• Net favorable prior year reserve development of $771 million ($510 million after-tax)
The underwriting expense ratio of 31.5% was 0.2 points lower than the underwriting expense ratio of 31.7% in 2015.
Earned premiums of $14.62 billion in 2016 were $99 million or 1% higher than in 2015. Earned premiums of $14.52 billion in 2015 were comparable to 2014.
The underwriting expense ratio of 32.9% in 2016 was 0.4 points higher than the underwriting expense ratio of 32.5% in 2015.
Select Accounts. Net written premiums of $2.73 billion in 2016 were comparable with 2015. Business retention rates remained strong in 2016. Renewal premium changes in 2016 remained positive but were lower than in 2015. New business premiums in 2016 increased over 2015. Net written premiums of $2.72 billion in 2015 were comparable to 2014. Business retention rates remained strong in 2015. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 were comparable to 2014.
The combined ratio of 95.1% in 2016 was 8.5 points higher than the combined ratio of 86.6% in 2015.
Net investment income is a material contributor to the Company's results of operations. Although interest rates increased in the latter part of 2016, they remain at very low levels by historical standards. Based on the current interest rate environment, the Company estimates that the impact of lower reinvestment yields, partially offset by the impact of a slightly higher level of fixed maturity investments, could, during 2017, result in approximately $15 million to $20 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to the corresponding quarters of 2016. Net investment income from the non-fixed maturity investment portfolio in 2016 was higher than in 2015. The impact of future market conditions on net investment income from the non-fixed maturity investment portfolio during 2017 is hard to predict. If general economic conditions and/or investment market conditions deteriorate during 2017, the Company could experience a reduction in net investment income and/or significant realized investment losses, including impairments.
The Company had a net pre-tax unrealized investment gain of $865 million ($569 million after-tax) in its fixed maturity investment portfolio at December 31, 2016. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders' equity, and a declining interest rate environment would have the opposite effects. The Company's investment portfolio has benefited
United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world as a corporate member of Lloyd's. Business and International Insurance is organized as follows:
Proceeds from sales of fixed maturities classified as available for sale were $1.42 billion, $1.95 billion and $1.05 billion in 2016, 2015 and 2014, respectively. Gross gains of $79 million, $95 million and $44 million and gross losses of $20 million, $14 million and $12 million were realized on those sales in 2016, 2015 and 2014, respectively.
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2016 and 2015.
The Company utilized a pricing service to estimate fair value for approximately 98% and 99% of short-term securities at December 31, 2016 and 2015, respectively. A description of the process and inputs used by the pricing service to estimate fair value is discussed in the "Fixed Maturities" section above. Estimates of fair value for U.S. Treasury securities and money market funds are based on market quotations received from the pricing service and are disclosed in Level 1 of the hierarchy. The fair value of other short-term fixed maturity securities is estimated by the pricing service using observable market inputs and is disclosed in Level 2 of the hierarchy. For short-term securities where an estimate is not obtained from the pricing service, the carrying value approximates fair value and is included in Level 3 of the hierarchy.
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.
The Company utilizes a corporate catastrophe excess-of-loss reinsurance treaty with unaffiliated reinsurers to manage its exposure to losses resulting from catastrophes and to protect its capital. In addition to the coverage provided under this treaty, the Company also utilizes catastrophe bonds to protect against certain weather-related and earthquake losses in the Northeastern United States, and a Northeast catastrophe reinsurance treaty to protect against losses resulting from weather-related and earthquake catastrophes in the Northeastern United States. The Company also utilizes excess-of-loss treaties to protect against earthquake losses up to a certain threshold in Business and International Insurance (for certain markets) and for Personal Insurance, and several reinsurance treaties specific to its international operations.
(1)Includes goodwill associated with the Company's international business which is subject to the impact of changes in foreign currency exchange rates.
Amortization expense of intangible assets was $11 million, $26 million and $46 million for the years ended December 31, 2016, 2015 and 2014, respectively. Intangible asset amortization expense is estimated to be $9 million in 2017, $8 million in 2018, $6 million in 2019, $5 million in 2020 and $5 million in 2021.
Asbestos and Environmental Reserves. 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 risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company's previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Company's ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near
The Company's U.S. insurance subsidiaries, domiciled principally in the State of Connecticut, are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid by each insurance subsidiary to its respective parent company without prior approval of insurance regulatory authorities. A maximum of $3.69 billion is available by the end of 2017 for such dividends to the holding company, TRV, without prior approval of the Connecticut Insurance Department. The Company may choose to accelerate the timing within 2017 and/or increase the amount of dividends from its insurance subsidiaries in 2017, which could result in certain dividends being subject to approval by the Connecticut Insurance Department.
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:
For tax return purposes, as of December 31, 2016, the Company had net operating loss (NOL) carryforwards in Brazil and the United Kingdom. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. Only the benefits of the United Kingdom NOL carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets. The NOL amounts by jurisdiction and year of expiration are as follows:
The Company has discretion regarding whether to provide additional funding and when to provide such funding to its qualified domestic pension plan. In 2016, 2015 and 2014, there were no required contributions to the qualified domestic pension plan. In 2016, 2015 and 2014, the Company voluntarily made contributions totaling $200 million, $100 million and $200 million, respectively, to the qualified domestic pension plan. There is no required contribution to the qualified domestic pension plan during 2017, and the Company has not determined whether or not additional funding will be made during 2017. With respect to the Company's foreign pension plans, there are no significant required contributions in 2017.
In 2016, the Company began using a full yield-curve approach in the estimation of the service and interest cost components of net periodic benefit costs for its qualified and nonqualified domestic pension plans and its domestic postretirement benefit plans. The full yield curve approach applies the specific spot rates along the yield curve that the Company used to determine its projected benefit obligation at the beginning of the year to the projected cash flows related to service and interest costs. Previously, the Company estimated these service and interest cost components by applying a single weighted-average discount rate derived from this yield curve. This change was made to provide a better estimate of the service and interest cost components of net periodic benefit costs, consistent with the methodology used to estimate the projected benefit obligation for each of the benefit plans.
In response to these claims, Travelers moved to enjoin the Statutory Actions and the Common Law Actions in the federal bankruptcy court that had presided over the bankruptcy of its former policyholder Johns-Manville Corporation on the ground that the suits violated injunctions entered in connection with confirmation of the Johns-Manville bankruptcy (the 1986 Orders). The bankruptcy court issued a temporary restraining order and referred the parties to mediation, which resulted in settlements of the Statutory Actions and the Common Law Actions (the Settlements). The Settlements were contingent upon, among other contingencies, a final order confirming that the 1986 Orders enjoined the Statutory Actions and the Common Law Actions as well as related contribution claims against Travelers (the Clarifying Order).