For Allstate Protection: premium, the number of policies in force (“PIF”), new business sales, policy retention, price changes, claim frequency and severity, catastrophes, loss ratio, expenses, underwriting results, and relative competitive position.
We continue to manage our property catastrophe exposure with the goal of providing shareholders an acceptable return on the risks assumed in our property business and to reduce the variability of our earnings. Our property business includes personal homeowners, commercial property and other property insurance lines. As of December 31, 2016, we have less than a 1% likelihood of exceeding average annual aggregate catastrophe losses by $2 billion, net of reinsurance, from hurricanes and earthquakes, based on modeled assumptions and applications currently available. The use of different assumptions and updates to industry models, and updates to our risk transfer program, could materially change the projected loss. Our growth strategies include areas previously restricted where we believe we can enhance diversification and earn an appropriate return for the risk and as a result our exposure may increase, but in aggregate remain lower than $2 billion as noted above. In addition, we have exposure to severe weather events which impact catastrophe losses.
We will continue to modernize our operating model, including enhancing our digital capabilities, to efficiently deliver our customer value propositions.
DAC We establish a DAC asset for costs that are related directly to the successful acquisition of new or renewal insurance policies, principally agents’ remuneration and premium taxes. For the Allstate Protection business, DAC is amortized to income over the period in which premiums are earned.
Paid claim frequency trends will often differ from gross claim frequency trends due to differences in the timing of when notices are received and when claims are settled. For property damage claims, paid frequency trends reflect little differences as timing between opening and settlement is minimal. For bodily injury, gross frequency trends reflect emerging trends since the difference in timing between opening and settlement is much greater and gross frequency does not experience the same volatility in quarterly fluctuations seen in paid frequency. In evaluating frequency, we typically rely upon paid frequency trends for physical damage coverages such as property damage and gross frequency for casualty coverages such as bodily injury to provide an indicator of emerging trends in overall claim frequency while also providing insights for our analysis of severity.
Our underwriting results were impacted by profit improvement actions that include rate increases, underwriting guideline adjustments, and decreased marketing in select geographies to manage risks.
Expense ratio decreased 1.6 points in 2015 compared to 2014 primarily due to agency compensation, employee compensation and technology costs.
We may continue to experience asbestos and/or environmental losses in the future. These losses could be due to the potential adverse impact of new information relating to new and additional claims or the impact of resolving unsettled claims based on unanticipated events such as arbitrations, litigation, legislative, judicial or regulatory actions. Environmental losses may also increase as the result of additional funding for environmental site cleanup. Because of our annual review, we believe that our reserves are appropriately established based on available information, technology, laws and regulations.
Auto reserve reestimates in 2016 were primarily due to severity development for auto liability coverages that was better than expected. Auto reserve reestimates in 2015 were primarily due to claim severity development for bodily injury coverage for recent years that was more than expected and litigation settlements from older years for Allstate brand. Auto reserve reestimates in 2014 were primarily due to claim severity development that was better than expected.
As of December 31, 2016 and 2015, MCCA includes $28 million and $29 million of reinsurance recoverable on paid claims, respectively, and $4.92 billion and $4.63 billion of reinsurance recoverable on unpaid claims, respectively.
Contract charges related to the cost of insurance totaled $556 million, $550 million and $593 million in 2016, 2015 and 2014, respectively.
In 2015, we shortened the maturity profile of the fixed income securities in Allstate Financial to make the portfolio less sensitive to rising interest rates. The approximately $2 billion of proceeds from the sale of longer duration fixed income securities were initially reinvested in shorter duration fixed income and public equity securities. We expect to shift the majority of the proceeds to performance-based investments over time. These investments primarily support our immediate annuity liabilities and are intended to improve our long-term economic results. We anticipate higher long-term returns on these investments. The dispositions generated net realized capital gains which results in lower future investment income due to the lower yields on the reinvested proceeds until repositioned to performance-based investments. Since June 30, 2015, the carrying value of performance-based investments and market-based equity securities have increased by $1.37 billion to $4.36 billion. The increase is expected to reach $2 billion by the end of 2018. The carrying value will vary from period to period and reflects amounts invested, cash distributions received from investments and changes in valuation of the underlying investments.
Life and annuity contract benefits increased 2.2% or $38 million in 2015 compared to 2014. Excluding results of the LBL business for first quarter 2014 of $65 million, life and annuity contract benefits increased $103 million in 2015 compared to 2014, primarily due to unfavorable life insurance mortality experience and growth at Allstate Benefits. Our 2015 annual review of assumptions resulted in a $4 million increase in reserves primarily for secondary guarantees on interest-sensitive life insurance due to higher than anticipated retention on guaranteed interest-sensitive life business.
The financial results for Allstate Annuities for the years ended December 31 are presented in the following table.
Net investment income decreased 10.7% or $142 million in 2016 compared to 2015, primarily due to lower fixed income portfolio yields and lower average investment balances. The lower fixed income yields relate to duration shortening in 2015 and the repositioning into performance-based investments and equity securities to support our long-term immediate annuities. While we anticipate higher returns on these investments over time, the investment income can vary significantly between periods. Net investment income decreased 14.1% or $217 million in 2015 compared to 2014, primarily due to lower average investment balances resulting from the sale of LBL on April 1, 2014 and the runoff of the deferred fixed annuity business.
Our $12.11 billion portfolio of privately placed securities is diversified by issuer, industry sector and country. The portfolio is made up of 432 issuers. Privately placed corporate obligations may contain structural security features such as financial covenants and call protections that provide investors greater protection against credit deterioration, reinvestment risk or fluctuations in interest rates than those typically found in publicly registered debt securities. Additionally, investments in these securities are made after due diligence of the issuer, typically including discussions with senior management and on-site visits to company facilities. Ongoing monitoring includes direct periodic dialog with senior management of the issuer and continuous monitoring of operating performance and financial position. Every issue not rated by an independent rating agency is internally rated with a formal rating affirmation at least once a year.
Foreign government securities totaled $1.08 billion as of December 31, 2016, with 99.5% rated investment grade and an unrealized net capital gain of $32 million. Of these securities, 69.1% are in Canadian governmental and provincial securities (64.4% of which are held by our Canadian companies), 19.2% are backed by the U.S. government and the remaining 11.7% are highly diversified in other foreign governments.
During fourth quarter 2016, we completed our annual goodwill impairment test using information as of September 30, 2016. The stock price and market capitalization analysis resulted in the fair value of our reporting units exceeding their respective carrying values. The results of this analysis are supported by the operating performance of the individual reporting units as well as their respective industry sector’s performance. Goodwill impairment evaluations indicated no impairment as of December 31, 2016 and no reporting unit was at risk of having its carrying value including goodwill exceed its fair value.
During 2016, we repurchased 20.2 million common shares for $1.34 billion. The common share repurchases were completed through open market transactions and two accelerated share repurchase agreements.
The National Association of Insurance Commissioners (“NAIC”) has also developed a set of financial relationships or tests known as the Insurance Regulatory Information System to assist state insurance regulators in monitoring the financial condition of insurance companies and identifying companies that require special attention or actions by state insurance regulators. The NAIC analyzes financial data provided by insurance companies using prescribed ratios, each with defined “usual ranges”. Additional regulatory scrutiny may occur if a company’s ratios fall outside the usual ranges for four or more of the ratios. Our domestic insurance companies have no significant departure from these ranges.
Reserve for property-liability insurance claims and claims expense estimation Reserves are established to provide for the estimated costs of paying claims and claims expenses under insurance policies we have issued. Property-Liability underwriting results are significantly influenced by estimates of property-liability insurance claims and claims expense reserves. These reserves are an estimate of amounts necessary to settle all outstanding claims, including IBNR, as of the financial statement date.
substantial funds in spread-sensitive fixed income assets. Equity price risk is the risk that the Company will incur losses due to adverse changes in the general levels of the equity markets.
If the Company has not made the decision to sell the fixed income security and it is not more likely than not the Company will be required to sell the fixed income security before recovery of its amortized cost basis, the Company evaluates whether it expects to receive cash flows sufficient to recover the entire amortized cost basis of the security. The Company calculates the estimated recovery value by discounting the best estimate of future cash flows at the security’s original or current effective rate, as appropriate, and compares this to the amortized cost of the security. If the Company does not expect to receive cash flows sufficient to recover the entire amortized cost basis of the fixed income security, the credit loss component of the impairment is recorded in earnings, with the remaining amount of the unrealized loss related to other factors recognized in other comprehensive income.
would be made to borrowers with similar characteristics, using similar types of properties as collateral. The fair value of cost method limited partnerships is determined using reported net asset values. The fair value of bank loans, which are reported in other investments, is based on broker quotes from brokers familiar with the loans and current market conditions. The fair value of agent loans, which are reported in other investments, is based on discounted cash flow calculations. Risk adjusted discount rates are selected using current rates at which similar loans would be made to borrowers with similar characteristics. The fair value measurements for mortgage loans, cost method limited partnerships, bank loans and agent loans are categorized as Level 3.
The following tables present gains and losses from valuation and settlements reported on derivatives not designated as accounting hedging instruments in the Consolidated Statements of Operations. In 2016, 2015 and 2014, the Company had no derivatives used in fair value hedging relationships.
have contributed to, and will continue to contribute to, material year-to-year fluctuations in the Company’s results of operations and financial position.
Management believes that the reserve for property-liability insurance claims and claims expense, net of reinsurance recoverables, is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the Consolidated Statements of Financial Position based on available facts, technology, laws and regulations.
Total amounts recoverable from reinsurers as of December 31, 2016 and 2015 were $6.28 billion and $5.98 billion, respectively, including $93 million and $86 million, respectively, related to property-liability losses paid by the Company and billed to reinsurers, and $6.18 billion and $5.89 billion, respectively, estimated by the Company with respect to ceded unpaid losses (including IBNR), which are not billable until the losses are paid.
The Company has the following catastrophe reinsurance agreements in effect as of December 31, 2016:
The Florida Excess Catastrophe Reinsurance agreement comprises five contracts, as described below, which reinsure Castle Key Insurance Company (“CKIC”) and Castle Key Indemnity Company’s (“CKI”, and together with CKIC, “Castle Key”) for personal lines property excess catastrophe losses in Florida. The agreement includes two contacts placed in the traditional market, CKIC’s and CKI’s reimbursement contracts with the Florida Hurricane Catastrophe Fund (“mandatory FHCF contracts”), and the Sanders Re 2014-2 Contract (“Sanders Re 2014-2 contact”) placed in the ILS markets.
The preferred stock ranks senior to the Company’s common stock with respect to the payment of dividends and liquidation rights. The Company will pay dividends on the preferred stock on a noncumulative basis only when, as and if declared by the Company’s board of directors (or a duly authorized committee of the board) and to the extent that the Company has legally available funds to pay dividends. If dividends are declared on the preferred stock, they will be payable quarterly in arrears at an annual fixed rate. Dividends on the preferred stock are not cumulative. Accordingly, in the event dividends are not declared on the
The net actuarial loss (gain) is recognized as a component of net periodic cost amortized over the average remaining service period of active employees expected to receive benefits. Estimates of the net actuarial loss (gain) and prior service credit expected to be recognized as a component of net periodic benefit cost during 2017 are shown in the table below.
Outside the target asset allocation, the pension plans participate in a securities lending program to enhance returns. As of December 31, 2016, U.S. government fixed income securities and U.S. equity securities are lent out and cash collateral is invested in short-term investments.
The Company made $2 million, $2 million and $3 million in contributions to the ESOP in 2016, 2015 and 2014, respectively. As of December 31, 2016, total committed to be released, allocated and unallocated ESOP shares were 1 million, 37 million and 1 million, respectively.
The change in PSA’s comprises those initially granted in 2016 and the adjustment to previously granted PSA’s for performance achievement. The fair value of performance stock awards is based on the market value of the Company’s stock as of the date of the grant. The market value in part reflects the payment of future dividends expected. The weighted average grant date fair value of performance stock awards granted was $62.32, $70.37 and $52.18 during 2016, 2015 and 2014, respectively. The total fair value of performance stock awards vested was $28 million and $56 million during 2016 and 2015, respectively. None of the performance stock awards vested during 2014.