodwill by segment. Each reportable segment includes goodwill associated with the Company’s international business which is subject to the impact of changes in foreign currency exchange rates.
Gross claims and claim adjustment expense reserves at December 31, 2020 increased by $2.67 billion over December 31, 2019, primarily reflecting the impacts of (i) reduced judicial system and claim settlement activity largely related to COVID-19 and (ii) catastrophe losses in 2020. Gross claims and claim adjustment expense reserves at December 31, 2019 increased by $1.18 billion over December 31, 2018, primarily reflecting the impacts of higher volumes of insured exposures and loss cost trends for the current accident year.
Beginning in late March, in response to COVID-19, a number of states have enacted changes designed to effectively expand workers’ compensation coverage by creating a presumption of compensability for certain types of workers. In addition, other states are considering similar changes. Depending on the number of states that institute such changes and the terms of the
changes, the Company could experience elevated claims frequency and severity for its workers’ compensation line, which could have a material adverse effect on its results of operations.
Included in the claims and claim adjustment expense reserves are reserves for long-term disability and annuity claim payments, primarily arising from workers’ compensation insurance and workers’ compensation excess insurance policies, that are discounted to the present value of the estimated future payments. The discount rates used were a range of 3.5% to 5.0% at both December 31, 2020 and December 31, 2019. Total reserves net of the discount were $2.69 billion and $2.48 billion, and the related amount of discount was $1.14 billion and $1.16 billion, at December 31, 2020 and 2019, respectively. Accretion of the discount is reported as part of “claims and claim adjustment expenses” in the consolidated statement of income and was $49 million in each of the years ended December 31, 2020, 2019 and 2018.
In 2020, estimated claims and claim adjustment expenses incurred included $267 million of net favorable development for claims arising in prior years, including $351 million of net favorable prior year reserve development and $49 million of accretion of discount that impacted the Company's results of operations.
•Asbestos reserves - an increase of $295 million, primarily in the segment's domestic general liability product line;
•Workers' compensation - better than expected loss experience in the segment's domestic operations for multiple accident years;
•Commercial property (excluding PG&E subrogation recoveries) - better than expected loss experience in the segment's domestic operations for multiple accident years; and
Bond & Specialty Insurance. Net unfavorable prior year reserve development in 2020 totaled $1 million, as higher than expected loss experience in the domestic general liability product line for management liability coverages for recent accident years was largely offset by better than expected loss experience in the surety product line for multiple accident years.
Business Insurance. Net unfavorable prior year reserve development in 2019 totaled $258 million, primarily driven by the following:
•General liability (excluding asbestos and environmental) - higher than expected loss experience in the segment's domestic operations for primary and excess coverages for multiple accident years, including the impact for accident years 2009 and prior related to the enactment of legislation by a number of states that extended the statute of limitations for childhood sexual molestation claims;
•Environmental reserves - an increase of $76 million, primarily in the segment's domestic general liability product line,
•Commercial property - better than expected loss experience in the segment's domestic operations for recent accident years.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2019 totaled $65 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages and in the fidelity and surety product line for multiple accident years.
Business Insurance. Net favorable prior year reserve development in 2018 totaled $142 million, primarily driven by the following:
•Commercial property - better than expected loss experience in the segment's domestic operations for recent accident years,
•Commercial automobile - higher than expected loss experience for recent accident years;
•Environmental reserves - an increase of $55 million, primarily in the segment's domestic general liability product line.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2018 totaled $266 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages for multiple accident years.
The following is a summary of claims and claim adjustment expense reserves, including certain components, for the Company’s major product lines by reporting segment at December 31, 2020.
(1)Net discount amount includes discount of $61 million on reinsurance recoverables for long-term disability and annuity claim payments.
Claims and claim adjustment expense reserves represent management’s estimate of the ultimate liability for unpaid losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported (IBNR) as of the balance sheet date. Claims and claim adjustment expense reserves do not represent an exact calculation of the liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods that develop estimates for the ultimate cost of claims and claim adjustment expenses. Because the establishment of claims and claims adjustment expense reserves is an inherently uncertain process involving estimates and judgment, currently estimated claims and claim adjustment expense reserves may change. The Company reflects changes to the reserves in the results of operations in the period the estimates are changed.
•The case incurred development method is the same as the paid loss development method but is based on cumulative case-incurred losses rather than paid losses.
For purposes of the claims development tables above, claims reported for direct business are counted even if they eventually close with no loss payment, except in the case of (i) deductible business, where the claim is not counted until the case incurred claim estimate is above the deductible and (ii) International-Canada reported claim counts where claims closed with no loss payment are not counted. Note that claims with zero claim dollars may still generate some level of claim adjustment expenses. Claim counts for assumed business are included only to the extent such counts are available. The Company generally does not receive claim count information for which the underlying claim activity is handled by others, including pools and associations. The Company does not generate claim counts for ceded business. The methods used to summarize claim counts have not changed significantly over the time periods reported in the tables above.
The Company cautions against using the summarized claim count information provided in this disclosure in attempting to project ultimate loss payouts by product line. The Company generally finds claim count data to be useful only on a more granular basis than the aggregated basis disclosed in the claim development tables above, as the risks, average values and other dynamics of the claim process can vary materially by the cause of loss and coverage within product line. For example, in Personal Automobile, the introduction of roadside assistance coverage resulted in a significant increase in claim counts with a low average claim cost. For this reason the Company varies its approach to, and in many cases the level of aggregation for, counting claims for internal analysis purposes depending on the particular granular analysis performed.
It is difficult to estimate the reserves for asbestos and environmental-related claims due to the vagaries of court coverage decisions, plaintiffs’ expanded theories of liability, the risks inherent in complex litigation and other uncertainties, including, without limitation, those which are set forth below.
Asbestos Reserves. 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 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.
•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
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.
Environmental Reserves. In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties. In the course of its 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
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 has been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. As a result of these factors, in 2020, 2019 and 2018, the Company increased its net environmental reserves by $54 million, $76 million and $55 million, respectively.
The Company has geographic exposure to catastrophe losses, which include hurricanes, tornadoes and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions, solar flares and other naturally-occurring events. Catastrophes can also result from terrorist attacks and other intentionally destructive acts including those involving nuclear, biological, chemical and radiological events, cyber events, civil unrest, explosions and destruction of infrastructure. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, wildfires and cyber attacks may produce significant damage in larger areas, especially those that are heavily populated. The Company generally seeks to mitigate its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; the potential impact of changing climate conditions, including higher frequency and severity of weather-related
2020 Debt Issuance. On April 27, 2020, the Company issued $500 million aggregate principal amount of 2.55% senior notes that will mature on April 27, 2050. The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $490 million. Interest on the senior notes is payable semi-annually in arrears on April 27 and October 27. Prior to October 27, 2049, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excluding October 27, 2049 on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current Treasury rate (as defined in the senior notes), plus 25 basis points. On or after October 27, 2049, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to,
Commercial Paper-The Company maintains an $800 million commercial paper program. Interest rates on commercial paper issued in 2020 ranged from 0.12% to 1.62%, and in 2019 ranged from 1.58% to 2.48%.
The Company’s consolidated balance sheet includes the debt instruments acquired in a business acquisition, which were recorded at fair value as of the acquisition date. The resulting fair value adjustment is being amortized over the remaining life of the respective debt instruments using the effective-interest method. The amortization of the fair value adjustment reduced interest expense by $2 million and $1 million for the years ended December 31, 2020 and 2019, respectively.
The Travelers Companies, Inc. fully and unconditionally guarantees the payment of all principal, premiums, if any, and interest on certain debt obligations of its subsidiaries Travelers Property Casualty Corp. (TPC) and Travelers Insurance Group Holdings Inc. (TIGHI). The guarantees pertain to the $200 million 7.75% notes due 2026 and the $500 million 6.375% notes due 2033.
The Company’s Articles of Incorporation provide authority to issue up to five million shares of preferred stock.
In August 2020, 41,997 shares of restricted stock issued by the Company in August 2017 to certain employees of an acquired business vested and were distributed. The value of the shares was recognized over the vesting period and was included with the share-based compensation cost of awards that are issued under the Company’s share-based incentive compensation plan (see note 14).
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 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. In April 2017, the Board of Directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity. During 2020, the Company repurchased 4.9 million shares under its share repurchase authorization, for a total of $625 million. The average cost per share repurchased was $127.17. At December 31, 2020, the Company had $1.16 billion of capacity remaining under its share repurchase authorization.
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 December 31, 2020.
For the years ended December 31, 2020, 2019 and 2018, TRV declared cash dividends per common share of $3.37, $3.23 and $3.03, respectively, and paid cash dividends of $861 million, $844 million and $814 million, respectively.
Statutory net income of the Company’s domestic and international insurance subsidiaries was $2.98 billion, $2.74 billion and $2.61 billion for the years ended December 31, 2020, 2019 and 2018, respectively. Statutory capital and surplus of the Company’s domestic and international insurance subsidiaries was $22.18 billion and $21.33 billion at December 31, 2020 and 2019, respectively.
The following table presents the changes in the Company’s accumulated other comprehensive income (AOCI) for the years ended December 31, 2020, 2019 and 2018.
The following table presents the pre-tax components of the Company’s other comprehensive income (loss) and the related income tax expense (benefit).
Potentially dilutive securities include restricted stock units, deferred stock units, stock options and performance share awards related to the employee share-based incentive compensation programs. The restricted stock units and deferred stock units contain non-forfeitable rights to dividends and are included as participating securities in the calculation of basic and diluted earnings per share using the two-class method. Stock option and performance share awards are included in the calculation of diluted earnings per share using the treasury stock method.
The following table presents the components of income tax expense included in the amounts reported in the Company’s consolidated financial statements:
The following is a reconciliation of income tax expense at the U.S. federal statutory income tax rate to the income tax expense reported in the Company’s consolidated statement of income:
The Company paid income taxes of $578 million, $428 million and $408 million during the years ended December 31, 2020, 2019 and 2018, respectively. The current income tax payable was $131 million and $126 million at December 31, 2020 and 2019, respectively, and was included in other liabilities in the consolidated balance sheet.
The net deferred tax liability comprises the tax effects of temporary differences related to the following assets and liabilities:
Included in the balances at December 31, 2020 and 2019 were $48 million and $34 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $1 million and $3 million, respectively, of tax positions for which the ultimate deductibility is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility could affect the annual effective tax rate depending on the year of deduction and tax rate at the time.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $0 million, $(1) million and $(10) million in interest, respectively. The Company had approximately $13 million accrued for the payment of interest at both December 31, 2020 and 2019.
In connection with the adoption of the 2014 Incentive Plan, The Travelers Companies, Inc. Amended and Restated 2004 Stock Incentive Plan, as amended (the 2004 Incentive Plan) was terminated, joining several other legacy share-based incentive compensation plans that had been terminated in prior years (together, the legacy plans). Outstanding grants were not affected by the termination of the legacy plans. The 2014 Incentive Plan is currently the only plan pursuant to which future stock-based awards may be granted.
On February 2, 2021, the Company, under the 2014 Incentive Plan, granted 1,594,624 stock option awards with an exercise price of $139.83 per share. The fair value attributable to the stock option awards on the date of grant was $23.30 per share.
The Company also has a Performance Share Awards Program established pursuant to the 2004 Incentive Plan and which continues pursuant to the 2014 Incentive Plan. Under the program, the Company may issue performance share awards to certain employees of the Company who hold positions of Vice President (or its equivalent) or above. The performance share awards provide the recipient the right to earn shares of the Company’s common stock based upon the Company’s attainment of certain performance goals and the recipient meeting certain years of service criteria. The performance goals for performance share awards are based on the Company’s adjusted return on equity over a three-year performance period. Vesting of performance
The total fair value of shares that vested during the years ended December 31, 2020, 2019 and 2018 was $127 million, $130 million and $135 million, respectively.
A summary of restricted stock units, deferred stock units and performance share activity under the 2014 Incentive Plan and the legacy plans as of and for the year ended December 31, 2020 is as follows:
In addition to the nonvested shares presented in the above table, there are related nonvested dividend equivalent shares. The number of nonvested dividend equivalent shares related to deferred stock units was 285 at the beginning of the year and 394 at the end of the year and the number of nonvested dividend equivalent shares related to performance shares was 22,359 at the beginning of the year and 29,751 at the end of the year. The dividend equivalent shares are subject to the same vesting terms as the deferred stock units and performance shares.
On February 2, 2021, the Company, under the 2014 Incentive Plan, granted 908,986 common stock awards in the form of restricted stock units, deferred stock units and performance share awards to participating officers, non-employee directors and other key employees. The restricted stock units and deferred stock units totaled 541,687 shares and the performance share awards totaled 367,299 shares. The fair value per share attributable to the common stock awards on the date of grant was $139.83.
The amount of compensation cost for awards subject to a service condition is based on the number of shares expected to be issued and is recognized over the time period for which service is to be provided (requisite service period), generally the vesting period. Awards granted to retiree-eligible employees or to employees who become retiree-eligible before an award’s vesting date are considered to have met the requisite service condition if the vesting terms are accelerated upon retirement. The compensation cost for awards subject to a performance condition is based upon the probable outcome of the performance condition, which on the grant date reflects an estimate of attaining 100% of the performance shares granted. The compensation cost reflects an estimated annual forfeiture rate from 3.5% to 4.5% over the requisite service period of the awards. That estimate is revised if subsequent information indicates that the actual number of instruments expected to vest is likely to differ from previous estimates. Compensation costs for awards are recognized on a straight-line basis over the requisite service period. For awards that have graded vesting terms, the compensation cost is recognized on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award was, in substance, multiple awards. The total compensation cost for all share-based incentive compensation awards recognized in earnings for the years ended December 31, 2020, 2019 and 2018 was $148 million, $142 million and $140 million, respectively. Included in these amounts are compensation cost adjustments of $3 million, $2 million and $3 million, for the years ended December 31, 2020, 2019 and 2018, respectively, that reflected the cost associated with the updated estimate of performance shares due to attaining certain performance levels from the date of the initial grant of the performance awards. The related tax benefits recognized in earnings were $25 million, $26 million and $26 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The following tables summarize the funded status, obligations and amounts recognized in the consolidated balance sheet for the Company’s benefit plans. The Company uses a December 31 measurement date for its pension and postretirement benefit plans.
The total accumulated benefit obligation for the Company’s defined benefit pension plans was $4.40 billion and $4.05 billion at December 31, 2020 and 2019, respectively. The qualified domestic pension plan accounted for $4.15 billion and $3.82 billion of the total accumulated benefit obligation at December 31, 2020 and 2019, respectively, whereas the nonqualified and foreign plans accounted for $0.25 billion and $0.23 billion of the total accumulated benefit obligation at December 31, 2020 and 2019, respectively.
For pension plans with a projected benefit obligation in excess of plan assets, the aggregate projected benefit obligation was $250 million and $228 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $109 million and $100 million at December 31, 2020 and 2019, respectively. For pension plans with an accumulated benefit obligation in excess of plan assets, the aggregate accumulated benefit obligation was $239 million and $218 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $109 million and $100 million at December 31, 2020 and 2019, respectively. For postretirement benefit plans with an accumulated benefit obligation in excess of plan assets, the aggregate accumulated benefit obligation was $170 million and $171 million at December 31, 2020 and 2019, respectively, and the aggregate plan assets were $11 million and $12 million at December 31, 2020 and 2019, respectively.
The $336 million and $451 million actuarial losses experienced in 2020 and 2019, respectively, for the qualified domestic pension plan were largely driven by the decrease in the assumed discount rate from the prior year that was used to determine the projected benefit obligation at December 31, 2020 and 2019, respectively.
The following table indicates the line items in which the respective service costs and non-service cost (benefit) are presented in the consolidated statement of income for the years ended December 31, 2020, 2019 and 2018.
The Company’s other postretirement benefit plans had financial assets of $11 million and $12 million at December 31, 2020 and 2019, respectively, which are measured at fair value on a recurring basis. The assets are primarily corporate bonds, which are categorized as level 2 in the fair value hierarchy.
Substantially all U.S. domestic Company employees are eligible to participate in The Travelers 401(k) Savings Plan (the Savings Plan). Eligible employees can contribute to the Savings Plan, and the Company makes a matching contribution into the employee's Savings Plan account, subject to limitations described below. In addition, starting on January 1, 2020, when an eligible U.S. employee makes a payment toward his or her student loans, the Company makes a contribution of that amount into the employee’s Savings Plan account, subject to limitations described below. The total annual amount of the Company's matching contributions, student loan repayment contributions or a combination of both is the lesser of 5% of eligible pay or $7,000, which becomes 100% vested after three years of service. All Company contributions to the Savings Plan are made in cash and invested according to the employee’s current investment elections and can be reinvested into other investment options in accordance with the terms of the Savings Plan. The Company’s non-U.S. employees participate in separate savings plans. The total expense related to all of the savings plans was $132 million, $123 million and $118 million for the years ended December 31, 2020, 2019 and 2018, respectively.
(2) Sublease income consists of rent from third parties of office space and is recognized as part of other revenues in the consolidated statement of income.
Lease expense was $185 million for the year ended December 31, 2018 for real estate and other operating leases.
The following table presents the contractual maturities of the Company's lease liabilities:
The major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of the Company’s properties is subject are described below.
this regard, the Company employs dedicated specialists and comprehensive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances. Currently, it is not possible to predict legal outcomes and their impact on future loss development for claims and litigation relating to asbestos and environmental claims. Any such development could be affected by future court decisions and interpretations, as well as future changes, if any, in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves. In addition, the Company’s estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or changes 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 results of operations in future periods.
The Company also has contingent obligations for guarantees related to certain investments, certain insurance policy obligations of former insurance subsidiaries and various other indemnifications. The Company also provides standard indemnifications to service providers in the normal course of business. The indemnification clauses are often standard contractual terms. The maximum amount of the Company’s obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at December 31, 2020, all of which is indemnified by a third party.