The 2013 value creation ratio benefited from improved operating results as well as higher valuation for our equity securities investment portfolio. A lower valuation for our fixed-maturity securities investment portfolio, before the effect of security purchases during 2013, partially offset the higher valuation in our equity portfolio. The contribution from operating results rose 0.8 percentage points in 2013, compared with 2012, while the contribution from realized gains plus the change in unrealized gains from our investment portfolios rose 0.9 points. The 2013 VCR also benefited from other items that affected book value per share, primarily a contribution from updated valuations and related assumptions for our employee benefit pension plan. The 2011 value creation ratio was depressed primarily due to unusually high catastrophe losses that lowered the ratio by 3.3 percentage points compared with 2010 and also drove a 56 percent decline in net income.
growth in net written premiums, primarily in our commercial lines segment. The contributions to commercial lines premiums from audits, which are significantly affected by economic trends, are further discussed in Commercial Lines Insurance Results of Operations.
In recent years prior to 2011, our agency renewal written premium trends included an unfavorable effect from the economic downturn and slow recovery in various regions. In 2013, 2012 and 2011, the effect was favorable. Changes in the economy affect insured exposures that directly relate to premium amounts for any given policy. For commercial accounts, we usually calculate initial estimates for general liability premiums based on estimated sales or payroll volume, while we calculate workers’ compensation premiums based on estimated payroll volume. A change in sales or payroll volume generally indicates a change in demand for a business’s goods or services, as well as a change in its exposure to risk. Policyholders who experience sales or payroll volume changes due to economic factors may also have other exposures requiring insurance, such as commercial auto or commercial property, in addition to general liability and workers’ compensation. Premium levels for these other types of coverages generally are not linked directly to sales or payroll volumes.
In 2013, our commercial lines new business premiums written by our agencies grew 11 percent or $39 million, compared with 15 percent for 2012. In 17 of the 39 states where we market standard market commercial lines policies, new business written premiums grew at a double-digit rate or higher for full-year 2013 compared with the same period of 2012. For new business, our field associates are frequently in our agents’ offices helping to judge the quality of each account, emphasizing the Cincinnati value proposition, calling on sales prospects with those agents, carefully evaluating risk exposure and providing their best quotes. Some of our new business comes from accounts that are not new to the agent. We believe these seasoned accounts tend to be priced more accurately than business that may be less familiar to our agent in cases where it was recently obtained from a competing agent. As we appoint new agencies who choose to move accounts to us, we report these accounts as new business to us.
In early 2013, we formed a multi-department, multi-disciplinary taskforce that has been reviewing our commercial auto business to determine ways to improve profitability, similar to the approach we used to improve workers’ compensation results. Important initiatives arising from the taskforce include education for underwriters and field marketing representatives and more focus on factors to improve pricing precision. These factors include classification of insured commercial autos, information about their cost-new, and improvements in the collection and use of commercial vehicle identification numbers.
Net written premiums for the commercial lines industry, excluding the mortgage and financial guaranty lines of business, are projected to increase approximately 4 percent in 2014, with the industry statutory combined ratio estimated at approximately 100 percent. Over the past several years, renewal and new business pricing has experienced significant competitive pressure, reinforcing the need for more pricing analytics and careful risk
of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 86.6 percent accident year 2012 loss and loss expense ratio reported as of December 31, 2012, developed favorably by 3.2 percentage points to 83.4 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2013. Accident years 2012 and 2011 for the personal lines segment have both developed favorably, as indicated by the progression over time for the ratios in the table.
Catastrophe losses added 0.7 percentage points for 2013, following 2.1 percentage points for both 2012 and 2011, to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.
The 67.1 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2013 improved 5.7 percentage points compared with the 72.8 percent accident year 2012 ratio measured as of December 31, 2012. This improvement reflected higher pricing, careful underwriting and 3.3 points of ratio improvement for 2013 new losses incurred of $250,000 or more, compared with 2012, as shown in the Excess and Surplus Lines Insurance Losses by Size table below.
The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with unchanged levels of permanent book-tax differences.
Historically, we have pursued a strategy of investing some portion of cash flow in tax-advantaged fixed-maturity and equity securities to minimize our overall tax liability and maximize after-tax earnings. See Item 1, Tax-Exempt Fixed Maturities, for further discussion on municipal bond purchases in our fixed-maturity investment portfolio. For our property casualty insurance subsidiaries, approximately 85 percent of income from tax-advantaged fixed-maturity investments is exempt from federal tax. Our life insurance company and our noninsurance companies own an immaterial amount of tax-advantaged fixed-maturity investments. For our property casualty insurance subsidiaries, the dividend received deduction, after the dividend proration of the 1986 Tax Reform Act, exempts approximately 60 percent of dividends from qualified equities from federal tax. For our noninsurance subsidiaries, the dividend received deduction exempts 70 percent of dividends from qualified equities. Our life insurance company owns no equities subject to the dividend received deduction. Details about our effective tax rate are found in Item 8, Note 11 of the Consolidated Financial Statements.
reserves for our excess and surplus lines insurance segment rose $31 million, reflecting a 25 percent increase in earned premiums.
We also have catastrophe reinsurance coverage on our life insurance operations that reimburses us for covered net losses in excess of $9 million. Our recovery is capped at $75 million for losses involving our associates.
Events resulting in capital market or credit market uncertainty, followed by prolonged periods of economic instability or recession, that lead to:
We sponsor a defined benefit pension plan that was modified during 2008. We froze entry into the pension plan, and only participants 40 years of age or older could elect to remain in the plan. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits, for more information about our defined benefit pension plan.
Certain property casualty policies are not entered into underwriting systems as of the effective date of coverage. An actuarial estimate is made to determine the amount of these unprocessed written premiums. A large majority of the estimate is unearned and does not have a material impact on earned premiums.
Included within our other invested assets are $36 million of life policy loans and $32 million of private equity investments. Life policy loans are carried at the receivable value. The private equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for private equity investments.
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value for the years ended December 31, 2013 and 2012. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.
Determination of fair value for structured settlements assumes the discount rates used to calculate the present value of expected payments are the risk-free spot rates plus an A3 rated bond spread for financial issuers at December 31, 2013, to account for nonperformance risk.
This table summarizes activity for our consolidated property casualty loss and loss expense reserves:
inter-departmental committee that includes actuarial management that is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends, that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the consolidated balance sheets also includes
end-of-year retirements. We have purchased more fixed maturities over the past several years to increase the duration of the fixed-maturity portfolio, diversify the types of credit risk and to better match our liability risks, which is consistent with our investment strategy. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.
$5 million and $4 million for the years ended December 31, 2013, 2012 and 2011, respectively. Options exercised during the year ended December 31, 2013, 2012 and 2011 had intrinsic value of $17 million, $6 million, and less than $1 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the year ended December 31, 2013, 2012 and 2011 had total intrinsic value of $15 million, $5 million, and $2 million, respectively.
Options outstanding and exercisable consisted of the following at December 31, 2013:
This table includes unaudited quarterly financial information for the years ended December 31, 2013 and 2012: