Investment Management

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.

Investment_Management_Accordion

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.

As of December 31, 2021, Travelers invested assets totaled $87.4 billion, of which 93% was invested in fixed maturity and short-term investments. This high-quality investment portfolio generated net investment income of $3 billion pre-tax in 2021.

In addition to achieving appropriate risk-adjusted returns, our investments enable many environmental and social improvements. As one of the largest investors in municipal bonds, we provide funding to approximately 950 different municipal issuers, with the proceeds of our investments used to improve the quality of life in communities across 48 states, the District of Columbia and Puerto Rico. For example, we invest in municipal bonds that support water and sewer projects ($6 billion), which help mitigate pollution, provide safe drinking water, promote conservation and, in many cases, respond to changing climate conditions. Additionally, our investments in K-12 education ($10.8 billion) and higher education ($5 billion) support enterprises directly involved in improving communities and students’ lives. We currently own almost $2.4 billion in fixed income securities classified as “green bonds” by Bloomberg. We also maintain smaller investments in low-income housing tax credits, which help build affordable housing. See the Investment Portfolio section in our Form 10-K for a detailed breakdown of our investment portfolio. For additional detailed information related to our investment holdings, please see our most recent annual audited statutory basis financial statements for the Travelers Combined Pool and other non-pooled entities. A summary of the investments held by investment type, country and credit rating (where applicable) can be found in the Summary Investment Schedule (Exhibit 2 for the Travelers Combined Pool Audit and Exhibit 1 for the other non-pooled companies audits). Additional investment information can be found in the Supplemental Investment Risks Interrogatories (Exhibit 3 for the Travelers Combined Pool Audit and Exhibit 2 for the other non-pooled companies audits).

We recognize the importance of responsible investment and, accordingly, incorporate environmental, social and governance (ESG) factors in assessing the sustainability of the entities in which we invest. We have traditionally limited our exposure to public equity securities and other riskier asset classes. Since we invest overwhelmingly in fixed income securities, our analysis of ESG factors focuses primarily on credit risk. Our Investment Policy, approved by our Board of Directors, reflects a long-term approach to sustainable value creation and requires Travelers' consideration of ESG factors in the investment process, to the extent relevant.

With respect to our fixed income investments, we invest using a variety of qualitative and quantitative criteria that take into account both expected returns and risks including interest rate, credit and prepayment risks. Our fundamental investment process weighs, on an appropriate basis, financial statement data, management information, relevant ESG factors, third-party research and other information. In addition, our asset allocation process considers the expected return advantages offered in the market in compensation for bearing various risks, including credit risk and ESG risks.

We have assigned internally developed ESG scores to all issuers in our fixed income portfolio. In certain circumstances, this process has led to the exclusion of potential investments or the divestment of portfolio holdings (“negative screening”) due to ESG risks where we believed that the expected returns were not consistent with the underlying risks – in other words, where we did not believe we would be appropriately compensated for the risks that we would be assuming.

Consistent with our credit-based approach to investing, we have also recently announced a public commitment to avoid making new debt or equity investments in companies with significant exposure to thermal coal mining, tar sands or coal-based electricity generation.

In addition, in our municipal bond, mortgage and real estate investments, we consider the impact that changing climate conditions may have on any given city, state or region. Since we assume catastrophe risks such as earthquakes and windstorms in our capacity as an insurer, we also seek to manage our portfolio’s credit risk to such events by assessing our investment exposures in impacted geographic areas. In addition, for municipal bond issuers in the Southwestern United States and other areas of the country susceptible to drought, all investment analyses include an assessment of water supply adequacy.

For further discussion on the incorporation of ESG factors in our investment process and the impact of the regulatory environment in which we operate on the investments we make, please see our SASB disclosure.