• Net income of $3.69 billion, or $10.82 per share basic and $10.70 per share diluted
• Net favorable prior year reserve development of $941 million ($616 million after-tax)
• Total investments of $73.26 billion; fixed maturities and short-term securities comprise 93% of total investments
• Repurchased 35.1 million common shares for a total cost of $3.28 billion under the publicly-announced share repurchase authorization
• Net unrealized investment gains of $3.01 billion ($1.97 billion after-tax)
Diluted net income per share of $10.70 in 2014 increased by 10% over diluted net income per share of $9.74 in 2013. Net income of $3.69 billion in 2014 increased slightly over net income of $3.67 billion in 2013. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The slight increase in net income was primarily driven by the pretax impacts of (i) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), (ii) higher net favorable prior year reserve development and (iii) higher net investment income, partially offset by (iv) higher catastrophe losses, (v) a decline in other revenues due to a gain from the settlement of a legal matter in 2013 and (vi) lower net realized investment gains. Catastrophe losses in 2014 and 2013 were $709 million and $591 million, respectively. Net favorable prior year reserve development in 2014 and 2013 was
$941 million and $840 million, respectively. The improvement in underlying underwriting margins primarily resulted from the impacts of (i) earned pricing that exceeded loss cost trends in each of the Company's business segments, (ii) lower reinsurance costs and (iii) a 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums, partially offset by (iv) an increase in non-catastrophe weather-related losses and (v) a higher level of what the Company defines as large losses. Partially offsetting this net pretax increase in income was an increase in income tax expense. The higher effective tax rate in 2014 than in 2013 resulted from the impact of a $63 million reduction in income tax expense in 2013 due to the resolution of prior year tax matters, as well as interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income in 2014 than in 2013.
Diluted net income per share of $9.74 in 2013 increased by 55% over diluted net income per share of $6.30 in 2012. Net income of $3.67 billion in 2013 increased by 49% over net income of $2.47 billion in 2012. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in 2013 and 2012. The increase in net income primarily reflected the pretax impacts of (i) lower catastrophe losses, (ii) higher underlying underwriting margins, (iii) an increase in net realized investment gains and (iv) an increase in other revenues due to a gain from the settlement of a legal proceeding, partially offset by (v) lower net investment income and (vi) lower net favorable prior year reserve development. Catastrophe losses in 2013 and 2012 were $591 million and $1.86 billion, respectively. Net favorable prior year reserve development in 2013 and 2012 was $840 million and $940 million, respectively. The improvement in underlying underwriting margins primarily resulted from the impact of earned pricing that exceeded loss cost trends in each of the Company's business segments. Partially offsetting this net pretax increase in income was an increase in income tax expense. The higher effective tax rate in 2013 than in 2012 resulted from interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income in 2013 than in 2012, partially offset by the resolution of prior year tax matters discussed above.
Earned premiums in 2014 were $23.71 billion, $1.08 billion or 5% higher than in 2013. The increase in earned premiums in 2014 primarily reflected the impact of the acquisition of Dominion on November 1, 2013. In the Business and International Insurance segment, earned premiums in 2014 increased by 9% over 2013, primarily reflecting the impact of the acquisition of Dominion. In the Bond & Specialty Insurance segment, earned premiums in 2014 increased by 5% over 2013. In the Personal Insurance segment, earned premiums in 2014 decreased by 3% from 2013.
Earned premiums in 2013 were $22.64 billion, $280 million or 1% higher than in 2012. In the Business and International Insurance segment, earned premiums in 2013 increased by 4% over 2012. In the Bond & Specialty Insurance segment, earned premiums in 2013 increased by 1% over 2012. In the Personal Insurance segment, earned premiums in 2013 decreased by 4% from 2012.
Factors contributing to the changes in earned premiums in each segment in 2014 and 2013 compared with the respective prior year are discussed in more detail in the segment discussions that follow.
The National Accounts market in the Business and International Insurance segment is the primary source of the Company's fee-based business. The $43 million and $72 million increases in fee income in 2014 and 2013, respectively, compared with the respective prior years are described in the Business and International Insurance segment discussion that follows.
Other net realized investment gains in 2014 included $35 million of net realized gains resulting from the sale of substantially all of one of the Company's real estate joint venture investments. The
Other net realized gains in 2013 of $181 million were primarily driven by $115 million of net realized gains associated with U.S. Treasury futures contracts, which require daily mark-to-market settlement and are used from time to time to shorten the duration of the Company's fixed maturity investment portfolio. The remaining $66 million of other net realized investment gains in 2013 were primarily driven by $41 million of net realized investment gains related to fixed maturity investments, $15 million of net realized investment gains related to equity securities and $10 million of net realized investment gains related to other investments.
development in each segment are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
The Company's threshold for disclosing catastrophes is determined at the reportable segment level. If a threshold for one segment or a combination thereof is pierced and the other segments have losses from the same event, losses from the event are identified as catastrophe losses in the segment results and for the consolidated results of the Company. The threshold for 2014 ranged from approximately $17 million to $30 million of losses before reinsurance and taxes.
General and administrative expenses in 2014 were $3.95 billion, $195 million or 5% higher than in 2013. The increase in 2014 primarily reflected the impact of the acquisition of Dominion and increases in employee and technology related expenses, partially offset by a reduction in the estimated liability for state assessments primarily related to workers' compensation premiums. General and administrative expenses in 2013 were $3.76 billion, $147 million or 4% higher than in 2012. General and administrative expenses are discussed in more detail in the segment discussions that follow.
Interest expense in 2014, 2013 and 2012 was $369 million, $361 million and $378 million, respectively. The increase in 2014 compared with 2013 primarily reflected slightly higher average levels of debt outstanding. The decline in 2013 compared with 2012 primarily reflected lower average levels of debt outstanding.
Income tax expense in 2014 was $1.40 billion, $125 million or 10% higher than in 2013, primarily reflecting the impact of a $63 million reduction in income tax expense in 2013 resulting from the resolution of prior year tax matters, as well as the tax effects of the $144 million increase in income before income taxes in 2014. Income tax expense in 2013 was $1.27 billion, $579 million or 84% higher than in 2012, primarily reflecting the impact of the tax effects of the $1.78 billion increase in income before income taxes, partially offset by the impact of the $63 million reduction in income tax expense resulting from the resolution of prior year tax matters in 2013.
The underwriting expense ratio of 31.4% in 2014 was 0.5 points lower than the underwriting expense ratio of 31.9% in 2013, primarily reflecting lower commission expenses in the Personal Insurance segment and a reduction in the estimated liability for state assessments primarily related to workers' compensation premiums in the Business and International Insurance segment, partially offset by the increase in general and administrative expenses described above.
The combined ratio of 89.8% in 2013 was 7.3 points lower than the combined ratio of 97.1% in 2012.
Gross and net written premiums in 2014 increased by 4% and 5%, respectively, over 2013, primarily reflecting the impact of the acquisition of Dominion. Gross and net written premiums in 2013 both increased by 1% over 2012. Factors contributing to the changes in gross and net written premiums in each segment in 2014 and 2013 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Operating income in 2014 was $2.35 billion, $57 million or 2% lower than operating income of $2.40 billion in 2013. The decrease in operating income in 2014 primarily reflected an increase in income taxes and a slight decrease in operating income before income taxes. The slight decrease in operating income before income taxes reflected the pretax impacts of (i) lower net favorable prior year reserve development, (ii) a decline in other revenues due to a gain from the settlement of a legal matter in 2013 and (iii) higher catastrophe losses, largely offset by (iv) higher underlying underwriting margins and (v) an increase in net investment income. Catastrophe losses in 2014 and 2013 were $367 million and $333 million, respectively. Net favorable prior year reserve development in 2014 and 2013 was $322 million and $399 million, respectively. The improvement in underlying underwriting margins in 2014 primarily reflected (i) earned pricing that exceeded loss cost trends and (ii) a reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums, partially offset by (iii) higher non-catastrophe weather-related losses and (iv) a higher level of what the Company defines as large losses. The increase in income tax expense was primarily due to the impact of a $43 million reduction in income tax expense in 2013 resulting from the resolution of prior year tax matters. The higher effective tax rate in 2014 than in 2013 primarily resulted from the impact of the reduction in income tax expense in 2013 described above.
Net investment income in 2014 was $2.16 billion, $69 million or 3% higher than in 2013, primarily reflecting the impact of the acquisition of Dominion. Net investment income in 2013 was $2.09 billion, $118 million or 5% lower than in 2012. Included in the Business and International Insurance segment are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2014 and 2013 compared with the respective prior years. In addition, refer to note 2 of notes to the Company's consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, as well as claims and policy management services to workers' compensation residual market pools. Fee income in 2014 increased by $43 million or 11% over 2013. Fee income in 2013 increased by $72 million or 22% over 2012. The increases in both years primarily reflected higher serviced premium volume in workers' compensation residual market pools and higher claim volume in the large deductible business.
Other revenues in 2013 included a $91 million gain from the settlement of a legal proceeding, which is discussed in more detail in note 16 of notes to the consolidated financial statements.
Claims and claim adjustment expenses in 2014 were $9.15 billion, $860 million or 10% higher than in 2013, primarily reflecting (i) the impact of the acquisition of Dominion, (ii) the impact of loss cost trends, (iii) higher non-catastrophe weather-related losses, (iv) a higher level of what the Company defines as large losses, (v) a decline in net favorable prior year reserve development and (vi) higher catastrophe losses, partially offset by (vii) the impact of lower volumes of insured exposures (excluding the impact of the acquisition of Dominion). Factors contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
The loss and loss adjustment expense ratio of 61.6% in 2014 was 0.8 points higher than the loss and loss adjustment expense ratio of 60.8% in 2013. Catastrophe losses in 2014 and 2013 accounted for 2.5 points of the loss and loss adjustment expense ratio in each year. Net favorable prior year reserve development in 2014 and 2013 provided 2.2 points and 3.0 points of benefit, respectively, to the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in 2014 was level with the 2013 ratio on the same basis, as the impact of earned pricing that exceeded loss cost trends was offset by higher non-catastrophe weather-related losses and a higher level of what the Company defines as large losses.
The loss and loss adjustment expense ratio of 60.8% in 2013 was 3.5 points lower than the loss and loss adjustment expense ratio of 64.3% in 2012. Catastrophe losses in 2013 and 2012 accounted for 2.5 points and 6.5 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in 2013 and 2012 provided 3.0 points and 4.6 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2013 underlying loss and loss adjustment expense ratio was 1.1 points lower than the 2012 ratio on the same basis, reflecting the impact of earned pricing that exceeded loss cost trends, partially offset by the impact of a change in business mix due to an increase in longer-tail loss-sensitive business in National Accounts.
Gross and net written premiums in 2013 both increased by 5% over 2012. Business retention rates in 2013 remained strong and were slightly lower than in 2012. Renewal premium changes remained
Select Accounts. Net written premiums of $2.71 billion in 2014 decreased by less than 1% from 2013. Business retention rates in 2014 were strong and higher than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 decreased from 2013. Net written premiums of $2.72 billion in 2013 decreased by 2% from 2012. Business retention rates in 2013 remained strong but were lower than in 2012. Renewal premium changes remained positive in 2013 and were higher than in 2012, primarily due to higher renewal rate increases. New business premiums in 2013 decreased from 2012.
Specialized Distribution. Net written premiums of $1.07 billion in 2014 decreased by 1% from 2013, primarily driven by premium decreases in National Programs. Business retention rates in 2014 remained strong and were higher than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 decreased from 2013. Net written premiums of $1.09 billion in 2013 decreased by 1% from 2012, primarily driven by premium decreases in National Programs. Business retention rates remained strong in 2013 but were lower than in 2012. Renewal premium changes remained positive in 2013 and were level with 2012. New business premiums in 2013 increased over 2012.
Earned premiums in 2014 were $2.08 billion, $95 million or 5% higher than in 2013, primarily reflecting the impact of lower reinsurance costs. Earned premiums in 2013 were $1.98 billion, $24 million or 1% higher than in 2012.
Net investment income in 2014 was $252 million, $8 million or 3% lower than in 2013. Net investment income in 2013 was $260 million, $20 million or 7% lower than in 2012. Included in the Bond & Specialty Insurance segment are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. As a result, reported net investment income in the Bond & Specialty Insurance segment reflects a significantly smaller proportion of allocated net investment income, including that from the Company's non-fixed maturity investments that experienced an increase in investment income in 2014 and a decrease in investment income in 2013. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2014 and 2013 compared with the respective prior years. In addition, refer to note 2 of notes to the Company's consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
The loss and loss adjustment expense ratio of 34.7% in 2013 was 5.1 points lower than the 2012 ratio of 39.8%. Net favorable prior year reserve development provided 11.7 points and 9.2 points of benefit, respectively, to the loss and loss adjustment expense ratio in 2013 and 2012. Catastrophe losses in 2013 and 2012 accounted for 0.4 points and 0.7 points of the loss and loss adjustment expense ratio, respectively. The 2013 underlying loss and loss adjustment expense ratio was 2.3 points lower than the 2012 ratio on the same basis, reflecting the impact of earned pricing that exceeded loss cost trends.
Gross and net written premiums in 2014 increased by 2% and 4%, respectively, over 2013. Gross and net written premiums in 2013 increased by 3% and 6%, respectively, over 2012.
Net written premiums in 2013 were $2.03 billion, $106 million or 6% higher than in 2012, primarily driven by higher contract surety volume, rate increases in the management liability business and lower reinsurance costs primarily resulting from a change in a reinsurance treaty. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in 2013 remained strong but were lower than in 2012. Renewal premium changes in 2013 remained positive and were higher than in 2012, as increases in renewal rate changes were largely offset by a decline in insured exposures. Renewal rate changes exceeded expected loss cost trends in 2013. New business premiums in 2013 decreased from 2012.
Operating income in 2014 was $824 million, $14 million or 2% lower than operating income of $838 million in 2013. The decrease in operating income primarily reflected the pretax impacts of (i) an increase in catastrophe losses, (ii) lower net favorable prior year reserve development and (iii) a decline in other revenues, partially offset by (iv) higher underlying underwriting margins and (v) higher net investment income. Catastrophe losses in 2014 and 2013 were $336 million and $250 million, respectively. Net favorable prior year reserve development in 2014 and 2013 was $169 million and $209 million, respectively. The improvement in underlying underwriting margins primarily reflected (i) earned pricing that exceeded loss cost trends and (ii) the benefit of the Company's previously announced expense reduction initiatives, partially offset by (iii) the impact of a higher mix of new business versus renewal business. Income tax expense in 2014 was level with 2013. The higher effective tax rate in 2014 than in 2013 primarily resulted from the impact of a $5 million reduction in income tax expense in 2013 due to the resolution of prior year tax matters.
Claims and claim adjustment expenses in 2014 were $4.24 billion, $83 million or 2% lower than in 2013. The decrease primarily reflected (i) the impact of lower volumes of insured exposures and (ii) the benefit of the Company's previously announced expense reduction initiatives on claim adjustment expenses, partially offset by (iii) higher catastrophe losses, (iv) the impact of loss cost trends and (v) lower net favorable prior year reserve development. Factors contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
Claims and claim adjustment expenses in 2013 were $4.33 billion, $1.18 billion or 21% lower than in 2012. The decrease primarily reflected (i) lower catastrophe losses, (ii) the impact of lower volumes of insured exposures, (iii) lower non-catastrophe weather-related losses and (iv) higher net favorable prior year reserve development, partially offset by (v) the impact of loss cost trends. Factors
contributing to net favorable prior year reserve development are discussed in more detail in note 7 of notes to the Company's consolidated financial statements.
The combined ratio of 88.9% in 2013 was 13.0 points lower than the combined ratio of 101.9% in 2012.
In 2014, net written premiums in the Agency Automobile line of business were slightly higher than in 2013. Business retention rates remained strong in 2014 and were higher than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 were significantly higher than in 2013 as a result of the Company's new private passenger automobile product, Quantum Auto 2.0. In 2013 in the Agency Automobile line of business, net written premiums were 8% lower than in 2012. Business retention rates in 2013 remained strong but were lower than in 2012, while new business premiums in 2013 decreased from 2012. Renewal premium changes in 2013 remained positive and were higher than in 2012, primarily driven by renewal rate changes.
In 2014, net written premiums in the Agency Homeowners and Other line of business were 2% lower than 2013 as a result of ongoing underwriting actions taken in response to the severe weather events that have occurred over the last several years, including seeking improved rates where the Company believes it is appropriate, as well as improved terms and conditions. Business retention rates remained strong in 2014 and were higher than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 were higher than in 2013. In 2013 in the Agency Homeowners and Other line of business, net written premiums were 3% lower than in 2012 as a result of the ongoing underwriting actions described above. Business retention rates remained strong but were lower than in 2012. Renewal premium changes in 2013 remained positive but were lower than in 2012. New business premiums in 2013 decreased from 2012.
For its Agency business, the Personal Insurance segment had approximately 6.0 million and 6.2 million active policies at December 31, 2014 and 2013, respectively.
The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims from the Company's policyholders (which includes others seeking coverage under a policy). Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the continued focus by plaintiffs on defendants who were not traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. In addition to contributing to the overall number of claims, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. The bankruptcy of many traditional defendants has also caused increased settlement demands against those
In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers' conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. Travelers Property Casualty Corp. (TPC) had previously entered into settlement agreements in connection with a number of these direct action claims (Direct Action Settlements). The Company had been involved in litigation concerning whether all of the conditions of the Direct Action Settlements had been satisfied. On July 22, 2014, the United States Court of Appeals for the Second Circuit ruled that all of the conditions of the Direct Action Settlements had been satisfied. On January 15, 2015, the bankruptcy court entered an order directing the Company to pay $579 million to the plaintiffs, and the Company has made that payment. For a full discussion of these settlement agreements and related litigation, see the "Asbestos Direct Action Litigation" section of note 16 of notes to the consolidated financial statements herein. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to these claims and has received favorable rulings in certain jurisdictions.
Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually. Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder's potential liability; the jurisdictions involved; past and anticipated future
• while overall payment patterns have been generally stable, there has been an increase in severity for certain policyholders due to the continued high level of litigation activity; and
The "policyholders with settlement agreements" category includes structured settlements, coverage in place arrangements and, with respect to TPC, Wellington accounts. Reserves are based on the expected payout for each policyholder under the applicable agreement. Structured settlements are arrangements under which policyholders and/or plaintiffs agree to fixed financial amounts to be paid at scheduled times. Coverage in place arrangements represent agreements with policyholders on specified amounts of coverage to be provided. Payment obligations may be subject to annual maximums and are only made when valid claims are presented. Wellington accounts refer to the 35 defendants that are parties to a 1985 agreement settling certain disputes concerning insurance coverage for their asbestos claims. Many of the aspects of the Wellington agreement are similar to those of coverage in place arrangements in which the parties have agreed on specific amounts of coverage and the terms under which the coverage can be accessed. As discussed above, on July 22, 2014, the United States Court of Appeals for the Second Circuit ruled that all the conditions of the Direct Action Settlements had been satisfied. As a result, during the third quarter of 2014, $502 million of reserves included in the unallocated IBNR component in the "home office and field office" category were reclassified to the "Policyholders with settlement agreements" category. For a full discussion of these settlement agreements, including the payment of this settlement and related interest in January 2015, see the "Settlement of Asbestos Direct Action Litigation" section of note 16 of notes to the consolidated financial statements.
The "home office and field office" category relates to all other policyholders and also includes IBNR reserves and reserves for the costs of defending asbestos-related coverage litigation. IBNR reserves in the "home office and field office" category include amounts for new claims from and adverse development on existing "home office and field office" policyholders, as well as reserves for claims from policyholders reporting asbestos claims for the first time and for policyholders for which there is, or may be, litigation. Policyholders are identified for the annual home office review based upon, among other factors: a combination of past payments and current case reserves in excess of a specified threshold (currently $100,000), perceived level of exposure, number of reported claims, products/completed operations and potential "non-product" exposures, size of policyholder and geographic distribution of products or services sold by the policyholder. The "assumed reinsurance and other" category primarily consists of reinsurance of excess coverage, including various pool participations.
On January 29, 2009, the Company and PPG Industries, Inc ("PPG"), along with approximately 30 other insurers of PPG, agreed in principle to an agreement to settle asbestos-related coverage litigation under insurance policies issued to PPG. The tentative settlement agreement has been incorporated into the Modified Third Amended Plan of Reorganization ("Amended Plan") proposed as part of the Pittsburgh Corning Corp. ("PCC," which is 50% owned by PPG) bankruptcy proceeding. Pursuant to the proposed Amended Plan, which was filed on January 30, 2009, PCC, along with enumerated other companies (including PPG as well as the Company as a participating insurer), are to receive protections
afforded by Section 524(g) of the Bankruptcy Code from certain asbestos-related bodily injury claims. Under the agreement in principle, the Company has the option to make a series of payments over the next 20 years totaling approximately $620 million to the Trust to be created under the Amended Plan, or it may elect to make a one-time discounted payment, which, as of March 31, 2015, would total approximately $505 million (approximately $476 million after reinsurance). The agreement in principle with PPG is subject to numerous contingencies, including final court approval of the Amended Plan, and the Company has no obligation to make the settlement payment until all contingencies are satisfied. The Company's obligations under this agreement in principle are included in the "home office and field office" category in the preceding table.
In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. The evaluation of the exposure presented by a policyholder can change as information concerning that policyholder and the many variables presented is developed. Conventional actuarial techniques are not used to estimate these reserves.
The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980's. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated. As a result of these factors, in 2014, 2013 and 2012, the Company increased its net environmental reserves by $87 million, $65 million and $90 million, respectively.
Net environmental paid loss and loss expenses were $84 million in each of the years 2014, 2013 and 2012. At December 31, 2014, approximately 92% of the net environmental reserve (approximately $318 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company's experience in resolving those claims. The balance, approximately 8% of the net environmental reserve (approximately $28 million), consists of case reserves.
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management's judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company's previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Company's ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.
The Company's invested assets at December 31, 2014 were $73.26 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The carrying value of the Company's fixed maturity portfolio at December 31, 2014 was $63.47 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's insurance and debt obligations. The weighted average credit quality of the Company's fixed maturity portfolio, both including and excluding U.S. Treasury securities, was "Aa2" at
both December 31, 2014 and 2013. Below investment grade securities represented 3.0% of the total fixed maturity investment portfolio at both December 31, 2014 and 2013. The average effective duration of fixed maturities and short-term securities was 3.5 (3.7 excluding short-term securities) at December 31, 2014 and 3.7 (3.9 excluding short-term securities) at December 31, 2013. See the "Outlook" section in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations."
(3)The Company owns $1 million of non-pre-refunded bonds issued by Puerto Rico, which have an average credit quality rating of "B2." The Company does not own any municipal securities issued by the city of Detroit, MI.
The following table shows the Company's Eurozone exposure at December 31, 2014 to all debt securities issued by foreign governments, financial companies, sovereign corporations (including sovereign banks) whose securities are backed by the respective country's government and all other corporate securities (comprised of industrial corporations and utility companies) which could be affected if economic conditions deteriorated due to a prolonged recession.
guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The average credit rating of the $725 million and $790 million of non-guaranteed CMO holdings at December 31, 2014 and 2013, respectively, was "Ba1" and "Ba3," respectively. The average credit rating of all of the above securities was "Aa3" and "A1" at December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, the Company's fixed maturity investment portfolio included CMOs backed by alternative documentation mortgages and asset-backed securities collateralized by sub-prime mortgages with a collective fair value of $252 million and $293 million, respectively (comprising less than 1% of the Company's total fixed maturity investments at both dates). The Company defines sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios. Alternative documentation securitizations are those in which the underlying loans primarily meet the government-sponsored entities' requirements for credit score but do not meet the government-sponsored entities' guidelines for documentation, property type, debt and loan-to-value ratios. The average credit rating on these securities and obligations held by the Company was"Ba2" at both December 31, 2014 and 2013. The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolio's relatively small size.
At December 31, 2014 and 2013, the Company held commercial mortgage-backed securities (including FHA project loans) of $715 million and $475 million, respectively. The average credit rating on these securities held by the Company was "Aaa" at both December 31, 2014 and 2013. The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolio's relatively small size and the underlying credit strength of these securities.
The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures. These asset classes have historically provided a higher return than the Company's fixed maturity investments but are subject to more volatility. At December 31, 2014 and 2013, the carrying value of the Company's other investments was $3.59 billion and $3.44 billion, respectively.
These unrealized investment losses at December 31, 2014 represent less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders' equity on an after-tax basis.
Following are the pretax realized losses on investments sold during the year ended December 31, 2014:
The Company actively monitors and evaluates changes in third-party models and, when necessary, calibrates the catastrophe risk model estimates delivered via its own proprietary modeling processes. The Company considers historical loss experience, recent events, underwriting practices, market share analyses, external scientific analysis and various other factors to account for non-modeled losses to refine its proprietary view of catastrophe risk. These proprietary models are continually updated as new information emerges.
The tables below set forth the probabilities that estimated losses, comprising claims and allocated claim adjustment expenses (but excluding unallocated claim adjustment expenses), from a single event occurring in a one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars and as a percentage of the Company's common equity), based on the current version of the proprietary and third-party computer models utilized by the Company at December 31, 2014. For example, on the basis described below the tables, the Company estimates that there is a one percent chance that the Company's loss from a single U.S. hurricane in a one-year timeframe would equal or exceed $1.3 billion, or 6% of the Company's common equity at December 31, 2014.
• Increased regulation adopted in response to potential changes in climate conditions may impact the Company and its customers. For example, state insurance regulation could impact the Company's ability to manage property exposures in areas vulnerable to significant climate driven losses. If the Company is unable to implement risk based pricing, modify policy terms or reduce exposures to the extent necessary to address rising losses related to catastrophes and smaller scale weather events (should those increased losses occur), its business may be adversely affected. See "Risk Factors-Catastrophe losses could materially and adversely affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance."
The following table summarizes the composition of the Company's reinsurance recoverables:
The $401 million decline in net reinsurance recoverables from December 31, 2013 primarily reflected the impact of (i) net favorable prior year reserve development, (ii) cash collections, (iii) commutation agreements, as well as (iv) a slightly lower level of reinsurance purchased in 2014.
(1)On September 1, 2014, NKSJ Holdings, Inc. changed its name to Sompo Japan Nipponkoa Holdings, Inc.
On January 25, 2015, AXIS Capital Holdings Limited and PartnerRe Ltd. announced that they had signed a definitive amalgamation agreement. The Company's aggregated reinsurance recoverables from these entities at December 31, 2014 totaled approximately $236 million. The A.M. Best ratings for each entity at February 12, 2015 was "A+" (second highest of 16 ratings). A.M. Best has placed the ratings of each entity under review with negative implications.
At December 31, 2014, the Company held $1.17 billion of collateral in the form of letters of credit, funds and trust agreements held to fully or partially collateralize certain reinsurance recoverables.
Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong. In the Business and International Insurance segment, the Company expects that renewal premium changes during 2015 will remain positive, driven by both positive renewal rate changes and, subject to the economic uncertainties discussed below, growth in insured exposures, but will be lower than the levels attained in 2014. In the Bond & Specialty Insurance segment, the Company expects that renewal premium changes during 2015 will be broadly consistent with 2014. With respect to surety, the Company expects net written premium volume in 2015 that is broadly consistent with the levels attained in 2014. In the Personal Insurance segment, the Company expects both Agency Automobile and Agency Homeowners and Other renewal premium changes during 2015 will remain positive, driven by both positive renewal rate changes (based on the Company's actions to file for rate increases) and, subject to the economic uncertainties discussed below, growth in insured exposures, but will be lower than the levels attained in 2014. The
need for state regulatory approval for changes to personal property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.
Catastrophe and other weather-related losses are inherently unpredictable from period to period. The Company experienced significant catastrophe and other weather-related losses in a number of recent periods, which adversely impacted its results of operations. The Company's results of operations could be adversely impacted if significant catastrophe and other weather-related losses were to occur during 2015.
It is possible that the steps taken by the federal government, particularly the Federal Reserve, to stabilize financial markets and improve economic conditions could lead to higher inflation than the Company had anticipated, which could in turn lead to an increase in the Company's loss costs. The impact of inflation on loss costs could be more pronounced for those lines of business that are considered "long tail", such as general liability, as they require a relatively long period of time to finalize and settle claims for a given accident year. For a further discussion, see "Part I-Item 1A - Risk Factors-If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, our financial results could be materially and adversely affected."
In Business and International Insurance, the Company expects underlying underwriting margins during 2015 that will be modestly higher than in 2014. In making this comparison, the Company has assumed that non-catastrophe weather-related losses and what the Company defines as large losses will be at lower levels than what the Company experienced in 2014, particularly in the second half of that year.
U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At December 31, 2014, the Company had $350 million notional value of open U.S. Treasury futures contracts. The Company continually evaluates its investment alternatives and mix. Currently, the majority of the Company's investments are comprised of a widely diversified portfolio of high-quality, liquid taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
Net investment income is a material contributor to the Company's results of operations. Interest rates remain at very low levels by historical standards. Based on the current interest rate environment, the Company estimates that the impact of lower reinvestment yields on the Company's fixed maturity portfolio could, for 2015, result in approximately $25 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to the corresponding quarters of 2014. Given recent general economic and investment market conditions, the Company expects investment income from the non-fixed maturity portfolio during 2015 will be lower than in 2014. If general economic conditions and/or investment market conditions deteriorate during 2015, the Company could also experience a further reduction in net investment income and/or significant realized investment losses, including impairments.
The Company had a net pre-tax unrealized investment gain of $2.67 billion ($1.75 billion after-tax) in its fixed maturity investment portfolio at December 31, 2014. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders' equity, and a declining interest rate environment would have the opposite effects.
For further discussion of the Company's investment portfolio, see "Investment Portfolio." For a discussion of the risks to the Company's business during or following a financial market disruption and risks to the Company's investment portfolio, see the risk factors entitled "During or following a period of financial market disruption or economic downturn, our business could be materially and adversely affected" and "Our investment portfolio may suffer reduced returns or material realized or unrealized losses" included in "Part I-Item 1A - Risk Factors." For a discussion of the risks to the Company's investments from foreign currency exchange rate fluctuations, see the risk factor entitled "We are subject to a number of risks associated with our business outside the United States" and see "Part I-
Consolidated Statement of Income for the years ended December 31, 2014, 2013 and 2012
We have audited the accompanying consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Travelers Companies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
The consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to the 2013 and 2012 financial statements to conform to the 2014 presentation, including reclassifications related to the realignment of the Company's reportable business segments described in the "Nature of Operations" section of this note. All material intercompany transactions and balances have been eliminated.
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date
part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity. When a company ceases to have a controlling financial interest in a subsidiary within a foreign entity, the company should recognize any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary had resided. Upon the partial sale of an equity method investment that is a foreign entity, the company should release into earnings a pro rata portion of the cumulative translation adjustment. Upon the partial sale of an equity method investment that is not a foreign entity, the company should release into earnings the cumulative translation adjustment if the partial sale represents a complete or substantially complete liquidation of the foreign entity that holds the equity method investment. The updated guidance was effective for the quarter ending March 31, 2014. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.
The updated guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.
Also included in other investments are non-public common and preferred equities, trading securities and derivatives. Non-public common and preferred equities are reported at fair value with changes in fair value, net of income taxes, charged or credited directly to other comprehensive income. Trading securities are marked to market with the change in fair value recognized in net investment income during the current period. The Company sold all of its remaining trading securities during 2013. The Company's derivative financial instruments are carried at fair value, with the changes in fair value reflected in the consolidated statement of income in net realized investment gains (losses). For a further discussion of the derivatives used by the Company, see note 3.
For fixed maturities where the Company records an other-than-temporary impairment, a determination is made as to the cause of the impairment and whether the Company expects a recovery
For structured fixed maturity securities (primarily residential and commercial mortgage-backed securities and asset-backed securities), the Company estimates the present value of the security by projecting future cash flows of the assets underlying the securitization, allocating the flows to the various tranches based on the structure of the securitization and determining the present value of the cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). The Company incorporates levels of delinquencies, defaults and severities as well as credit attributes of the remaining assets in the securitization, along with other economic data, to arrive at its best estimate of the parameters applied to the assets underlying the securitization. In order to project cash flows, the following assumptions are applied to the assets underlying the securitization: (1) voluntary prepayment rates, (2) default rates and (3) loss severity. The
key assumptions made for the Prime, Alt-A and first-lien Sub-Prime mortgage-backed securities at December 31, 2014 were as follows:
collateral held by the third-party custodian or the obligation to return the collateral. The loaned securities remain a recorded asset of the Company. The Company accepts only cash as collateral for securities on loan and restricts the manner in which that cash is invested.
reflect the Company's assessment of the risks inherent in the projected future cash flows and the Company's weighted-average cost of capital, and are compared against available market data for reasonableness.
Claims and claim adjustment expense reserves represent estimates for the ultimate cost of unpaid reported and unreported claims incurred and related expenses. The reserves are adjusted regularly based upon experience. Included in the claims and claim adjustment expense reserves in the consolidated balance sheet are certain reserves discounted to the present value of estimated future payments. The liabilities for losses for most long-term disability and annuity claim payments, primarily arising from workers' compensation insurance and workers' compensation excess insurance policies, were discounted using a rate of 5% at both December 31, 2014 and 2013. These discounted reserves totaled $2.01 billion and $2.21 billion at December 31, 2014 and 2013, respectively.
Included in other liabilities in the consolidated balance sheet is the Company's estimate of its liability for guaranty fund and other insurance-related assessments. The liability for expected state guaranty fund and other premium-based assessments is recognized as the Company writes or becomes obligated to write or renew the premiums on which the assessments are expected to be based. The liability for loss-based assessments is recognized as the related losses are incurred. At December 31, 2014 and 2013, the Company had a liability of $245 million and $261 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $15 million and $14 million,
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance contracts, primarily workers' compensation, are participating whereby dividends are paid to policyholders in accordance with contract provisions. Net written premiums for participating dividend policies were approximately 1%, 1% and 2% of total net written premiums for the years ended December 31, 2014, 2013 and 2012, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled $54 million and $53 million at December 31, 2014 and 2013, respectively.
The Company's U.S. insurance subsidiaries, domiciled principally in the state of Connecticut, are required to prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. The State of Connecticut requires insurers domiciled in Connecticut to prepare their statutory financial statements in accordance with National Association of Insurance Commissioners' (NAIC) statutory accounting practices.
The Company has an employee stock incentive compensation plan that permits grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, deferred stock, stock units, performance awards and other share-based or share-denominated awards with respect to the Company's common stock.
Compensation cost is measured based on the grant-date fair value of an award, utilizing the assumptions discussed in note 13. Compensation cost is recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period). In connection with certain share-based awards, participants are entitled to receive dividends during the vesting period, either in cash or dividend equivalent shares, commensurate with the dividends paid to common shareholders. Dividends and dividend equivalent shares on awards that are expected to vest are recorded in retained earnings. Dividends paid on awards
that are not expected to vest as part of the Company's forfeiture estimate are recorded as compensation expense.
• The Company's International Insurance group, which had previously been included in the Financial, Professional & International Insurance segment, was combined with the Company's previous Business Insurance segment to create a new Business and International Insurance segment.
• The Bond & Financial Products group, which comprised the remaining businesses in the Financial, Professional & International Insurance segment, now comprises the new Bond & Specialty Insurance segment.
The realignment of segments described above was made to reflect the realignment of the Company's senior management responsibilities and the manner in which the Company's businesses have been managed starting July 1, 2014, and the aggregation of products and services based on the type of customer, how the business is marketed and the manner in which risks are underwritten. In connection with these changes, the Company realigned and revised the names of several businesses that comprise the Business and International Insurance segment.
through Excess Casualty and insurance coverages for foreign organizations with United States exposures through Global Partner Services.
Homeowners policies provide protection against losses to dwellings and contents from a variety of perils (excluding flooding) as well as coverage for personal liability. The Company writes homeowners insurance for dwellings, condominiums and tenants, and rental properties. The Company also writes coverage for boats and yachts and valuable personal items such as jewelry, and also writes coverages for umbrella liability, identity fraud, and weddings and special events.
(1)The primary component of other assets at December 31, 2014 was other intangible assets. The primary components of other assets at December 31, 2013 were other intangible assets and accrued over-funded benefit plan assets related to the Company's qualified domestic pension plan.
The Company's fixed maturity investment portfolio at December 31, 2014 and 2013 included $2.21 billion and $2.42 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMO). Included in the totals at December 31, 2014 and 2013 were $872 million and $1.07 billion, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.34 billion and $1.36 billion at December 31, 2014 and 2013, respectively. Approximately 46% and 42% of the Company's CMO holdings at December 31, 2014 and 2013, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The average credit rating of the $725 million and $790 million of non-guaranteed CMO holdings at December 31, 2014 and 2013, respectively, was "Ba1" and "Ba3," respectively. The average credit rating of all of the above securities was "Aa3" and "A1" at December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, the Company held commercial mortgage-backed securities (CMBS, including FHA project loans) of $715 million and $475 million, respectively, which are included in "All other corporate bonds" in the tables above. At December 31, 2014 and 2013, approximately $202 million and $59 million of these securities, respectively, or the loans backing such securities, contained guarantees by the U.S. government or a government-sponsored enterprise. The average credit rating of the $513 million and $416 million of non-guaranteed securities at December 31, 2014 and 2013, respectively, was "Aaa" at both dates. The CMBS portfolio is supported by loans that are diversified across economic sectors and geographical areas. The average credit rating of the CMBS portfolio was "Aaa" at both December 31, 2014 and 2013.
Proceeds from sales of fixed maturities classified as available for sale were $1.05 billion, $1.64 billion and $1.09 billion in 2014, 2013 and 2012, respectively. Gross gains of $44 million, $66 million and $70 million and gross losses of $12 million, $25 million and $9 million were realized on sales in 2014, 2013 and 2012, respectively.
Proceeds from sales of equity securities were $158 million, $86 million and $37 million in 2014, 2013 and 2012, respectively. Gross gains of $27 million, $16 million and $8 million and gross losses of $3 million, $1 million and less than $1 million were realized on those sales (excluding impairments) in 2014, 2013 and 2012, respectively.
Proceeds from the sale of real estate investments were $15 million, $18 million and $53 million in 2014, 2013 and 2012, respectively. Gross gains of $6 million, $7 million and $19 million were realized on those sales in 2014, 2013 and 2012, respectively, and there were no gross losses. The Company had no real estate held for sale at December 31, 2014 and 2013. Accumulated depreciation on real estate held for investment purposes was $290 million and $264 million at December 31, 2014 and 2013, respectively.
The Company's short-term securities consist of Aaa-rated registered money market funds, U.S. Treasury securities, high-quality commercial paper (primarily A1/P1) and high-quality corporate securities purchased within a year to their maturity with a combined average of 57 days to maturity at December 31, 2014. The amortized cost of these securities, which totaled $4.36 billion and $3.88 billion at December 31, 2014 and 2013, respectively, approximated their fair value.
The following tables summarize, for all investments in an unrealized loss position at December 31, 2014 and 2013, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1, in determining whether such investments are other-than-temporarily impaired.
These unrealized losses at December 31, 2014 represented less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders' equity on an after-tax basis.
At December 31, 2014 and 2013, other than U.S. Treasury securities, obligations of U.S. government and government agencies and authorities, and obligations of the Canadian government, the Company was not exposed to any concentration of credit risk of a single issuer greater than 5% of the Company's shareholders' equity.
From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At December 31, 2014 and 2013, the Company had $350 million and $0 notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains in 2014, 2013 and 2012 included net losses of $1 million, net gains of $115 million and net losses of $14 million, respectively, related to U.S. Treasury futures contracts.
• Level 1-Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.
• Level 2-Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
non-redeemable preferred stocks held by the Company, the Company receives an estimate of fair value from the pricing services. The services utilize similar methodologies to price the non-redeemable preferred stocks as they do for the fixed maturities. The Company includes the fair value estimate for these non-redeemable preferred stocks in the amount disclosed in Level 2.
2013. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.
During the year ended December 31, 2014, the Company had transfers of $1 million of obligations of states, municipalities and political subdivisions and $7 million of non-redeemable preferred stock
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2014 and 2013.
The Company uses various financial instruments in the normal course of its business. The Company's insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below. The following tables present the carrying value and fair value of the Company's financial assets and financial liabilities disclosed, but not carried, at fair value at December 31, 2014 and 2013, and the level within the fair value hierarchy at which such assets and liabilities are categorized.
The Company utilized a pricing service to estimate fair value for approximately 98% and 97% of short-term securities at December 31, 2014 and 2013, respectively. A description of the process and inputs used by the pricing service to estimate fair value is discussed in the "Fixed Maturities" section above. Estimates of fair value for U.S. Treasury securities and money market funds are based on market quotations received from the pricing service and are disclosed in Level 1 of the hierarchy. The fair value of other short-term fixed maturity securities is estimated by the pricing service using observable market inputs and is disclosed in Level 2 of the hierarchy. For short-term securities where an estimate is not obtained from the pricing service, the carrying value approximates fair value and is included in Level 3 of the hierarchy.
The Company had no material assets or liabilities that were measured at fair value on a non-recurring basis during the years ended December 31, 2014 and 2013.
The Company utilizes general corporate catastrophe treaties with unaffiliated reinsurers to help manage its exposure to losses resulting from catastrophes and protect its capital. In addition to the coverage provided under these treaties, the Company also utilizes catastrophe bonds to protect against hurricane losses in the Northeastern United States, and a Northeast catastrophe reinsurance treaty to protect against losses resulting from weather-related and earthquake catastrophes in the Northeastern United States. The Company also utilizes excess-of-loss treaties to protect against earthquake losses up to a certain threshold in the Business and International Insurance segment (for certain markets) and for the Personal Insurance segment, and several reinsurance treaties specific to its international operations.
Also included in reinsurance recoverables are amounts related to structured settlements. Structured settlements are annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers' compensation claims comprise a significant portion. In cases where the Company did not receive a release from the claimant, the structured settlement is included in reinsurance recoverables and the related claim cost is included in the liability for claims and claim adjustment expense reserves, as the Company retains the contingent liability to the claimant. If it is expected that the life insurance company is not able to pay, the Company would recognize an impairment of the related reinsurance recoverable if, and to the extent, the purchased annuities are not
The Terrorism Risk Insurance Program is a Federal program administered by the Department of the Treasury that provides for a system of shared public and private compensation for certain insured losses resulting from certified acts of terrorism. The program expired at the end of 2014 but was reauthorized, with some adjustments to its provisions, in January 2015 for six years through December 31, 2020.
The deductible for any calendar year is equal to 20% of the insurer's direct earned premiums for covered lines for the preceding calendar year. The Company's estimated deductible under the program is $2.38 billion for 2015. The annual cap limits the amount of aggregate subject losses for all participating insurers to $100 billion. Once subject losses have reached the $100 billion aggregate during a program year, participating insurers will not be liable under the program for additional covered terrorism losses for that program year. There have been no terrorism-related losses that have triggered program coverage since the program was established. Since the law is untested, there is substantial uncertainty as to how it will be applied if an act of terrorism is certified under the program. It is also possible that future legislative action could change or eliminate the program. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company's own reinsurance program, future losses from acts of terrorism, particularly involving nuclear, biological, chemical or radiological events, could be material to the Company's operating results, financial position and/or liquidity in future periods. In addition, the Company may not have sufficient resources to respond to claims arising from a high frequency of high severity natural catastrophes and/or of man-made catastrophic events involving conventional means. While the Company seeks to manage its exposure to man-made catastrophic events involving conventional means, the Company may not have sufficient resources to respond to claims arising out of one or more man-made catastrophic events involving nuclear, biological, chemical or radiological means.
(1)Includes goodwill associated with the Company's acquisition of Dominion in 2013, which is subject to the impact of changes in foreign currency exchange rates.
(1)Fair value adjustments of $5 million and $191 million were recorded in connection with the acquisition of Dominion in 2013 and in connection with the merger of The St. Paul Companies, Inc. and Travelers Property Casualty Corp. in 2004, respectively, and were based on management's estimate of nominal claims and claim adjustment expense reserves and reinsurance recoverables. The method used calculated a risk adjustment to a risk-free discounted reserve that
Gross claims and claim adjustment expense reserves at December 31, 2014 decreased by $1.04 billion from December 31, 2013, primarily reflecting the impact of net favorable prior year reserve development and payments related to operations in runoff. Gross claims and claim adjustment expense reserves at December 31, 2013 decreased by $23 million from December 31, 2012, primarily reflecting the impact of net favorable prior year reserve development and payments related to catastrophes and operations in runoff, largely offset by the impact of the acquisition of Dominion.
Reinsurance recoverables on unpaid losses at December 31, 2014 declined by $492 million from December 31, 2013, reflecting the impacts of (i) net favorable prior year reserve development, (ii) cash collections, (iii) commutation agreements, as well as (iv) a slightly lower level of reinsurance purchased in 2014. Reinsurance recoverables on unpaid losses at December 31, 2013 declined by $974 million from December 31, 2012, reflecting the impacts of (i) a decline in mandatory pools and associations primarily due to catastrophe-related collections and, to a lesser extent the sale of renewal rights, related to the Company's National Flood Insurance Program in 2013, (ii) cash collections, (iii) commutation agreements and (iv) net favorable prior year reserve development, partially offset by (v) the acquisition of Dominion, which added $352 million of reinsurance recoverables on unpaid losses at November 1, 2013.
In 2014, estimated claims and claim adjustment expenses incurred included $957 million of net favorable development for claims arising in prior years, including $941 million of net favorable prior year reserve development impacting the Company's results of operations and $50 million of accretion of discount.
Business and International Insurance. Net favorable prior year reserve development in 2014 totaled $322 million. Net favorable prior year reserve development in 2014 was primarily driven by (i) better than expected loss experience in the general liability product line (excluding increases to asbestos and environmental reserves discussed below), primarily related to excess coverages for accident years 2008 through 2012, reflecting more favorable legal and judicial environments than what the Company previously expected, (ii) a $162 million benefit resulting from better than expected loss experience related to, and the commutation of reinsurance treaties associated with, a workers' compensation reinsurance pool for accident years 1996 and prior, (iii) better than expected loss experience in the property product line for accident years 2010 through 2013, including catastrophe losses from Storm Sandy for accident year 2012 and (iv) better than expected loss experience in the commercial auto product line for accident years 2011 and 2012. These factors contributing to net favorable prior year reserve development in 2014 were partially offset by (i) $250 million and $87 million increases to asbestos and environmental reserves, respectively, which are discussed in further detail in the "Asbestos and Environmental Reserves" section below, (ii) an increase in unallocated loss adjustment expense reserves of $77 million for interest awarded as part of damages pursuant to a court decision in the third quarter of 2014 related to a legal matter, which is discussed in more detail in the "Asbestos Direct Action Litigation" section of note 16 and (iii) higher than expected loss experience for liability coverages in the commercial multi-peril product line for accident years 2010 through 2013.
Personal Insurance. Net favorable prior year reserve development in 2014 of $169 million was primarily driven by better than expected loss experience in the Homeowners and Other line of business for non-catastrophe weather-related losses for accident year 2013 and catastrophe losses for accident years 2011 through 2013.
Personal Insurance. Net favorable prior year reserve development in 2013 of $209 million was primarily driven by better than expected loss experience in the Homeowners and Other product line for catastrophe losses incurred in 2012, and non-catastrophe weather-related losses and non-weather-related losses for accident years 2012 and 2011.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2012 of $180 million was primarily driven by better than expected loss experience in the contract surety product line for accident years 2008 and prior, and better than expected results for management liability business primarily for the errors & omissions and fiduciary products for accident years 2007 and prior.
The Home Office and Field Office categories, which account for the vast majority of policyholders with active asbestos-related claims, experienced a slight increase in net asbestos-related payments in 2014 when compared with 2013. The number of policyholders with pending asbestos claims in these categories as of December 31, 2014 was essentially unchanged when compared with December 31, 2013. Payments on behalf of policyholders in these categories continue to be influenced by the high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury continue to target defendants who were not traditionally primary targets of asbestos litigation.
The Company's quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders in the Home Office, Field Office and Assumed Reinsurance and Other categories as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves nor have the Company's evaluations resulted in any way of determining a meaningful average asbestos defense or indemnity payment.
The completion of these reviews and analyses in 2014, 2013 and 2012 resulted in $250 million, $190 million and $175 million increases, respectively, in the Company's net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company's estimate of projected settlement and defense costs related to a broad number of policyholders in the Home Office category due to a higher level of litigation activity surrounding mesothelioma claims than previously anticipated. In addition, the reserve increases in 2013 and 2012 also reflected higher projected payments on assumed reinsurance accounts. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be higher than previously anticipated due to the impact of the current litigation environment discussed above. Notwithstanding these trends, the Company's overall view of the underlying asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.
environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; the potential impact of changing climate conditions, including higher frequency and severity of weather-related events; infrastructure disruption; fraud; the effect of mold damage and business income interruption costs; and reinsurance collectibility. The timing of a catastrophe's occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.
2013 Debt Issuance. On July 25, 2013, the Company issued $500 million aggregate principal amount of 4.60% senior notes that will mature on August 1, 2043. The net proceeds of the issuance, after original issuance discount and the deduction of underwriting expenses and commissions and other expenses, totaled approximately $494 million. Interest on the senior notes is payable semi-annually in arrears on February 1 and August 1. The senior notes are redeemable in whole at any time or in part from time to time, at the Company's option, at a redemption price equal to the greater of (a) 100% of the principal amount of senior notes to be redeemed or (b) the sum of the present value of the remaining scheduled payments of principal and interest on the senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current treasury rate (as defined) plus 15 basis points.
Commercial Paper-The Company maintains an $800 million commercial paper program, supported by a $1.0 billion bank credit agreement that expires on June 7, 2018. (See "Credit Agreement" discussion that follows). Interest rates on commercial paper issued in 2014 ranged from 0.08% to 0.15%, and in 2013 ranged from 0.08% to 0.13%.
Senior Notes-The Company's various senior debt issues are unsecured obligations that rank equally with one another. Interest payments are made semi-annually. The Company generally may redeem some or all of the notes prior to maturity in accordance with terms unique to each debt instrument.
The Company has the right, on one or more occasions, to defer the payment of interest on the debentures. The Company will not be required to settle deferred interest until it has deferred interest for five consecutive years or, if earlier, made a payment of current interest during a deferral period. The Company may defer interest for up to ten consecutive years without giving rise to an event of default. Deferred interest will accumulate additional interest at an annual rate equal to the annual interest rate then applicable to the debentures.
The Company's consolidated balance sheet includes the debt instruments acquired in the merger, which were recorded at fair value as of the acquisition date. The resulting fair value adjustment is being amortized over the remaining life of the respective debt instruments using the effective-interest method. The amortization of the fair value adjustment reduced interest expense by $1 million for each of the years ended December 31, 2014 and 2013.
The number of authorized shares of the company is 1.755 billion, consisting of five million of preferred stock, 1.745 billion shares of voting common stock and five million undesignated shares. The Company's Articles of Incorporation authorize the board of directors to establish, from the undesignated shares, one or more classes and series of shares, and to further designate the type of shares and terms thereof.
In May 2013, the Company's shareholders voted to amend the Company's Articles of Incorporation to provide authority to issue up to five million additional shares of preferred stock. Subsequent to this amendment of the Company's Articles of Incorporation, the Company filed a shelf registration statement with the Securities and Exchange Commission in June 2013 pursuant to which it may publicly sell securities, including the new preferred stock, from time to time. The new shelf registration statement replaced the Company's prior shelf registration statement.
For the years ended December 31, 2014, 2013 and 2012, TRV declared cash dividends per common share of $2.15, $1.96 and $1.79, respectively, and paid cash dividends of $729 million, $729 million and $694 milllion, respectively.
The following table presents the pretax components of the Company's other comprehensive income (loss) and the related income tax expense (benefit) for the years ended December 31, 2014, 2013 and 2012.
For tax return purposes, as of December 31, 2014, the Company had net operating loss (NOL) carryforwards in the United States, Canada and the United Kingdom. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. The benefits of the NOL carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets. The NOL amounts by jurisdiction and year of expiration are as follows:
The 2014 Incentive Plan is currently the only plan pursuant to which future stock-based awards may be granted. In addition to the 10 million shares initially authorized for issuance under the 2014 Incentive Plan, the following will not be counted towards the 10 million shares available and will be available for future grants under the 2014 Incentive Plan: (i) shares of common stock subject to awards that expire unexercised, that are forfeited, terminated or canceled, that are settled in cash or other forms of property, or otherwise do not result in the issuance of shares of common stock, in whole or in part; (ii) shares that are used to pay the exercise price of stock options and shares used to pay withholding taxes on awards generally; and (iii) shares purchased by the Company on the open market using cash option exercise proceeds; provided, however, that the increase in the number of shares of common stock available for grant pursuant to such market purchases shall not be greater than the number that could be repurchased at fair market value on the date of exercise of the stock option giving rise to such option proceeds. In addition, the 10 million shares initially authorized for issuance under the 2014 Incentive Plan will be increased by any shares subject to awards under the 2004 Incentive Plan that were outstanding as of May 27, 2014 and subsequently expire, are forfeited, cancelled, settled in cash or otherwise terminate without the issuance of shares.
Stock option awards granted to eligible officers and key employees have a ten-year term. Prior to January 1, 2007, stock options were granted with an exercise price equal to the fair market value of the Company's common stock on the day preceding the date of grant. Beginning January 1, 2007, all stock options are granted with an exercise price equal to the closing price of the Company's common stock on the date of grant. The stock options granted generally vest upon meeting certain years of service criteria. Except as the Compensation Committee of the Board may allow in the future, stock options cannot be sold or transferred by the participant. The stock options granted under the 2014 Incentive Plan and the 2004 Incentive Plan vest three years after grant date (cliff vest).
Restricted Stock Units, Deferred Stock Units and Performance Share Award Programs
The Company issues restricted stock unit awards to eligible officers and key employees under the Equity Awards program established pursuant to the 2014 Incentive Plan. A restricted stock unit represents the right to receive a share of common stock. These restricted stock unit awards are granted at market price, generally vest three years from the date of grant, do not have voting rights and the underlying shares of common stock are not issued until the vesting criteria is satisfied. In addition, the Company's board of directors can be issued deferred stock unit awards from (i) an annual award; (ii) deferred compensation (in lieu of cash retainer); and (iii) dividend reinvestment shares earned on outstanding deferred compensation.
At December 31, 2014, there was $123 million of total unrecognized compensation cost related to all nonvested share-based incentive compensation awards. This includes stock options, restricted and deferred stock units and performance shares granted under the 2014 Incentive Plan and the 2004 Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.7 years. Cash received from the exercise of employee stock options under share-based compensation plans totaled $195 million and $206 million in 2014 and 2013, respectively. The tax benefit realized for tax deductions from employee stock options exercised during 2014 and 2013 totaled $40 million and $42 million, respectively.
The total accumulated benefit obligation for the Company's defined benefit pension plans was $3.51 billion and $3.05 billion at December 31, 2014 and 2013, respectively. The qualified domestic pension plan accounted for $3.29 billion and $2.85 billion of the total accumulated benefit obligation at December 31, 2014 and 2013, respectively, whereas the nonqualified and foreign plans accounted for $0.22 billion and $0.20 billion of the total accumulated benefit obligation at December 31, 2014 and 2013, respectively.
The following table summarizes the components of net periodic benefit cost and other amounts recognized in other comprehensive income related to the benefit plans for the years ended December 31, 2014, 2013 and 2012.
The following table summarizes assumptions used with regard to the Company's U.S. qualified domestic pension plan and the postretirement benefit plans.
The discount rate assumption used to determine the benefit obligation was based on a yield-curve approach. Under this approach, a weighted average yield is determined from a hypothetical portfolio of high quality fixed maturity corporate bonds (rated Aa) available at the year-end valuation date for which the timing and amount of cash outflows correspond with the timing and amount of the estimated benefit payouts of the Company's benefit plan.
The U.S. qualified domestic pension plan assets are invested for the exclusive benefit of the plan participants and beneficiaries and are intended, over time, to satisfy the benefit obligations under the plan. Risk tolerance is established through consideration of plan liabilities, plan funded status and corporate financial position. The asset mix guidelines have been established and are reviewed quarterly. These guidelines are intended to serve as tools to facilitate the investment of plan assets to maximize long-term total return and the ongoing oversight of the plan's investment performance. Investment risk is measured and monitored on an ongoing basis through daily and monthly investment portfolio reviews, annual liability measurements and periodic asset/liability studies.
The following tables present the level within the fair value hierarchy at which the financial assets of the Company's pension plans are measured on a recurring basis at December 31, 2014 and 2013.
The Company has a savings plan, The Travelers 401(k) Savings Plan (the Savings Plan), in which substantially all U.S. domestic Company employees are eligible to participate. Under the Savings Plan, the Company matches employee contributions up to 5% of eligible pay, with a maximum annual match of $6,000 which becomes 100% vested after three years of service. The Company's matching contribution is made in cash and invested according to the employee's current investment elections and can be reinvested into other investment options in accordance with the terms of the plan. The Company's non-U.S. employees participate in separate savings plans. The total expense related to all of the savings plans was $103 million, $100 million and $92 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Rent expense was $215 million, $196 million and $192 million in 2014, 2013 and 2012, respectively.
After the parties reached the settlements of the Statutory and Hawaiian Actions and the Common Law Claims (collectively "the Settlements"), numerous proceedings took place in the bankruptcy, district and appellate courts concerning the approval of the Settlements and their effect on other parties. As a result of certain rulings in those proceedings, TPC concluded that it was not obligated to go forward with the Settlements because certain conditions precedent to the Settlements had not been met.
The plaintiffs in the Statutory and Hawaii Actions and the Common Law Claims actions thereafter filed motions in the bankruptcy court to compel TPC to make payment under the settlement agreements, arguing that all conditions precedent to the Settlements had been met. On December 16, 2010, the bankruptcy court granted the plaintiffs' motions and ruled that TPC was required to fund the Settlements. The court entered judgment against TPC on January 20, 2011 in accordance with this ruling and ordered TPC to pay the Settlements plus prejudgment interest. The bankruptcy court's judgment was reversed by the district court on March 1, 2012, the district court having found that the conditions to the Settlements had not been met. The plaintiffs appealed the district court's March 1, 2012 decision to the Second Circuit Court of Appeals. On July 22, 2014, the Second Circuit issued an opinion reversing the district court's decision and reinstating the bankruptcy court's January 20, 2011 order which ordered TPC to pay the Settlements plus prejudgment interest. On August 5, 2014, TPC filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit, which was denied on January 5, 2015. At December 31, 2014, the amount of the Company's payment was recognized in the Company's consolidated financial statements in the amount of $579 million, comprising the $502 million settlement amount described above, plus pre-judgment and post-judgment interest totaling $77 million. On January 15, 2015, the bankruptcy court entered an order directing TPC to pay $579 million to the plaintiffs, and the Company has made that payment.
Investment Commitments-The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.63 billion and $1.52 billion at December 31, 2014 and 2013, respectively.
In the ordinary course of selling businesses to third parties, the Company has agreed to indemnify purchasers for losses arising out of breaches of representations and warranties with respect to the businesses being sold, covenants and obligations of the Company and/or its subsidiaries following the closing and, in certain cases, obligations arising from certain liabilities, adverse reserve development and imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law. Such indemnification provisions generally are applicable from the closing date to the expiration of the relevant statutes of limitations, although, in some cases, there may be agreed upon term limitations or no term limitations. Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments. The maximum amount of the Company's contingent obligation for indemnifications related to the sale of businesses that are quantifiable was $462 million at December 31, 2014, of which $8 million was recognized on the balance sheet at that date.
The Company also has contingent obligations for guarantees related to certain investments, third-party loans related to certain investments, certain insurance policy obligations of former insurance subsidiaries, and various other indemnifications. The Company also provides standard indemnifications to service providers in the normal course of business. The indemnification clauses are often standard contractual terms. Certain of these guarantees and indemnifications have no stated or notional amounts or limitation to the maximum potential future payments, and, accordingly, the Company is unable to develop an estimate of the maximum potential payments for such arrangements. The maximum amount of the Company's obligation for guarantees of certain investments and third-party loans related to certain investments that are quantifiable was $150 million at December 31, 2014, approximately $75 million of which is indemnified by a third party. The maximum amount of the Company's obligation related to the guarantee of certain insurance policy obligations of a former insurance subsidiary was $480 million at December 31, 2014, all of which is indemnified by a third party.
There were no material noncash financing or investing activities during the years ended December 31, 2014, 2013 and 2012.
(1)Total other-than-temporary impairments (OTTI) for the year ended December 31, 2013, and the amounts comprising total OTTI that were recognized in net realized investment gains and in other comprehensive income (loss) (OCI), were as follows: