The following table sets forth information regarding the Company's net pre-tax realized investment gains.
Claims and claim adjustment expenses in 2016 were $15.07 billion, $1.35 billion or 10% higher than in 2015, primarily reflecting the impacts of (i) higher volumes of insured exposures, (ii) loss cost trends, (iii) higher catastrophe losses, (iv) lower net favorable prior year reserve development and (v) higher loss estimates in the personal automobile product line for bodily injury liability coverages, partially offset by (vi) lower non-catastrophe fire-related losses and other loss activity in Business Insurance. Catastrophe losses in 2016 primarily resulted from Hurricane Matthew, wind and hail storms in several regions of the United States, flooding in the Southeast region of the United States, wildfires in Canada and Tennessee, and winter storms in the eastern United States. Catastrophe losses in 2015 primarily resulted from wildfires in California, and several winter, wind and hail storms throughout the United States.
The combined ratio of 97.8% in 2017 was 3.7 points higher than the combined ratio of 94.1% in 2016.
Income tax expense in 2017 was $208 million, $101 million or 33% lower than in 2016, primarily reflecting the impact of the $257 million decrease in income before income taxes in 2017 and the $17 million reduction in income tax expense resulting from the resolution of prior year tax matters. Income tax expense in 2016 was $309 million, $26 million or 9% higher than in 2015, primarily reflecting the impact of the $55 million increase in income before income taxes in 2016.
For its domestic Agency business, Personal Insurance had approximately 6.9 million and 6.6 million active policies at December 31, 2017 and 2016, respectively.
The Company bases its investment decision on the underlying credit characteristics of the municipal security. The weighted average credit rating of the municipal bond portfolio was "Aa1" at December 31, 2017.
The tables below set forth the probabilities that estimated losses, comprising claims and allocated claim adjustment expenses (but excluding unallocated claim adjustment expenses), from a single event occurring in a one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars, net of tax at the newly enacted federal tax rate of 21%, and as a percentage of the Company's common equity), based on the proprietary and third-party computer models utilized by the Company at December 31, 2017. For example, on the basis described below the tables, the Company estimates that there is a one percent chance that the Company's loss from a single U.S. and Canadian hurricane in a one-year timeframe would equal or exceed $1.6 billion, or 7% of the Company's common equity at December 31, 2017.
The $127 million increase in net reinsurance recoverables over December 31, 2016 primarily reflected the impacts of catastrophe losses and the asbestos reserve increase in 2017, partially offset by cash collections in 2017, including the settlement of certain disputes as discussed in more detail in note 16 of notes to the consolidated financial statements.
The consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to the 2016 and 2015 financial statements to conform to the 2017 presentation, including reclassifications related to the realignment of the Company's reportable business segments as described in the "Nature of Operations" section of this note. All material intercompany transactions and balances have been eliminated.
determination that it is more likely than not that the reporting unit's fair value is less than its carrying value, including goodwill (consistent with current guidance), or (2) applying Step 1.
Proceeds from the sale of real estate investments were $23 million, $69 million and $31 million in 2017, 2016 and 2015, respectively. Gross gains of $10 million, $7 million and $4 million were realized on those sales in 2017, 2016 and 2015, respectively, and there were no gross losses. Accumulated depreciation on real estate held for investment purposes was $364 million and $332 million at December 31, 2017 and 2016, respectively.
While the vast majority of the Company's fixed maturities are included in Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued by the pricing service and estimates the fair value of these bonds using an internal pricing matrix with some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information, the Company includes the fair value estimates for these particular bonds in Level 3. The fair value of the fixed maturities for which the Company used an internal pricing matrix was
The Terrorism Risk Insurance Program is a Federal program administered by the Department of the Treasury authorized through December 31, 2020 that provides for a system of shared public and private compensation for certain insured losses resulting from certified acts of terrorism.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act of 2017 (TCJA) which, among other changes, reduced the U.S. federal tax rate from 35% to 21% beginning on January 1, 2018 and imposed a tax on undistributed and previously untaxed post-1986 foreign earnings and profits (accumulated foreign earnings). The estimated effects of enactment of TCJA are reflected in the net deferred tax asset and current tax liability that are reported on the Company's balance sheet at December 31, 2017.
Total income tax expense for 2017 included a net charge of $129 million to reflect the change in tax laws and tax rates included in TCJA at the date of enactment, resulting primarily from revaluing the Company's deferred tax assets and liabilities and the tax imposed on accumulated foreign earnings.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016:
The Company has discretion regarding whether to provide additional funding and when to provide such funding to its qualified domestic pension plan. In 2017, 2016 and 2015, there were no required contributions to the qualified domestic pension plan. In 2017, 2016 and 2015, the Company voluntarily made contributions totaling $300 million, $200 million and $100 million, respectively, to the qualified domestic pension plan. There is no required contribution to the qualified domestic pension plan during 2018, and the Company has not determined whether or not additional funding will be made during 2018. With respect to the Company's foreign pension plans, there are no significant required contributions in 2018.
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 the future development of claims and litigation relating to asbestos and environmental claims. Any such development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company's current insurance reserves. In addition, the Company's estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or changes in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company's results of operations in future periods.
(1)Income tax expense for the fourth quarter and full year of 2017 included a net charge of $129 million to reflect the change in tax laws and tax rates enacted in the U.S. on December 22, 2017 as part of the Tax Cuts and Jobs Act of 2017, resulting primarily from revaluing the Company's deferred tax assets and liabilities and the tax imposed on accumulated foreign earnings.