Building upon the changes introduced late in 2015 to improve claim handling practices, philosophies, leadership and front line personnel, we undertook a number of additional efforts during 2016 with the objective of improving overall claims efficiencies and effectiveness. These were inclusive of, but not limited to (i) driving prompt and thorough investigations, (ii) minimizing the utilization of external resources and building a larger State Auto field team, (iii) reinforcing the criticality of accurate and timely reserving, (iv) reducing the time from opening to closing of each claim, and (v) identifying and investigating potential fraudulent matters and aggressively defending claims through litigation as appropriate. These and other efforts were brought to bear across all claims with particular emphasis on improving outcomes in the commercial and personal lines auto environment. Additionally, whether it be the multitude of hail storms, tornadoes, Hurricane Matthew or the tragic wildfires surrounding Gatlinburg, Tennessee, our CARE associates responded quickly, compassionately and equitably to all of our valued customers.
The personal insurance segment’s SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2015 was 54.7%, compared to pro forma SAP non-catastrophe loss and ALAE ratio of 52.3% in 2014 (Table 2 and Reconciliation Table 4). The 2.4 point increase in the 2015 ratio when compared to 2014 (Table 2 and Reconciliation Table 4) was due to a 6.6 point increase in the personal auto ratio (Table 2), primarily attributable to increased bodily injury severity trends that resulted in higher ultimate loss and LAE estimates for the current and prior accident years. The personal auto ratio increase was partially offset by a decrease in the homeowners ratio of 3.1 points (Table 2 and Reconciliation Table 3) due to improvement in the 2015 accident year.
Losses and loss expenses for a calendar year represent the combined estimated ultimate liability for claims occurring in the current calendar year along with any change in the estimated ultimate liability for claims occurring in prior years. The following table sets forth the provision for losses and loss expenses for those claims occurring in the current and prior years, along with the GAAP loss and LAE ratio for the years ended December 31, 2016, 2015 and 2014:
Our externally managed equity portfolios invest in U.S. small-cap equities and international funds. These managers are permitted to manage the portfolios according to their own respective portfolio objectives. In selecting our outside investment managers we confirm that their portfolio objectives, including risk tolerance, are acceptable to us; however, there may be slight differences in their objectives when compare to how we manage our large-cap equity holdings.
We believe that the fixed maturity portfolio’s exposure to credit risk is minimal as approximately 66.8% of the bonds we own are rated AA or better. We do not intend to change our investment policy or the quality of our fixed maturity investments. The fixed maturity portfolio is managed in a laddered-maturity style and considers business mix and liability payout patterns to ensure adequate cash flow to meet claims as they are presented. We also manage liquidity risk by maintaining sufficient cash balances, owning some agency and U.S. Treasury securities at all times, purchasing bonds of major issuers, and purchasing bonds that are part of a medium or large issue. The fixed maturity portfolio does not have any direct exposure to either exchange rate risk or commodity risk. We do not rely on the use of derivative financial instruments. We categorize our fixed maturities as available-for-sale in order to provide us greater flexibility in managing our portfolio. We do not maintain a trading portfolio.
At December 31, 2016, 2015 and 2014, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.
The potential impact of the loss reserve variability on net income can be illustrated using the range end points and carried reserve amounts listed above. For example, if ultimate losses reach a level corresponding to the high point of the range, $1,218.8 million, the reserve increase of $38.1 million corresponds to an after-tax decrease of $24.8 million in net income, assuming a tax
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of State Auto Financial Corporation and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
The following tables set forth the Company’s gross unrealized losses and fair value on its investments by lot, aggregated by investment category and length of time for individual securities that have been in a continuous unrealized loss position at December 31, 2016 and 2015:
Proceeds on sales of available-for-sale securities in 2016, 2015 and 2014 were $365.4 million, $326.2 million and $263.3 million, respectively.
The Company recorded adverse development related to prior years’ loss and loss expense reserves in 2016, 2015 and 2014 of $27.0 million and $10.0 million, and $45.1 million, respectively. Unallocated loss adjustment expenses contributed $3.7 million of the adverse development and catastrophe reserves contributed $1.4 million of favorable development in 2016. The personal insurance segment non-catastrophe loss and ALAE reserves accounted for $7.8 million of the adverse development in 2016, driven by personal auto which contributed $7.9 million of adverse development, primarily due to higher than anticipated bodily injury severity from the prior two accident years. The business insurance segment non-catastrophe loss and ALAE reserves contributed $3.9 million of favorable development in 2016, driven by other & product liability and workers’ compensation of $4.5 million and $4.2 million, respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years. The favorable development was partially offset by adverse development in commercial auto of $3.3 million, which was driven by higher than anticipated bodily injury severity from the prior two accident years. The specialty insurance segment non-catastrophe loss and ALAE reserves accounted for $20.8 million of adverse development in 2016, which was driven by programs and E&S casualty with adverse development of $14.3 million and $4.6 million, respectively. Programs adverse development was driven by higher than expected severity in programs with commercial auto exposures. E&S casualty adverse development was driven by increased severity from the healthcare line, which was placed in run-off in the first quarter of 2016.
Income taxes for the year ended December 31, 2016 reflect the impact of a correction of prior period deferred tax expense related to expired stock options. As a result of the correction, deferred federal income tax expense (“other, net” above) and additional paid-in-capital were reduced by $1.6 million, respectively.
insurance regulations of Iowa and Ohio (the states of domicile), the maximum amount of dividends that the Company may pay out of earned surplus to shareholders within a twelve month period without prior approval of the Department is limited to the greater of 10% of the most recent year-end policyholders’ surplus or net income for the twelve month period ending the 31st day of December of the previous year-end. Pursuant to these rules, approximately $84.4 million is available for payment to State Auto Financial from its insurance subsidiaries in 2016 without prior approval. State Auto Financial received dividends from its insurance subsidiaries in the amount of $10.0 million, $15.0 million and $20.0 million in 2016, 2015 and 2014, respectively.
The following table sets forth the status of the Company’s non-vested and vested restricted shares and changes for the years ended December 31, 2016, 2015 and 2014: