Cincinnati Financial Corporation owns our headquarters building located on 100 acres of land in Fairfield, Ohio. This building has 1,508,200 square feet of total space. The property, including land, is carried in our financial statements at $134 million at December 31, 2015, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies 6,750 square feet (less than 1 percent). This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.
The Cincinnati Insurance Company owns the CFC Winton Center used for business continuity, with approximately 48,000 square feet of total space, located approximately six miles from our headquarters. The property, including land, is carried on our financial statements at $9 million at December 31, 2015, and is classified as land, building and equipment, net, for company use. This property is used by all segments reported in the Consolidated Financial Statements and accompanying Notes.
On January 1, 2012, we retrospectively adopted ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. All prior year information has been restated.
Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on net written premium volume for the first nine months of 2015, among approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 39 states as discussed in Item 1, Our Business and Our Strategy.
To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. We refer to this measure as our value creation ratio, or VCR, and it is made up of two primary components: (1) our rate of growth in book value per share plus (2) the ratio of dividends declared per share to beginning book value per share. This measure, intended to be all-inclusive regarding changes in book value per share, uses originally reported book value per share in cases where book value per share has been adjusted, such as after the adoption of Accounting Standards Updates with a cumulative effect of a change in accounting.
For the period 2013 through 2017, we are targeting an annual value creation ratio averaging 10 percent to 13 percent. We were below that range for 2015, but within it for the three-year and five-year periods that ended in December 2015. For the period 2009 through 2012, our annual value creation ratio averaged 12.4 percent, within the 12 percent to 15 percent five-year target range established in early 2009, soon after the U.S. credit crisis. For several years following the credit crisis, interest rates generally declined and credit spreads tightened, increasing the contribution of valuation gains from our fixed-maturity securities to the VCR. Those gains contributed between 2 percent and 3 percent annually to VCR during 2010 through 2012. Although a similar contribution was
not expected to occur in the subsequent five-year period, as indicated by a significant negative effect in both 2013 and 2015, management continues to believe the company will continue to produce strong underwriting results.
The 2015 value creation ratio included strong operating results as its primary contributor, offsetting negative contributions from both our fixed-maturity and equity securities investment portfolios due to a decline in market valuations for much of the year. The 2014 contribution from operating results was 1.3 percentage points lower than in 2013, while the contribution from realized gains plus the change in unrealized gains from our investment portfolios in aggregate was 0.9 points lower. The 2013 VCR included very favorable contributions from both operating results and a rising valuation for our equity securities investment portfolio, partially offset by an unfavorable valuation effect from our fixed-maturity securities portfolio. It 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, while that effect in 2014 and 2015 was minimal.
The board of directors is committed to rewarding shareholders directly through cash dividends and share repurchase authorizations. Through 2015, the company has increased the annual cash dividend rate for 55 consecutive years, a record we believe is matched by only eight other publicly traded U.S. companies. In addition to regular dividends, excellent company performance provided the opportunity to further reward shareholders and was the main driver of a special dividend paid in December 2015. The board regularly evaluates relevant factors in dividend-related decisions, and the 2015 increase to the regular dividend and the special dividend reflected confidence in our strong capital, liquidity and financial flexibility, as well as progress through our initiatives to improve earnings performance while growing insurance premium revenues. We discuss our financial position in more detail in Liquidity and Capital Resources.
For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $4.460 billion at year-end 2015 compared with $4.438 billion at year-end 2014.
definition provided by Property Claims Service (PCS), a division of Insurance Services Office (ISO). PCS defines a catastrophe as an event that causes countrywide damage of $25 million or more in insured property losses and affects a significant number of policyholders and insureds.
to pay interest or dividends; signs indicating that the receivable carrying amount may not be recoverable; and changes in legal factors or in the business climate.
Impairment charges are recorded for other-than-temporary declines in value if, in the asset impairment committee’s judgment, the value is not expected to be recouped within a designated recovery period. When determining OTTI charges for our fixed-maturity portfolio, management places significant emphasis on whether issuers of debt are current on contractual payments and whether future contractual amounts are likely to be paid. Our fixed-maturity invested asset impairment policy states that OTTI is considered to have occurred (1) if we intend to sell the impaired fixed-maturity security; (2) if it is more likely than not we will be required to sell the fixed-maturity security before recovery of its amortized cost basis; or (3) if the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. If we intend to sell or it is more likely than not we will be required to sell, the amortized cost of any such securities is reduced to fair value as the new amortized cost basis, and a realized loss is recorded in the quarter in which it is recognized. When we believe that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount to the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the quarter in which it occurs. The difference between the fair value and the net present value of the cash flows of the security, the noncredit loss, is recognized in other comprehensive income as an unrealized loss.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had been less than cost, the severity of the decline in fair value below cost, the volatility of the security and our ability and intent to hold each position until its forecasted recovery.
Holding all other assumptions constant, a 0.5 percentage-point decrease in the discount rate would decrease our 2016 income before income taxes by $1 million. A 0.5 percentage-point decrease in the expected return on plan assets would decrease our 2016 income before income taxes by $1 million.
We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company, and the financial results of our reinsurance assumed operations.
Other written premiums consist primarily of premiums ceded to reinsurers as part of our ceded reinsurance program. A decrease in ceded premiums, other than Cincinnati Re premiums, contributed $34 million to net written premium growth in 2015, compared with 2014.
Catastrophe loss trends are an important factor in assessing trends for overall underwriting results. Our 10-year historical annual average contribution of catastrophe losses to the combined ratio was 5.9 percentage points at December 31, 2015. Our five-year average was 6.9 percentage points.
The following table shows catastrophe losses incurred for the past three calendar years, net of reinsurance, as well as the effect of loss development on prior period catastrophe reserves. We individually list declared catastrophe events for which our incurred losses reached or exceeded $10 million.
Most of the incurred losses and loss expenses shown in the consolidated property casualty insurance results three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our consolidated property casualty current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate 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 67.4 percent accident year 2014 loss and loss expense ratio reported as of December 31, 2014, developed favorably by 1.5 percentage points to 65.9 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2015. Accident years 2014 and 2013 have both developed favorably, as indicated by the progression over time for the ratios in the table.
As discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves, stable historical paid loss patterns are a key assumption used to make projections necessary for estimating IBNR reserves. During 2014, paid losses for commercial casualty, especially related to a few umbrella liability claims,
Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates have had a mixed effect on premium trends in recent years. On an earned premium basis for our commercial lines insurance segment, audits contributed $23 million to the $140 million earned premiums increase in 2015, $5 million to the $220 million earned premiums increase in 2014 and negative $3 million to the $253 million earned premiums increase in 2013. On a net written premium basis, audits contributed $20 million to the $103 million net written premiums increase in 2015, $9 million to the $162 million net written premiums increase in 2014 and $12 million to the $301 million net written premiums increase in 2013. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above.
In 2015, our commercial lines new business premiums written by our agencies increased $5 million, or 1 percent, compared with 2014. In 2014, it decreased 8 percent from a record-high amount in 2013. New business premium volume in recent years has been significantly influenced by new agency appointments. Agencies appointed since the beginning of 2014 produced commercial lines new business written premiums of $29 million, in aggregate, during 2015, up $18 million from what they produced during 2014. All other agencies contributed the remaining $336 million, down $14 million from the $350 million they produced in 2014.
The 58.6 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2015 decreased 2.1 percentage points compared with the 60.7 percent accident year 2014 ratio measured as of December 31, 2014. Higher noncatastrophe weather losses and higher commercial casualty IBNR reserves in 2014, noted above, accounted for some of the decrease and were partially offset by the 2015 increase in reserves for our commercial auto line of business. Large losses, described below, and the corresponding ratios for new losses above $1 million, contributed a 1.5 percentage-point decrease to the 2015 ratio. Other contributors to the decrease included favorable effects from initiatives, such as those to improve pricing precision and loss experience related to claims and loss control practices.
In 2015, total large losses incurred decreased by $20 million, or 11 percent, net of reinsurance. The corresponding ratio decreased 1.0 percentage points. The 2015 decreases on both a dollar and ratio basis were primarily due to lower amounts for our commercial casualty and commercial property lines of business. In 2014, total large losses incurred and the corresponding ratio was lower than it was in 2013, largely due to a lower amount of large losses for our workers’ compensation line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Commercial lines commission expenses as a percent of earned premiums in 2015 matched 2014. The ratio decreased slightly during 2014, compared with 2013. In 2015, other underwriting expenses as a percent of earned premiums in 2015 also matched 2014. In 2014, the ratio decreased by 0.5 percentage points, as earned premiums grew faster than expenses.
The 2015 total loss and loss expense ratio improved 7.7 percentage points, driven by favorable development on prior accident year reserves that followed unfavorable development during the prior year. In 2014, the total loss and loss expense ratio rose 12.1 percentage points, primarily due to that unfavorable development on prior accident year reserves. During 2014, our commercial casualty line experienced a 1.6 point increase in its paid loss and loss expense ratio for cumulative accident years three or more years old, resulting in a significant increase in estimates for IBNR loss and loss expense reserves for all prior accident years in total. Development trends are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
In addition to ongoing improvements in pricing precision and segmentation, we believe recent-year improvements in our property loss and loss expense ratio is in part due to increased use of property inspections and similar loss control efforts. More specialization among selected claims associates and increased use of higher minimum loss deductible amounts, including per-building wind or hail deductibles, also contributed to the improvement of those ratios.
The 2015 total loss and loss expense ratio rose 1.7 percentage points in 2015, compared with 2014, due to an increase of 3.9 points in the ratio for the current accident year before catastrophe losses. Nearly all of the ratio increase was attributable to case incurred experience on known claims. As part of the U.S. economic recession of a few years ago, slowing business activity influenced our estimates of reserves for ultimate losses and loss expenses during that period. As the economy slowly recovered, we believe we were slow to recognize some of the higher loss cost effects in current accident year reserve estimates for at least part of that period. As claims that occurred during that period have become more mature, paid and reported loss cost trends resulted in us increasing our reserve estimates for claims that have not yet been settled. The 2014 total loss and loss expense ratio rose 8.2 percentage points, compared with 2013. That increase was largely due to an increase of 7.0 points in unfavorable development on prior accident year reserves before catastrophe losses, including 4.7 points attributable to case incurred experience on known claims and 2.3 points attributable to IBNR reserves.
During 2015, a multi-department, multi-disciplinary taskforce continued implementing initiatives to improve our commercial auto profitability, similar to the approach we used to improve workers’ compensation results. Pricing precision is an ongoing focus. In 2016, we plan to increase commercial auto base premium rates for 16 states, with seven states at a double-digit percentage increase. Related actions include improving premium rate classification and using other rating variables in risk selection and pricing. In 2015, we also continued to further automate collection of key rating variables, including an enhanced process to verify vehicle identification numbers. We are continuing efforts to further automate the collection of driver history information through motor vehicle reports, allowing for better use of this information for modeling and other underwriting processes.
The 2015 total loss and loss expense ratio improved compared with 2014, largely due to more benefit from favorable development on prior accident year reserves. We believe our workers' compensation results continue to reflect ongoing benefits of profit improvement initiatives that began in 2009, including using a predictive modeling tool to improve risk selection and pricing precision, adding staff specializing in workers’ compensation risks and direct reporting of workers’ compensation claims. Direct reporting allows us to quickly obtain detailed information from policyholders to promptly assign the appropriate level of claims handling expertise to each case. Obtaining more information sooner for specific claims allows for medical care appropriate to the nature of each injury, benefiting injured workers, employers and agents while ultimately lowering overall loss costs. In addition, our medical provider bill review process continues to provide significant savings compared with initial charges by providers. The 2014 total loss and loss expense ratio improved, compared with 2013, primarily due to more benefit from favorable development on prior accident year reserves.
Net written premiums for the commercial lines industry, excluding its mortgage and financial guaranty lines of business, are projected to increase approximately 1 percent in 2016, with the industry statutory combined ratio estimated at approximately 99 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 selection. While competition remains intense, industrywide commercial lines market pricing turned positive toward the end of 2011 and continued to firm for a period of time, according to several industry surveys. Average renewal pricing for our commercial lines insurance segment generally followed a similar trend. According to a variety of reports that focus on the commercial lines market, commercial lines pricing is expected to continue to soften during 2016. Despite challenging market conditions from strong competition, we believe we can manage our business and execute strategic initiatives to offset market pressures to some extent and profitably grow our commercial lines insurance segment.
We intend to keep marketing our products to a broad range of business classes with a package approach, while also continuing to improve our pricing precision. We intend to maintain our underwriting selectivity and carefully manage our rate levels as well as our programs that seek to accurately match exposures with appropriate premiums. We will continue to evaluate each risk individually and to make decisions about rates, the use of three-year commercial policies and other policy conditions on a case-by-case basis, even in lines and classes of business that are under competitive pressure. We believe that our initiatives to improve pricing precision and lower loss costs will continue to benefit commercial lines profitability during 2016, and that recent-year premium growth initiatives will continue to increase commercial lines premiums.
We have increased our use of pricing precision and implemented numerous rate increases in recent years, to improve our personal lines insurance segment results. In addition, we have made greater use of higher minimum loss deductibles and nonrenewed policies in select areas more prone to natural catastrophes. We have worked to improve our geographic diversification by expanding our personal lines operation to several states less prone to catastrophes.
Our personal lines statutory combined ratio was 100.0 percent in 2015, up from 99.1 percent in 2014 and 96.3 percent in 2013. By comparison, the estimated industry personal lines combined ratio was 98.6 percent in 2015, 98.8 percent in 2014 and 97.5 percent in 2013. Our concentration of business in areas affected by catastrophe events contributed to recent-year results that differed from the overall industry, an issue we are
addressing in part through gradual geographic expansion. The contribution of catastrophe losses to our personal lines statutory combined ratio was 6.2 percentage points in 2015, 7.8 percentage points in 2014 and 7.7 percentage points in 2013, compared with industry estimates of 4.0, 5.5 and 4.3 percentage points, respectively.
Personal lines insurance is a strategic component of our overall relationship with most of our agencies and is an important component of our agencies’ relationships with their clients. We believe agents recommend our personal insurance products for their clients who seek to balance quality and price and who are attracted by our superior claims service and the benefits of our package approach. We also believe our continuing efforts to improve pricing precision are helping us attract and retain more of our agencies’ preferred business, while also obtaining higher rates for more thinly-priced business. Our progress toward broader geographic diversification is reflected in part through premium growth trends. Personal lines earned premiums in our five highest volume states increased in aggregate by 3 percent in 2015, while premiums for the remaining states that include our newer areas of operation increased 8 percent in aggregate.
The 4 percent increase in agency renewal written premiums in 2015 largely reflected various rate changes. We estimate that premium rates for our personal auto line of business increased at average percentages near the low end of the mid-single-digit range during 2015, with some individual policies experiencing lower or higher rate changes based on enhanced pricing precision enabled by predictive models. Approved personal auto rate increases for 14 states, effective beginning in the second half of 2015, were at percentages averaging in the upper-single-digit range. For our homeowner line of business, we estimate that rate increases during 2015 averaged in the mid-single-digit range. Similar to our personal auto line of business, that average varied widely by state, and some individual policies experienced lower or higher rate changes based on pricing precision and current rate level indications that help determine appropriate premium rates.
Personal lines new business written premiums were down significantly in 2014, compared with 2013. The downward trend began in the second half of 2013 and was expected due to our increasing premium rates and underwriting actions such as expanded use of actual cash value loss settlement for older roofs.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For our personal auto line of business in 2015, we experienced a rising trend in paid losses and loss expenses that was more than we expected. As a result, we increased our actuarial best estimate of ultimate loss and loss expense ratios for that line at the end of 2015, compared with year-end 2014. Net loss and loss expense reserves for our personal auto line of business at December 31, 2015, were $31 million, or 14 percent, higher than at year-end 2014. The IBNR portion of the reserve increase was $16 million.
Most of the incurred losses and loss expenses shown in the personal lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since approximately two-thirds of our personal lines current accident year incurred losses and loss expenses represent net paid amounts, the remaining one-third represents reserves for our estimate 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 72.2 percent accident year 2014 loss and loss expense ratio reported as of December 31, 2014, developed favorably by 1.8 percentage points to 70.4 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2015. Accident year 2013 for the personal lines insurance segment developed favorably during 2014 then unfavorably during 2015, as indicated by the progression over time for the ratios in the table. The unfavorable development during 2015 reflects the personal auto reserve addition described above.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain much of the movement in current accident year loss and loss expense ratios for accident year 2015, compared with accident year 2014. Catastrophe losses added 6.5 percentage points for 2015, and 8.8 points for both 2014 and 2013 to the respective personal lines current accident year loss and loss expense ratios in the table above. Personal lines catastrophe losses for 2015 resulted in a ratio well below our 10.9 percent 10-year annual average for personal lines that included 22.8 percent for 2011. Our personal lines catastrophe loss ratios for 2014 and 2013 were basically in line with our 8.7 percent 10-year annual average for the years 2001 through 2010. Personal lines catastrophe losses also are inherently volatile, as discussed above and in Consolidated Property Casualty Insurance Results.
The 64.9 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2015 rose 1.5 percentage points compared with the 63.4 percent accident year 2014 ratio measured as of December 31, 2014. The increase was largely due to a 2.2 percentage-point increase in the ratio for current accident year losses of $1 million or more per claim, shown in the table below, that were largely for personal umbrella claims related to auto accidents. Lower noncatastrophe weather losses, noted above, partially offset the increase.
Personal lines reserve development on prior accident years recognized in 2015 was unfavorable by $5 million, in aggregate, compared with a favorable net amount of $12 million in 2014. The 2015 unfavorable development was driven by $15 million of unfavorable development for our personal auto line of business, including $10 million for accident year 2013. Our personal lines 2015 net unfavorable reserve development on prior accident years included $12 million of favorable development in our homeowner line of business. Favorable development recognized during 2014 and 2013 was also primarily from our homeowner line of business. Development by line of business and other trends for personal lines loss and loss expenses and the related ratios are further analyzed in Personal Lines of Business Analysis, and in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Net written and earned premiums for personal auto rose in 2015 and 2014, with both years reflecting recent-year rate increases, ongoing high levels of policy retention and a higher level of insured exposures.
As discussed in Personal Lines Insurance Premiums, we continue to implement rate changes and improve our pricing precision to improve our total loss and loss expense ratio for our personal auto line of business. Estimated rate increases during 2015 averaged percentages near the low end of the mid-single-digit range, with some individual policies experiencing lower or higher rate changes by applying appropriate pricing precision actions. Approved personal auto rate increases for 14 states, effective beginning in the second half of 2015, were at percentages averaging in the upper-single-digit range.
We continue to work toward more precise pricing per risk in addition to broad-based rate increases to help improve profitability over the long term. A multi-department taskforce began work in 2015 to implement additional ways of improving our personal auto profitability, similar to the approach we used in the past to improve workers’ compensation results.
Net written and earned premiums for homeowner grew in both 2015 and 2014, primarily due to an increase in renewal written premiums that largely reflected higher pricing.
The total loss and loss expense ratio for 2015 included a decrease of 3.1 percentage points for catastrophe losses, compared with 2014. It also included a 3.5 percentage-point decrease from noncatastrophe weather losses. The 2014 ratio increase included a ratio for noncatastrophe weather losses that was 2.8 percentage points higher than 2013. The 2015 catastrophe loss ratio of 13.0 percentage points was below the 17.4 percent 10-year average for the years 1998 through 2007. For the six-year period 2008 through 2013, the homeowner catastrophe loss ratio averaged 31.5 percent, almost double the average of the previous 10 years. Our pricing models are adjusted annually to account for expected losses from catastrophe perils that relate to causes of insured losses from weather or earthquake catastrophe events.
Loss and loss expense ratios in 2015 continued at a profitable level, despite a significant increase for current accident year before catastrophe losses. That increase reflected an $11 million, or 122 percent, increase in large losses incurred of $1 million or more per claim, primarily from personal umbrella claims related to auto accidents. Reserve development on prior accident years did not benefit these ratios in 2015 or 2014, following a significant benefit in 2013. Reserve development can fluctuate significantly for this business line because personal umbrella liability coverage is a major component of other personal losses.
Our excess and surplus lines insurance segment includes results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. Performance highlights for this segment include:
Combined ratio - The combined ratio improved 9.4 percentage points in 2015, primarily due to improved experience in current accident year losses and loss expenses before catastrophe losses.
The $17 million increase in 2015 renewal premiums reflected the opportunity to renew many policies for the first time as well as higher renewal pricing. Average renewal price increases were near the low end of the mid-single-digit range during 2015, while 2014 was higher in that same range. December 2015 was the 64th consecutive month of positive average price changes for this segment of our property casualty business. We measure average changes in excess and surplus lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies.
New business written premiums rose 10 percent in 2015, compared with 2014. In addition to careful underwriting in an increasingly competitive market, writing fewer new large-premium accounts also contributed to the slowing growth rate in new business written premiums.
In 2015, total large losses incurred increased by $5 million or 250 percent, net of reinsurance, helping to raise the corresponding ratio by 2.7 percentage points, compared with 2014. That ratio for 2014 trended in the opposite direction, largely due to 2014 total large losses decreasing from 2013. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Excess and surplus lines commission expense as a percent of earned premiums was fairly stable during the three-year period ending in December 2015. Other underwriting expenses declined in 2015 and 2014 as a percent of earned premiums, largely due to earned premiums rising faster than those expenses.
The excess and surplus lines market is expected to see the magnitude of rate increases continue to decline on several classes of business due to increased capacity in the market. Competition is expected to remain strong, especially on large accounts, due primarily to standard market insurance companies insuring businesses that previously were written by excess and surplus lines insurers. Firming is expected to continue for specific classes of business where loss costs are exceeding rates, such as habitational and lessors-risk classes for property coverages and also lawyers professional in errors and omissions coverages.
Profitability - The life insurance segment frequently reports only a small profit or loss because most of its investment income is included in the investments segment results. We include only investment income credited to contract holders (interest assumed in life insurance policy reserve calculations) in life insurance segment results. The segment reported a $2 million loss in 2015, following a $5 million loss in 2014 and $9 million of profit in 2013. It has averaged a $1 million loss over the past five years.
Earned premiums rose $11 million in 2015, primarily due to growth in our term life and universal life insurance business, as shown in the table below. Growth in 2014 was primarily due to term life insurance.
Contract holders’ benefits incurred, related to traditional life and interest-sensitive products, accounted for 78.1 percent of 2015 total benefits and expenses compared with 78.4 percent in 2014 and 77.3 percent in 2013. Total contract holders’ benefits increased as life policy reserves and net death claims were higher in 2015,
compared with 2014. Net death claims increased over 2014, slightly exceeding our projections while remaining within our range of pricing expectations.
We recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. On a basis that includes investment income and realized gains or losses from life insurance-related invested assets, the life insurance company reported a net profit of $41 million in 2015, compared with net profit of $39 million in 2014 and $48 million in 2013. The life insurance company portfolio had after-tax net realized investment gains of less than $1 million in 2015, compared with $3 million in 2014 and $4 million in 2013. Realized investment gains and losses are discussed under Investments Results. We exclude most of our life insurance company investment income from investments segment results.
We view the life insurance industry as stable and poised for a rebound in 2016. The decade-long slump in life insurance sales appears like it may be ending. Historic lows in life insurance ownership are likely to be the catalyst for new growth. We believe those carriers who are able to adjust the insurance buying experience to align with millennial expectations will be the new market leaders. Accordingly, we are pursuing a new approach to how life insurance is sold to our middle market property casualty customers. We expect to have a new term product available in the latter half of 2016 that will use this new approach.
Investment income - Pretax investment income grew $23 million, or 4 percent, in 2015, with increases from interest and dividends contributing nearly equal dollar amounts. Dividend income reflected rising dividend rates and net purchases of equity securities from available funds. Interest income also rose, as net purchases of fixed-maturity securities offset the continuing effects on bond yields of the low interest rate environment. Pretax investment income also rose 4 percent in 2014, reflecting significantly higher dividend income and a modest increase in interest income. Average yields in the investment income table below are based on the average invested asset and cash amounts indicated in the table using fixed-maturity securities valued at amortized cost and all other securities at fair value.
Dividend income rose $12 million, or 9 percent, in 2015, after rising 13 percent in 2014. Increases in dividend payment rates for most of the holdings in our common stock portfolio during both 2015 and 2014, plus a net increase in funds invested in that portfolio for both years, drove the increases in dividend income.
In 2015, we continued to invest available cash flow in both fixed income and equity securities in a manner that we believe balances current income needs with longer-term invested asset growth goals. While our bond portfolio more than covers our insurance reserve liabilities, we believe our diversified common stock portfolio of mainly blue chip, dividend-paying companies represents one of our best investment opportunities for the long term. We position our portfolio with consideration to both the challenges presented by the current low interest rate environment and the risks presented by potential future inflation. As bonds in our generally laddered portfolio mature or are called over the near term, we will be challenged to replace their current yield. The table below summarizes pretax yield to amortized costs excluding any book value adjustments due to impairment for bonds in our fixed-maturity portfolio by various maturity periods.
The $133 million net realized investment gains and losses in 2014 were primarily due to $136 million in net realized gains from equity security sales and $18 million from fixed-maturity security sales and calls, partially offset by $24 million of OTTI charges for six securities.
In 2013, the $83 million net realized investment gains and losses were largely due to $64 million in net realized gains from equity security sales and $15 million from fixed-maturity security sales and calls.
Cash in excess of operating requirements is invested in fixed-maturity and equity securities. Cash generated from investment income provides an important investment contribution to cash flow and liquidity. The sale of investments could provide an additional source of liquidity at either the parent company or insurance subsidiary level, if required. In addition to possible sales of investments, proceeds of call or maturities of fixed-maturity securities also can provide liquidity. During the five-year period beginning in 2016, fair value of $3.702 billion, or 38.4 percent, of our fixed-maturity portfolio is scheduled to mature. At year-end 2015, total unrealized gains in the investment portfolio, before deferred income taxes, were $2.094 billion. Liquidity sourced from our investment portfolio is not materially at risk from European-based securities. At the end of 2015 this totaled $339 million on a fair value basis, or 2.4 percent of our total investments. We own no European sovereign debt. Our European-based securities are summarized by country in Item 7A, Qualitative and Quantitative Disclosures About Market Risk.
$391 million aggregate principal amount of 6.920% senior debentures due 2028.
The company’s senior debt is rated investment grade by independent rating firms. On June 30, 2015, Standard & Poor’s Ratings Services upgraded its rating of our debt that it had assigned in July 2010, to BBB+ from BBB, revising its outlook to stable. None of the other three rating agencies made changes to our debt ratings in 2015. Our debt ratings at February 24, 2016, were: a- from A.M. Best, A from Fitch Ratings, A3 from Moody’s Investors Service and BBB+ from Standard & Poor’s.
Dividends to shareholders -The ability of our company to continue paying cash dividends is subject to factors the board of directors deem relevant. While the board and management believe there is merit to sustaining the company’s long record of dividend increases, our first priority is the company’s financial strength. Over the past 10 years, the company has paid an average of 63 percent of net income as dividends. Through 2015, the board had increased our cash dividend for 55 consecutive years. The board decision in January 2016 to increase the dividend demonstrated confidence in the company’s strong capital, liquidity, financial flexibility and initiatives to grow earnings.
As of December 31, 2015, we estimate our future contractual obligations as follows:
At December 31, 2015, we believe our most significant other commitments were:
Other invested assets - We may invest up to $13 million in private equity investments over the next four years.
Parent-company liquidity could be constrained by Ohio regulatory requirements that restrict the dividends insurance subsidiaries can pay. During 2016, our insurance subsidiary can declare $534 million in dividends to our parent company without regulatory approval. We do not expect future pension contributions to constrain our liquidity, as the fair value of plan assets is 95 percent of the accumulated benefit obligation at December 31, 2015. Continued economic weakness also has the potential to affect our liquidity and capital resources in a number of different ways, including delinquent payments from agencies, defaults on interest payments by fixed-maturity holdings in our portfolio, dividend reductions by holdings in our equity portfolio or declines in the market value of holdings in our portfolio.
For the business lines in the commercial and personal lines insurance segments, and in total for the excess and surplus lines insurance segment, the following table details gross reserves among case, IBNR and loss expense reserves, net of salvage and subrogation. The $222 million increase in total gross reserves was largely due to a $95 million increase in case loss reserves, including $103 million for our commercial casualty line of business. Total gross reserves for our commercial auto line of business rose $52 million, and for our personal auto line of business they rose $36 million.
Our estimates of gross property casualty loss and loss expense payments do not include reinsurance receivables or ceded losses. As discussed in 2016 Reinsurance Programs, we purchase reinsurance to mitigate our property casualty risk exposure. Ceded property casualty reinsurance unpaid receivables of $281 million at year-end 2015 are an offset to our gross property casualty loss and loss expense obligations. Our reinsurance program mitigates the liquidity risk of a single large loss or an unexpected rise in claim severity or frequency due to a catastrophic event. Reinsurance does not relieve us of our obligation to pay covered claims. The financial strength of our reinsurers is important because our ability to recover losses under our reinsurance agreements depends on the financial viability of the reinsurers.
We direct our associates and agencies to settle claims and pay losses as quickly as is practical, and we made $2.349 billion of net claim payments during 2015. At year-end 2015, total net property casualty reserves of $4.379 billion reflected $2.189 billion in unpaid amounts on reported claims (case reserves), $976 million in loss expense reserves and $1.214 billion in estimates of claims that were incurred but had not yet been reported (IBNR). The specific amounts and timing of obligations related to case reserves and associated loss expenses are not set contractually. The amounts and timing of obligations for IBNR claims and related loss expenses are unknown. We discuss our methods of establishing loss and loss expense reserves and our belief that reserves are adequate in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
Management’s best estimate of total loss and loss expense reserves as of year-end 2015 and 2014 was consistent with the corresponding actuarial best estimate.
Section B shows the cumulative net amount paid with respect to the previously recorded reserve as of the end of each succeeding year. For example, as of December 31, 2015, we paid $2.466 billion of loss and loss expenses in calendar years 2006 through 2015 for losses that occurred in accident years 2005 and prior. An estimated $328 million of losses remained unpaid as of year-end 2015 (net re-estimated reserves of $2.794 billion from Section C less cumulative net paid loss and loss expenses of $2.466 billion).
In evaluating the development of our estimated reserves for loss and loss expenses for the past 10 years, note that each amount includes the effects of all changes in amounts for prior periods. For example, payments or reserve adjustments related to losses settled in 2015 but incurred in 2009 are included in the cumulative deficiency or redundancy amount for 2009 and each subsequent year. In addition, this table presents calendar year data, not accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that affected development of reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future reserve development based on this data.
The following table shows net reserve changes at year-end 2015, 2014 and 2013 by property casualty segment and accident year:
Personal auto loss emergence - Personal auto continued to develop unfavorably during calendar year 2015. This line of business is subject to many of the same cost pressures related to the economic slowdown as commercial auto. Initiatives to improve profitability of our personal auto line of business are discussed in Personal Lines Insurance Results.
For the excess and surplus lines insurance segment, the table showing reserves by segment and lines of business in Property Casualty Loss and Loss Expense Obligations and Reserves, shows the components of gross reserves among case, IBNR and loss expense reserves. Total gross reserves were up $25 million from year-end 2014 primarily due to the increase in premiums and exposures for this segment, as we discussed in Excess and Surplus Lines Insurance Results. Favorable development during 2015 of $35 million for excess and surplus lines insurance segment reserves, shown in the table above, illustrates the potential for revisions inherent in estimating reserves.
2016 Reinsurance Programs, we purchase reinsurance to mitigate our life insurance risk exposure. At year-end 2015, ceded death benefits represented approximately 42.3 percent of our total gross policy face amounts in force.
These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of $4.992 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of $3.302 billion (total of life insurance policy reserves and separate account policy reserves). Separate account policy reserves make up all but $10 million of separate accounts liabilities.
The modeled losses according to RMS in the table are based on its RiskLink version 15.0 catastrophe model and use a medium-term storm catalog methodology. The medium-term storm catalog theory is a more conservative approach and places a higher weighting on the increased hurricane activity of the past several years, thus producing higher probable maximum loss projections than a longer-term view. The modeled losses according to AIR in the table are based on its AIR Touchstone version 3.0 catastrophe model and use a long-term methodology. The AIR storm catalog includes decades of documented weather events used in simulations for probable maximum loss projections.
Property excess treaty - For 2016, we again purchased property reinsurance treaties that provide an additional $25 million in protection for property losses. These treaties, along with the property per risk treaty, provides a total of $50 million of protection. The 2016 ceded premium estimate was approximately $6 million, essentially unchanged from the 2015 estimate.
placed on an individual certificate basis. For risks with casualty limits that are between $25 million and $27 million, we sometimes forego facultative reinsurance and retain an additional $2 million of loss exposure.
A form of reinsurance is also provided through The Terrorism Risk Insurance Act of 2002 (TRIA). TRIA was originally signed into law on November 26, 2002, and extended on several occasions, including the most recent extension on January 12, 2015. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, aircraft and workers’ compensation. In the event of a terrorism event defined by TRIA, the federal government would reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of subject written premiums for the preceding calendar year. Our deductible in 2015 was $494 million (20 percent of 2014 subject premiums), and we estimate it is $514 million (20 percent of 2015 subject premiums) for 2016.
The Cincinnati Specialty Underwriters Insurance Company has separate property and casualty reinsurance treaties for 2016 through its parent, The Cincinnati Insurance Company. Primary components of the treaties include:
Casualty treaties - The casualty treaty is written on an excess of loss basis and provide limits up to $6 million, which is adequate capacity for the risk profile we insure. A second treaty layer of $5 million excess of $6 million is written to provide coverage for extra contractual obligations or clash exposures. The maximum retention for any one casualty loss is $1 million by Cincinnati Specialty Underwriters. Losses between $1 million and $6 million are reinsured at 100 percent by Cincinnati Insurance.
Difficulties with technology or data security breaches, including cyberattacks, that could negatively affect our ability to conduct business and our relationships with agents, policyholders and others
Inability to defer policy acquisition costs for any business segment if pricing and loss trends would lead management to conclude that segment could not achieve sustainable profitability
Further, the company’s insurance businesses are subject to the effects of changing social, global, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.
The management of Cincinnati Financial Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal controls, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). The company’s internal control over financial reporting includes those policies and procedures that:
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2015, as required by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment was based on the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that the company maintained effective internal control over financial reporting as of December 31, 2015. The assessment led management to conclude that, as of December 31, 2015, the company’s internal control over financial reporting was effective based on those criteria.
We have audited the accompanying consolidated balance sheets of Cincinnati Financial Corporation and subsidiaries (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15(c). We also have audited the Company's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the Company's internal control over financial reporting based on our audits.
Our invested asset impairment policy states that fixed maturities below their amortized cost that the company (1) intends to sell or (2) more likely than not will be required to sell before recovery of their amortized cost basis are deemed to be other-than-temporarily impaired (OTTI). The amortized cost of any such securities is reduced to fair value as the new cost basis, and a realized loss is recorded in the period in which it is recognized. When these two criteria are not met, and the company believes that full collection of interest and/or principal is not likely, we determine the net present value of future cash flows by using the effective interest rate implicit in the security at the date of acquisition as the discount rate and compare that amount with the amortized cost and fair value of the security. The difference between the net present value of the expected future cash flows and amortized cost of the security is considered a credit loss and recognized as a realized loss in the period in which it occurred. The difference between the fair value and the net present value of the cash flows of the security, the noncredit loss, is recognized in other comprehensive income as an unrealized loss. We had no fixed-maturity securities with a noncredit loss for the years ended 2015 and 2014.
the severity of the decline in fair value below cost, the volatility of the security and our ability and intent to hold each position until its forecasted recovery.
The consolidated property casualty companies actively write property casualty insurance through independent agencies in 39 states. Our 10 largest states generated 62 percent and 63 percent of total earned premiums in 2015 and 2014, respectively. Ohio, our largest state, accounted for 17 percent and 18 percent of total earned premiums in 2015 and 2014, respectively. Illinois, Indiana, Georgia, Pennsylvania, Michigan and North Carolina each accounted for between 5 percent and 7 percent of total earned premiums in 2015. Our largest single agency relationship accounted for approximately less than 1 percent of our total property casualty earned premiums in 2015. No aggregate agency relationship locations under a single ownership structure accounted for
more than 3 percent of our total property casualty earned premiums in 2015. We record revenues for installment charges as fee revenues in the consolidated statements of income.
Property casualty written premiums are deferred and recorded as earned premiums on a pro rata basis over the terms of the policies. We record as unearned premiums the portion of written premiums that applies to unexpired policy terms. Expenses associated with successfully acquiring insurance policies - commissions, premium taxes and underwriting costs - are deferred and amortized over the terms of the policies. All acquisition costs are in accordance with Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. We assess recoverability of deferred acquisition costs at the segment level, consistent with the way we acquire, service and manage insurance policies and measure profitability. We analyze our acquisition cost assumptions to reflect actual experience, and we evaluate potential premium deficiencies.
The Cincinnati Insurance Company is expanding in the area of assumed reinsurance. Business written includes treaties that provide coverage for property catastrophe events on a worldwide basis. Premiums are primarily earned on a pro rata basis over the coverage period of the treaty. We also assume risk with limited exposure as a reinsurer for other insurance companies, reinsurers and involuntary state pools.
We reduce risk and uncertainty by buying property casualty and life reinsurance. Reinsurance contracts do not relieve us from our obligation to policyholders, but rather help protect our financial strength to perform that duty. All of these ceded reinsurance contracts transfer the economic risk of loss.
We record land at cost, and record building and equipment at cost less accumulated depreciation. Equipment held under capital leases also is classified as property and equipment with the related lease obligations recorded as liabilities. We capitalize and amortize costs for internally developed computer software during the application development stage. These costs generally consist of external consulting, payroll and payroll-related costs. Our depreciation is based on estimated useful lives (ranging from three years to 39.5 years) using straight-line and accelerated methods. Depreciation expense was $36 million for 2015, and $37 million for 2014 and 2013, respectively. We monitor land, building and equipment and software assets for potential impairments. Potential impairments may include a significant decrease in the fair values of the assets, considerable cost overruns on projects, a change in legal factors or business climate or other factors that indicate that the carrying amount may not be recoverable or useful. There were no recorded land, building and equipment impairments for 2015, 2014 or 2013.
unit credit actuarial cost method. Refer to Note 13, Employee Retirement Benefits, for more information about our defined benefit pension plan.
We grant qualified and nonqualified share-based compensation under authorized plans. The stock options generally vest on a graded scale over three years following the date of grant and are exercisable over 10-year periods. We grant service-based restricted stock units that cliff vest three years after the date of grant as well as service-based restricted stock units that vest ratably over the three year vesting term. We also grant performance-based restricted stock units that vest if certain market conditions are attained. In 2015, the CFC compensation committee approved share-based awards including incentive stock options, nonqualified stock options, service-based restricted and performance-based restricted stock units. See Note 17, Share-Based Associate Compensation Plans, for further details.
The company adopted these ASU's retrospectively as of December 31, 2015. Certain prior year amounts have been reclassified to conform with the current-year presentation, including Other assets and Long-term debt and capital lease obligations which were reduced by approximately $5 million each. There were no changes to shareholders' equity as a result of these adoptions. There were no other impacts on our company's consolidated financial position, cash flows or results of operations.
ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that performance targets that affect vesting and that could be achieved after the requisite service period be treated as performance conditions. The effective date of ASU 2014-12 is for interim and annual reporting periods beginning after December 15, 2015. The ASU has not yet been adopted and will not have a material impact on our company’s consolidated financial position, cash flows or results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The effective date of ASU 2016-01 is for interim and annual reporting periods beginning after December 15, 2017. The ASU has not yet been adopted. Management is currently evaluating the impact on our company’s consolidated financial position, cash flows and results of operations.
The net unrealized investment gains in our fixed-maturity portfolio are primarily the result of the continued low interest rate environment that increased the fair value of our fixed-maturity portfolio. Our commercial mortgage-backed securities had an average rating of Aa1/AA at December 31, 2015 and 2014. The seven largest net unrealized investment gains in our common stock portfolio are from Exxon Mobil Corporation (NYSE:XOM), Honeywell International Incorporated (NYSE:HON), The Procter & Gamble Company (NYSE:PG), BlackRock Inc. (NYSE:BLK), Microsoft Corporation (Nasdaq:MFST), Johnson and Johnson (NYSE:JNJ), and JP Morgan Chase & Co. (NYSE:JPM), which had a combined gross unrealized gain of $566 million. At December 31, 2015, JP Morgan Chase & Co. was our largest single equity holding with a fair value of 3.3 percent of our publicly traded common equities portfolio and 1.0 percent of the total investment portfolio.
During 2013, we other-than-temporarily impaired seven securities. At December 31, 2013, 40 fixed-maturity investments with a total unrealized loss of $5 million had been in an unrealized loss position for 12 months or more. Of that total, no fixed-maturity investments had fair values below 70 percent of amortized cost. There were no equity security investments in an unrealized loss position for 12 months or more as of December 31, 2013.
The following table provides the change in Level 3 assets during 2015 and 2014:
Fair value of the note payable was determined based upon the outstanding balance at December 31, 2015 and 2014, because it is short term and tied to a variable interest rate. The note payable was classified as Level 2 as an active market does not exist, but fair value is determined based on observable inputs.
Fair values for deferred annuities were calculated based upon internally developed models because active, observable markets do not exist for those items. To determine the fair value, we made the following significant assumptions: (1) 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, 2015 and 2014, to account for nonperformance risk; (2) the rate of interest credited to policyholders is the portfolio net earned interest rate less a spread for expenses and profit; and (3) additional lapses occur when the credited interest rate is exceeded by an assumed competitor credited rate, which is a function of the risk-free rate of the economic scenario being modeled.
$29 million of favorable development in excess and surplus lines. Favorable development in 2014 was $49 million less than in 2013, largely due to the change in prior accident years before catastrophes. We recognized favorable reserve development of $51 million for the workers’ compensation line, $34 million for the commercial property line and $14 million for the homeowner line, due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines. Our commercial casualty line experienced $5 million of adverse development due to an increase in its paid loss and loss expenses for cumulative accident years three or more years old, resulting in an increase recognized in estimates for IBNR losses and loss expenses for all prior accident years in total compared to 2013 and 2012. Our commercial auto line developed unfavorably by $39 million during 2014 due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.
During 2013, we experienced $147 million of favorable development on prior accident years including $95 million of favorable development in commercial lines, $39 million of favorable development in personal lines and
$13 million of favorable development in excess and surplus lines. Favorable development in 2013 was $249 million less than in 2012, largely due to the change in prior accident years before catastrophes. We recognized favorable reserve development of $70 million for the commercial casualty line, $22 million for the commercial property line, $14 million for the workers' compensation line and $19 million for the homeowner line, due to reduced uncertainty of prior accident year loss and loss adjustment expense for these lines.
$45 million of reserves for mold claims at December 31, 2015, compared with $81 million and $51 million, respectively, at December 31, 2014. The asbestos and environmental claims amounts for each respective year constituted 1.9 percent and 2.0 percent of total net loss and loss expense reserves at these year-end dates.
The change in amortized shadow deferred policy acquisition costs in 2015 and 2013 compared to 2014 was the result of increasing interest rates. No premium deficiencies were recorded in the consolidated statements of income in 2015, 2014 and 2013, as the sum of the anticipated loss and loss adjustment expenses, policyholder dividends and unamortized deferred acquisition expenses did not exceed the related unearned premiums and anticipated investment income.
Investments realized gains and life deferred acquisition costs, life policy reserves and other realized gains are recorded in the realized investment gains, net, line item in the consolidated statements of income. Amortization on pension obligations is recorded in the insurance losses and contract holders' benefits and underwriting, acquisition and insurance expenses in the consolidated statements of income.
Primary components of our property casualty operations assumed reinsurance include involuntary and voluntary assumed as well as contracts from our reinsurance assumed operations, known as Cincinnati Re. Primary components of our ceded reinsurance include a property per risk treaty, property excess treaty, casualty per occurrence treaty, casualty excess treaty, property catastrophe treaty and catastrophe bonds and retrocessions on our reinsurance assumed operations. Management’s decisions about the appropriate level of risk retention are affected by various factors, including changes in our underwriting practices, capacity to retain risks and reinsurance market conditions.
Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes.
The statute of limitations for federal tax purposes has closed for tax years 2011 and earlier. There are no federal returns under examination and we have not been notified of any upcoming IRS examinations.
In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions. The statute of limitations for state income tax purposes has closed for tax years 2011 and earlier. There are no state income returns under examination and we have not been notified of any upcoming state examinations.
The current sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Share-Based Associate Compensation Plans. The above table includes the number of anti-dilutive share-based awards at year-end 2015, 2014 and 2013. We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects.
We sponsor a qualified defined benefit pension plan. During 2008, we changed the form of retirement benefit we offer some associates to a company match on contributions to a 401(k) plan from the defined benefit pension plan. We closed entry into the pension plan for new associates as of June 30, 2008, and only participants 40 years of age or older as of August 31, 2008, could elect to continue to participate. For participants remaining in the pension plan, we continue to contribute to fund future benefit obligations. Benefits for the defined benefit pension plan are based on years of credited service and compensation level. Contributions are based on the prescribed method defined in the Pension Protection Act. 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. The qualified plan has been amended to allow for distribution of vested balances to terminated participants.
$11 million and $10 million during the years 2015, 2014 and 2013, respectively. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation. We also pay all operating expenses for the 401(k) plan. Participants vest in the company match for the 401(k) plan after three years of eligible service.
We maintain a supplemental executive retirement plan (SERP) with a benefit obligation of $14 million at
To determine the discount rate for each plan, a theoretical settlement portfolio of high-quality rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate for each plan was determined resulting in a discounted value of the plan's benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics. Based on this analysis, we increased the rate from the prior year by 0.30 percentage points for the qualified pension plan and by 0.25 percentage points for the SERP. Compensation increase assumptions reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases. The mortality assumption was updated in 2014 to the RP-2014 Employee Mortality Tables and RP-2014 Annuitant Mortality Tables for males and females projected generationally with Scale MP-2014. During 2015, the 2014 mortality tables were updated to include the generational projection using Scale MP-2015.The updated mortality table did not have a significant impact on our financial statements as our qualified plan assumes the majority of benefits will be paid in the form of lump sums.
This is a summary of the weighted-average assumptions used to determine our net expense for the plans:
The discount rate was decreased by 0.90 percentage points for the qualified pension plan and 0.75 percentage points for the SERP due to market interest rate conditions at the beginning of 2015. The discount rate assumptions for our benefit obligation generally track with high-quality rated corporate bond yields chosen in our theoretical settlement portfolio, and yearly adjustments reflect any changes to those bond yields. We believe the expected return on plan assets is representative of the expected long-term rate of return on these assets, which is consistent with 2015 expectations of interest rates and based partially on the fact that the plan’s common stock holdings pay dividends. We believe this rate is representative of the expected long-term rate of return on these plan assets. We review historical actual return on plan assets when determining our expected long-term rate of return. Total portfolio return for 2015 was 0.6 percent and for 2014 was 11.7 percent. Our compensation increase assumptions in 2015 reflect anticipated rates of inflation, real return on wage growth and merit and promotional increases.
Our unfunded status increased for 2015 primarily due to a decline in plan assets and losses from other assumptions partially offset by actuarial gains resulting from increases in discount rates.
The total recognized in net periodic benefit cost and other comprehensive income (loss) was a net cost of
$21 million, net cost of $31 million, and a net benefit of $63 million for the years ended December 31, 2015, 2014 and 2013, respectively. The change in the amount recognized in other comprehensive income from 2014 is largely due to losses from investment return being different than assumed and losses from other assumptions partially offset by an increase in discount rate. The 2014 change in the amount recognized in other comprehensive income from 2013 is largely due to decreases in discount and lump sum rates, partially offset with greater than anticipated return on plan assets. The estimated costs to be amortized from AOCI into net periodic benefit cost over the next year for our plans are $2 million in actuarial loss and $1 million in prior service cost.
Excluding cash, during 2015 we held approximately 83 percent of our pension portfolio in domestic common equity investments. The remainder of the portfolio consisted of 12 percent in states, municipalities and taxable political subdivisions fixed-maturity investments and 5 percent in domestic corporate fixed-maturity investments. Our common equity portfolio consisted of 22 percent in the information technology sector, 20 percent in the financial sector, 13 percent in the healthcare sector, 11 percent in the consumer staples sector and 10 percent in the industrial sector at year-end 2015. No additional sectors accounted for 10 percent or more of our common equity portfolio balance at year-end 2015. We had $21 million of cash on hand at December 31, 2015, to cover retirements.
Our pension plan assets included 267,113 and 467,113 shares of the company’s common stock at December 31, 2015 and 2014, which had a fair value of $16 million and $24 million at December 31, 2015 and 2014, respectively. The defined benefit pension plan did not purchase any shares of our common stock during 2015 and 2014. During 2015, the pension plan sold 200,000 shares of the company’s common stock. No shares of our common stock were sold during 2014. The company paid $1 million in cash dividends on our common stock to the pension plan in both 2015 and 2014.
We contributed $5 million to our qualified plan during the first quarter of 2016 and estimate $6 million of benefit payments from the SERP during 2016. We expect to make the following benefit payments for our qualified plan and SERP, reflecting expected future service:
$7 million in 2015, $7 million in 2014 and $6 million 2013, on premium volume of $42 million, $41 million and
The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such proceedings have alleged, for example, breach of an alleged duty to search national data bases to ascertain unreported deaths of insureds under life insurance policies. The company’s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith in the handling of insurance claims or claims alleging discrimination by former associates.
Share-based compensation cost after tax was $14 million, $13 million and $12 million for the years ended
for each of the years ended December 31, 2015, 2014 and 2013, respectively. Options exercised during the years ended December 31, 2015, 2014 and 2013, had intrinsic value of $15 million, $13 million, and $17 million, respectively. Intrinsic value is the market price less the exercise price. Options vested during the years ended December 31, 2015, 2014 and 2013, had total intrinsic value of $7 million, $9 million and $15 million, respectively.
As of December 31, 2015, we had $23 million of unrecognized total compensation cost related to nonvested stock options and restricted stock unit awards. That cost will be recognized over a weighted-average period of 1.7 years.
Cash received from the exercise of options was $24 million, $22 million and $25 million for the years ended December 31, 2015, 2014 and 2013, respectively. We acquired 292,414, 378,276 and 577,745 shares totaling
$16 million, $19 million and $28 million, respectively, from associates in consideration for option exercises during 2015, 2014 and 2013. The weighted-average remaining contractual life for options expected to vest as of December 31, 2015, was 8.5 years.
Options outstanding and exercisable consisted of the following at December 31, 2015:
The weighted-average remaining contractual life for exercisable awards as of December 31, 2015, was 3.6 years. Under all active shareholder approved plans, a total of 17.3 million shares were authorized to be granted. At December 31, 2015, 4.7 million shares remained available for future issuance under the plans. During 2015, we granted 20,880 shares of common stock to our directors for 2014 board service fees.
Service-based restricted stock units granted to associates are valued at fair value of the shares on the date of grant less the present value of the dividends that holders of restricted stock units do not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units generally cliff vest three years after the date of grant. During 2015, we also granted restricted stock units which vest on a three year ratable vesting schedule. Service-based restricted stock units vested during the year had an intrinsic value of $26 million, $14 million and $15 million for the years ended December 31, 2015, 2014 and 2013, respectively.
This is a summary of service-based and performance-based share information, assuming a target payout for performance-based shares, for the year 2015:
We report as Other the noninvestment operations of the parent company and its noninsurer subsidiary, CFC Investment Company. We also report as Other the results of our reinsurance assumed operations, known as Cincinnati Re.
Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company, operating expenses of our headquarters and, for 2015, premiums earned minus loss and loss expenses and underwriting expenses of Cincinnati Re.