Net investment income in 2018 was $1.83 billion, $47 million or 3% higher than in 2017. Net investment income in 2017 was $1.79 billion, $85 million or 5% higher than in 2016. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion for a description of the factors contributing to the increases in the Company’s consolidated net investment income in 2018 and 2017 compared with the respective prior years. 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.
Net favorable prior year reserve development in 2017 and 2016 provided 6.1 points and 15.5 points of benefit, respectively, to the combined ratio. Catastrophe losses in 2017 and 2016 accounted for 0.3 points of the combined ratio in each year. The underlying combined ratio in 2017 was 2.3 points higher than the 2016 ratio on the same basis, primarily reflecting the impact of a higher level of international surety losses.
International. Net written premiums in 2018 were $238 million, $39 million or 20% higher than in 2017, primarily driven by increases in the United Kingdom. Net written premiums of $199 million in 2017 increased by 16% over 2016, driven by increases in the United Kingdom and Canada.
Domestic Agency gross and net written premiums in 2017 were both 9% higher than in 2016.
Net asbestos paid loss and loss expenses in 2018, 2017 and 2016 were $225 million, $271 million and $708 million, respectively. Net payments in 2016 included the $458 million payment related to the PPG settlement, as described above. Approximately 9%, 4% and 69% of total net paid losses in 2018, 2017 and 2016, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company’s liability.
The following table displays the funding sources for the $9.85 billion of municipal bonds identified as revenue bonds in the foregoing table at December 31, 2018.
Increasingly unpredictable and severe weather conditions could result in increased frequency and severity of claims under policies issued by the Company. See “Risk Factors-Catastrophe losses 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 “-Outlook-Underwriting Gain/Loss.”
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 in the Southwestern United States, and more frequent and/or severe hurricanes could impact the creditworthiness of issuers in the Southeastern United States, among other areas. See “Risk Factors-Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced 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. For example, state insurance regulation could impact the Company’s ability to manage property exposures in areas vulnerable to significant climate driven losses. 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 “Risk Factors-Catastrophe losses 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.” 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.
The full range of potential liability exposures related to changing climate conditions continues to evolve. Through the Company’s Emerging Issues Committee and its Committee on Climate, Energy and the Environment, the Company works with its business units and corporate groups, as appropriate, to identify and try to assess climate change-related liability issues, which are continually evolving and often hard to fully evaluate. The Company regularly reviews emerging issues, including changing climate conditions, to consider potential changes to its modeling and the use of such modeling, as well as to help determine the need for new underwriting strategies, coverage modifications or new products. See “Risk Factors-The effects of emerging claim and coverage issues on our business are uncertain.”
The following table presents the Company’s top five reinsurer groups by reinsurance recoverable at December 31, 2018 (in millions). Also included is the A.M. Best rating of the Company's predominant reinsurer from each such reinsurer group at February 14, 2019:
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-
The Company does not capitalize the costs to obtain or fulfill the contracts for which revenues are reported in fee income and other revenues, and has not recognized any material impairment losses on the receivables related to these contracts during the twelve months ended December 31, 2018.
As a result of the reviews performed for the years ended December 31, 2018, 2017 and 2016, 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.
Claims and claim adjustment expense reserves represent estimates for the ultimate cost of unpaid reported and unreported claims incurred and related expenses. The reserves are adjusted regularly based upon experience. Included in the claims and claim adjustment expense reserves in the consolidated balance sheet 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 estimated future payments.
The cost of common stock repurchased by the Company is reported as treasury stock and represents authorized and unissued shares of the Company under the Minnesota Business Corporation Act.
The accounting policies used to prepare the segment reporting data for the Company’s three reportable business segments are the same as those described in the Summary of Significant Accounting Policies in note 1.
During the years ended December 31, 2018 and 2017, the Company’s transfers between Level 1 and Level 2 were not significant.
For Business Insurance and for Personal Insurance, claim file information is summarized such that the Company generally recognizes one count for each policy claim event by internal regulatory line of business, regardless of the number of claimants or coverages involved. The claims counts are then accumulated and reported by product line. While the methodology is generally consistent within each segment for the product lines displayed, there are some minor differences between and within segments. For Bond & Specialty Insurance, the Company generally recognizes one count per coverage per policy claim event and one count per bond per surety claim event.
The Company has a shelf registration statement filed with the Securities and Exchange Commission that expires on June 17, 2019 which permits it to issue securities from time to time at prices and on other terms to be determined at the time of offering.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2018, 2017 and 2016, the Company recognized approximately $(10) million, $(33) million and $31 million in interest, respectively. The Company had approximately $14 million and $25 million accrued for the payment of interest at December 31, 2018 and 2017, respectively.
A summary of stock option activity under the 2014 Incentive Plan and the legacy plans as of and for the year ended December 31, 2018 is as follows:
The qualified domestic pension plan assets are invested for the exclusive benefit of the plan participants and beneficiaries and are intended, over time, to satisfy the benefit obligations under the plan. Risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial position. The asset mix guidelines have been established and are reviewed quarterly. These guidelines are intended to serve as tools to facilitate the investment of plan assets to maximize long-term total return and the ongoing oversight of the plan’s investment performance. Investment risk is measured and monitored on an ongoing basis through daily and monthly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
Future minimum annual rental payments under noncancellable operating leases for 2019, 2020, 2021, 2022 and 2023 are $127 million, $105 million, $89 million, $61 million and $41 million, respectively, and $77 million for 2024 and thereafter. Future sublease rental income aggregating approximately $1 million will partially offset these commitments.
In the ordinary course of its insurance business, the Company has received and continues to receive claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation. The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcomes of these disputes are uncertain. In 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
There were no material noncash financing or investing activities during the years ended December 31, 2018, 2017 and 2016.