Chaucer’s underwriting loss for the year ended December 31, 2017 was $45.1 million, compared to an underwriting profit of $80.3 million for the year ended December 31, 2016, a decline of $125.4 million. This decrease is primarily due to higher catastrophe losses. Catastrophe losses for the year ended December 31, 2017 were $131.1 million, compared to $8.0 million for the year ended December 31, 2016, an increase of $123.1 million. The high level of catastrophe activity in 2017 is primarily due to hurricanes Harvey, Irma and Maria and two earthquakes in Mexico in the third quarter and California wildfires in the fourth quarter. Favorable development on prior years’ loss reserves for the year ended December 31, 2017 was $34.1 million, compared to $95.3 million for the year ended December 31, 2016, a decrease of $61.2 million, including the effect of foreign exchange fluctuations (See “Foreign Exchange” and “Reserve for Loss and Loss Adjustment Expenses” sections below for further discussion).
The major causes of material uncertainty relating to ultimate losses and LAE (“risk factors”) generally vary for each line of business, as well as for each separately analyzed component of the line of business. In some cases, such risk factors are explicit assumptions of the estimation method and in others, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain substantially unchanged. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.
As stated above, numerous factors (both internal and external) contribute to the inherent uncertainty in the process of establishing loss reserves, including changes in the rate of inflation for goods and services related to insured damages (e.g., medical care, home repairs, etc.), changes in the judicial interpretation of policy provisions, and settlement obligations, changes in the general attitude of juries in determining damage awards, legislative actions, changes in the extent of insured injuries, changes in the trend of expected frequency and/or severity of claims, changes in our book of business (e.g., change in mix due to new product offerings, new geographic areas, etc.), changes in our underwriting practices, and changes in claim handling procedures and/or systems. Regarding our indirect business from voluntary and involuntary pools, we are provided loss estimates by managers of each pool. We adopt reserve estimates for the pools that consider this information and other facts.
Personal and Commercial Automobile Bodily Injury - loss reserves recorded for bodily injury on U.S. voluntary business were $611.1 million as of December 31, 2017. A key assumption for bodily injury is the inflation rate underlying the estimated reserve. A five point change (e.g., 4% changed to 9% or -1%) in the embedded inflation rate would have changed total reserves by approximately $64 million, either positive or negative, respectively, at December 31, 2017.
See also Note 1 - “Summary of Significant Accounting Policies, New Accounting Pronouncements, Recently Issued Standards” in the Notes to Consolidated Financial Statements and Supplementary Data of this Form 10-K. Beginning in 2018, upon the implementation of ASU No. 2016-01, all increases or decreases in fair value on equity securities will be reflected in net income as they occur, rather than accumulated other comprehensive income, eliminating the requirement to monitor these securities for OTTI.
At December 31, 2017, THG, as a holding company, held approximately $313.7 million of fixed maturities and cash. We believe our holding company assets will be sufficient to meet our 2018 obligations, which consist primarily of dividends to our shareholders (as and to the extent declared), the interest on our senior and subordinated debentures, certain costs associated with benefits due to our former life employees and agents, and, to the extent required, payments related to indemnification of liabilities associated with the sale of various subsidiaries. As discussed below, we have, and opportunistically may continue to, repurchase our common stock and debt. We may decide to provide funds to the holding company for these or other opportunities through dividends or short-term intercompany lending arrangements.
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
In connection with the reinsurance arrangement, insurance liabilities of approximately $443 million were ceded, including $137.4 million of written premiums, and approximately $419 million of investments, cash, and premiums receivable were transferred. The $25 million difference between assets and liabilities approximates the DAC balance associated with this business.
The Company participates in a security lending program for the purpose of enhancing income. Securities on loan to various counterparties had a fair value of $23.4 million and $29.9 million at December 31, 2017 and 2016, respectively, and were fully collateralized by cash. The fair value of the loaned securities is monitored on a daily basis, and the collateral is maintained at a level of at least 102% of the fair value of the loaned securities. Securities lending collateral is recorded by the Company in cash and cash equivalents, with an offsetting liability included in expenses and taxes payable.
In accordance with Lloyd’s operating guidelines, the Company deposits funds at Lloyd’s to support underwriting operations. These funds are available only to fund claim obligations. At December 31, 2017 and 2016, fixed maturities with a fair value of $528.1 million and $491.2 million, respectively, and cash of $7.1 million and $6.3 million, respectively, were on deposit with Lloyd’s.
The Company recognizes the current net underfunded status of its plans in its Consolidated Balance Sheets. Changes in the funded status of the plans are reflected as components of either net income or accumulated other comprehensive loss or income. The components of accumulated other comprehensive loss or income are reflected as either a net actuarial gain or loss or a net prior service cost.
The unrecognized net actuarial gains (losses) which exceed 10% of the greater of the projected benefit obligation or the fair value of plan assets are amortized as a component of net periodic pension cost over the next five years. The following table reflects the total estimated amount of actuarial losses that will be amortized from accumulated other comprehensive income into net periodic pension cost in 2018 (the estimated expense related to the Chaucer plan was converted to U.S. dollars at an exchange rate of 1.35):
In addition to the defined benefit plans, THG provides a defined contribution 401(k) plan for its U.S. employees, whereby the Company matches employee elective 401(k) contributions, up to a maximum of 6% of eligible compensation in 2017, 2016, and 2015. The Company’s expense for this matching provision was $21.3 million, $21.4 million and $20.1 million for 2017, 2016 and 2015, respectively. In addition to this matching provision, the Company can elect to make an annual contribution to employees’ accounts. Additional contributions amounted to $2.2 million and $2.0 million and were contributed to the plan during 2017 and 2015, respectively.
A one-percentage point change in assumed health care cost trend rates in each year would have an immaterial effect on net periodic benefit cost during 2017 and accumulated postretirement benefit obligation at December 31, 2017.
The decrease in ceded reinsurance premiums from 2015 to 2016 is primarily due to the above mentioned non-recurring U.K. motor activity in 2015, partially offset by a planned increase in Chaucer’s ceded reinsurance premiums as the Company continues to manage its overall underwriting risk. The increase in ceded reinsurance premiums from 2016 to 2017 is primarily due to Chaucer’s continued planned increase in reinsurance purchases.
The table below summarizes the gross, ceded and net reserve for losses and LAE and reconciles to the incurred claims development in the following section. Accordingly, the commercial multiple peril, workers’ compensation, commercial automobile liability lines and general liability and umbrella - occurrence presentation includes AIX program business. Chaucer is presented in two components, its ongoing core lines and it’s reinsured and run-off lines.
The incurred and cumulative paid losses and ALAE, IBNR and reported claim counts retroactively includes the 6 month period that pre-dates the acquisition of Chaucer on July 1, 2011. Additionally, during 2011 Chaucer experienced an elevated level of high severity catastrophe events. For example, three such events, the February 2011 New Zealand earthquake, March 2011 Japanese tsunami and October 2011 Thailand floods totaled approximately $135 million of incurred losses, and each event was in excess of $30 million. Chaucer experienced no catastrophe events in excess of $30 million from 2012 through 2016. During 2017, hurricanes Harvey and Irma totaled approximately $85 million of incurred losses, and each event was in excess of $40 million.
The minimum statutory capital and surplus necessary to satisfy the Company’s regulatory requirements was $500.7 million, $460.1 million and $409.9 million, which equals the Authorized Control Level at December 31, 2017, 2016 and 2015, respectively. Beginning in 2017, the NAIC modified the RBC formula to require the inclusion of catastrophe risk. Accordingly, the Authorized Control Levels for 2016 and 2015 have been restated to reflect this change.