We strive to be thoughtful underwriters on both sides of our balance sheet, and we have always allocated our assets to support our insurance operations, not the reverse. Because the primary purpose of our investment portfolio is to fund future claim payments, Travelers employs a risk-adjusted approach to its investment portfolio. Our asset allocation gives us a high level of confidence that our capital is adequate to support our insurance business, in both good times and bad. Our approach has served us remarkably well over a long period and allows us to invest in our businesses with an eye to the future.
Our Co-Chief Investment Officers – members of our Management and Operating Committees – lead our investment department, which directly manages our fixed income assets (93% of our investment portfolio), as well as our investments in equity securities, real estate, private equity limited partnerships, hedge funds, real estate partnerships and joint ventures. The Investment and Capital Markets Committee of the Board oversees our investment strategy and the risks related to our investment portfolio (including valuation and credit risks), capital structure, financing arrangements and liquidity.
Well-Defined and Consistent Investment Philosophy
Our investment portfolio is a key source of stability and strength for Travelers. The portfolio is managed first and foremost to support our insurance operations and, accordingly, is positioned to meet our obligations to policyholders under almost every foreseeable circumstance – anything from a global pandemic to a significant natural disaster to a financial crisis. With this in mind, we are focused on risk-adjusted returns and credit quality rather than reaching for yield that is not commensurate with the underlying risk.
Our asset allocation is designed so that the predictable stream of investment income from our fixed income portfolio will provide a firm and reliable foundation for our business. In addition, the allocation between fixed income and alternative investments is designed such that when the market is challenging for our alternative investment portfolio, we still have a shot at reaching our target returns, and when the alternative portfolio has a strong year, we will benefit from the upside.
Our performance over the past two years is a perfect illustration of how effective this disciplined investment strategy is in managing through very different and volatile market conditions. In 2020, we saw record low interest rates (the 10-year Treasury hit a stunning low of 0.318%), and we experienced significant volatility in the equity markets that negatively impacted the returns from our alternative investment portfolio. Nonetheless, we delivered strong 2020 net investment income of $1.9 billion after-tax, contributing to a strong core return on equity of 11.3%. In 2021, the alternative investment portfolio benefited from the recovery in the equity markets, and the same disciplined strategy and well-constructed portfolio delivered net investment income of $2.5 billion after-tax, contributing to an industry-leading core return on equity of 13.7%.
Strategy, not serendipity, drove these strong results throughout two very different economic and market environments – that is the value of our thoughtful and disciplined approach.
1Rated using external rating agencies or by Travelers when a public rating does not exist. Ratings shown are the higher of the rating of the underlying insurer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default. Below investment grade assets refer to securities rated "Ba" or below.