The Company leases its principal executive offices in New York, New York, as well as 234 field and claim offices totaling approximately 4.7 million square feet throughout the United States under leases or subleases with third parties. The Company also leases offices in Canada, the United Kingdom, Brazil, India, China and the Republic of Ireland that house operations (primarily for the Business and International Insurance segment) in those locations. The Company owns six buildings in Hartford, Connecticut, consisting of approximately 1.8 million square feet of office space. The Company also owns an office building in St. Paul, Minnesota which consists of approximately 587,000 square feet of office space. The Company also owns buildings located in Norcross, Georgia and Omaha, Nebraska. The Company owns a building in London, England, which houses a portion of its Business and International Insurance segment's operations in the United Kingdom.
• Net income of $3.44 billion, or $10.99 per share basic and $10.88 per share diluted
• Net favorable prior year reserve development of $941 million ($617 million after-tax)
• Total investments of $70.47 billion; fixed maturities and short-term securities comprise 93% of total investments
• Total debt of $6.34 billion, resulting in a debt-to-total capital ratio of 21.2% (22.1% excluding net unrealized investment gains, net of tax)
• Net unrealized investment gains of $1.97 billion ($1.29 billion after-tax)
Diluted net income per share of $10.88 in 2015 increased by 2% over diluted net income per share of $10.70 in 2014. Net income of $3.44 billion in 2015 decreased by 7% from net income of $3.69 billion in 2014. The percentage increase in diluted net income per share compared with the percentage decrease in net income reflected the impact of share repurchases in recent periods. The decrease in net income primarily reflected the pretax impacts of (i) lower net investment income, (ii) lower net realized investment gains, (iii) a decline in other revenues and (iv) slightly lower underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins"), partially offset by (v) lower catastrophe losses. Catastrophe losses in 2015 and 2014 were $514 million and $709 million, respectively. Net favorable prior year reserve development in both 2015 and 2014 was $941 million. Partially offsetting this net pretax decrease in income was a
related decrease in income tax expense. In addition, income tax expense in 2015 was reduced by $32 million as a result of the resolution of prior year tax matters.
Earned premiums in 2015 were $23.87 billion, $161 million or 1% higher than in 2014. In the Business and International Insurance and the Bond & Specialty Insurance segments, earned premiums in 2015 were comparable to 2014. In the Personal Insurance segment, earned premiums in 2015 increased by 2% over 2014.
Earned premiums in 2014 were $23.71 billion, $1.08 billion or 5% higher than in 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 November 2013. 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.
The National Accounts market in the Business and International Insurance segment is the primary source of the Company's fee-based business. The $7 million and $43 million increases in fee income in 2015 and 2014, respectively, compared with the respective prior years are described in the Business and International Insurance segment discussion that follows.
Claims and claim adjustment expenses in 2015 were $13.72 billion, $147 million or 1% lower than in 2014, primarily reflecting (i) lower catastrophe losses and (ii) lower non-catastrophe weather-related losses, partially offset by (iii) the impact of loss cost trends. Catastrophe losses in 2015 included wildfires in California, hail and wind storms in several regions of the United States and winter storms in several regions of the United States. Catastrophe losses in 2014 included multiple wind and hail storms in several regions of the United States and a winter storm in the Mid-Atlantic, Midwestern and Southeastern regions of the United States.
Claims and claim adjustment expenses in 2014 were $13.87 billion, $563 million or 4% 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) higher catastrophe losses and (v) a higher level of what the Company defines as large losses, partially offset by (vi) the impact of lower volumes of insured exposures (excluding the impact of the acquisition of Dominion) and (vii) higher net favorable prior year reserve development. Catastrophe losses in 2013 resulted from multiple tornado, wind and hail storms in several regions of the United States, as well as floods in Alberta, Canada and Storm Xaver in the United Kingdom.
Factors contributing to net favorable prior year reserve development in each segment for the years ended December 31, 2015, 2014 and 2013 are discussed in more detail in note 7 of notes to the consolidated financial statements herein.
The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in 2015, 2014 and 2013, the amount of related net unfavorable (favorable) prior year reserve development recognized in subsequent years, and the estimate of ultimate losses for those catastrophes at December 31, 2015, 2014 and 2013. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes.
General and administrative expenses in 2015 were $4.08 billion, $127 million or 3% higher than in 2014. The increase primarily reflected the impact of a $76 million first quarter 2014 reduction in the estimated liability for state assessments related to workers' compensation premiums. General and administrative expenses in 2014 were $3.95 billion, $195 million or 5% higher than in 2013. The increase 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 are discussed in more detail in the segment discussions that follow.
Interest expense in 2015, 2014 and 2013 was $373 million, $369 million and $361 million, respectively. The increases in both 2015 and 2014 compared with the respective prior years primarily reflected slightly higher average levels of debt outstanding.
Income tax expense in 2015 was $1.30 billion, $96 million or 7% lower than in 2014, which primarily resulted from the $349 million decrease in income before income taxes in 2015 and the $32 million reduction in income tax expense in 2015 resulting from the resolution of prior year tax matters. Income tax expense in 2014 was $1.40 billion, $125 million or 10% higher than in 2013, which primarily resulted from a $63 million reduction in income tax expense in 2013 resulting from the resolution of prior year tax matters, as well as the $144 million increase in income before income taxes in 2014.
The combined ratio of 89.0% in 2014 was 0.8 points lower than the combined ratio of 89.8% in 2013.
Gross and net written premiums in 2015 both increased by 1% over 2014. Gross and net written premiums in 2014 increased by 4% and 5%, respectively, over 2013, primarily reflecting the impact of the acquisition of Dominion. Factors contributing to the changes in gross and net written premiums in each segment in 2015 and 2014 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Operating income in 2015 was $2.17 billion, $177 million or 8% lower than operating income of $2.35 billion in 2014. The decrease primarily reflected the pretax impacts of (i) lower net investment income and (ii) lower underlying underwriting margins, partially offset by (iii) lower catastrophe losses and (iv) higher net favorable prior year reserve development. Catastrophe losses in 2015 and 2014 were $247 million and $367 million, respectively. Net favorable prior year reserve development in 2015 and 2014 was $405 million and $322 million, respectively. The lower underlying underwriting margins primarily resulted from the pretax impacts of a 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums, partially offset by lower non-catastrophe weather-related losses. Partially offsetting this net pretax decrease in income was a related decrease in income tax expense. In addition, income tax expense in 2015 was reduced by $12 million as a result of the resolution of prior year tax matters.
Operating income in 2014 was $2.35 billion, $57 million or 2% lower than operating income of $2.40 billion in 2013. The decrease 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 higher 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.
Earned premiums of $14.52 billion in 2015 were comparable to 2014. Earned premiums in 2014 were $14.51 billion, $1.18 billion or 9% higher than in 2013. The changes in both 2015 and 2014 reflected the impact of changes in net written premiums over the preceding twelve months. The increase in net written premiums in 2014 was primarily due to the acquisition of Dominion.
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 herein.
Claims and claim adjustment expenses in 2015 were $8.86 billion, $286 million or 3% lower than in 2014. The decrease primarily reflected (i) lower catastrophe losses, (ii) higher net favorable prior year reserve development and (iii) lower non-catastrophe weather-related losses, partially offset by (iv) the impact of loss cost trends. Claims and claim adjustment expenses in 2014 were $9.15 billion, $860 million or 10% higher than in 2013. The increase primarily reflected (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) lower 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 during the years ended December 31, 2015, 2014 and 2013 are discussed in more detail in note 7 of notes to the consolidated financial statements herein.
General and administrative expenses in 2015 were $2.69 billion, $145 million or 6% higher than in 2014, primarily reflecting the impacts of the 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums, higher technology and employee related expenses and higher contingent commissions. General and administrative expenses in 2014 were $2.54 billion, $172 million or 7% higher than in 2013, primarily reflecting 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.
Income tax expense in 2015 was $769 million, $29 million or 4% lower than in 2014, which primarily resulted from the $206 million decrease in income before income taxes in 2015 and the $12 million reduction in income tax expense in 2015 resulting from the resolution of prior year tax
matters. Income tax expense in 2014 was $798 million, $40 million or 5% higher than in 2013, primarily reflecting the impact of a $43 million reduction in income tax expense in 2013 resulting from the resolution of prior year tax matters, partially offset by the $17 million decrease in income before income taxes in 2014.
Select Accounts. Net written premiums of $2.72 billion in 2015 were comparable to 2014. Business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 were comparable to 2014. Net written premiums of $2.71 billion in 2014 decreased by 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. New business premiums in 2014 decreased from 2013.
Middle Market. Net written premiums of $6.33 billion in 2015 increased by 4% over 2014. Business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes remained positive in 2015 but were lower than in 2014. New business premiums in 2015
increased over 2014. Net written premiums of $6.11 billion in 2014 increased by 4% over 2013. 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. New business premiums in 2014 increased over 2013.
First Party. Net written premiums of $1.56 billion in 2015 decreased by 1% from 2014. Business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 were negative, compared with positive renewal premium changes in 2014. New business premiums in 2015 decreased from 2014. Net written premiums of $1.58 billion in 2014 increased by 2% over 2013, primarily due to lower reinsurance costs. Business retention rates in 2014 remained strong but were slightly lower 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.
Results of the Company's Bond & Specialty Insurance segment were as follows:
Operating income in 2014 was $727 million, $154 million or 27% higher than operating income of $573 million in 2013. The increase primarily reflected the pretax impacts of (i) higher net favorable prior year reserve development and (ii) higher underlying underwriting margins, partially offset by (iii) lower net investment income. Net favorable prior year reserve development in 2014 and 2013 was $450 million and $232 million, respectively. Catastrophe losses in 2014 and 2013 were $6 million and $8 million, respectively. The higher underlying underwriting margins primarily reflected the pretax impact of lower reinsurance costs. Partially offsetting this net pretax increase in operating income was a related increase in income tax expense. In addition, income tax expense in 2013 was reduced by $15 million as a result of the resolution of prior year tax matters.
Earned premiums of $2.09 billion in 2015 were comparable to 2014. Earned premiums in 2014 were $2.08 billion, $95 million or 5% higher than in 2013, primarily reflecting the impact of lower reinsurance costs.
Net investment income in 2015 was $223 million, $29 million or 12% lower than in 2014. Net investment income in 2014 was $252 million, $8 million or 3% lower than in 2013. 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 a decrease in investment income in 2015 and an increase in investment income in 2014. 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 2015 and 2014 compared with the respective prior years. In addition, refer to note 2 of notes to the consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
Amortization of deferred acquisition costs in 2015 was $393 million, $5 million or 1% higher than in 2014. Amortization of deferred acquisition costs in 2014 was $388 million, $10 million or 3% higher than in 2013. The increases in both years were generally consistent with the changes in earned premiums.
Income tax expense in 2015 was $272 million, $76 million or 22% lower than in 2014, primarily reflecting the $170 million decrease in income before income taxes and the $16 million reduction in income tax expense in 2015 resulting from the resolution of prior year tax matters. Income tax expense in 2014 was $348 million, $121 million or 53% higher than in 2013, primarily reflecting the $275 million increase in income before income taxes, as well as a $15 million reduction in income tax expenses in 2013 resulting from the resolution of prior year tax matters.
The combined ratio of 67.9% in 2015 was 7.1 points higher than the combined ratio of 60.8% in 2014.
The loss and loss adjustment expense ratio of 30.4% in 2015 was 7.6 points higher than the 2014 ratio of 22.8%. Net favorable prior year reserve development in 2015 and 2014 provided 12.4 points and 21.7 points of benefit, respectively, to the loss and loss adjustment expense ratio. Catastrophe losses in 2015 and 2014 accounted for 0.2 points and 0.3 points of the loss and loss adjustment expense ratio, respectively. The 2015 underlying loss and loss adjustment expense ratio was 1.6 points lower than the 2014 ratio on the same basis, primarily reflecting lower loss estimates in certain management liability businesses.
Bond & Specialty Insurance gross and net written premiums were as follows:
Earned premiums in 2015 were $7.27 billion, $143 million or 2% higher than in 2014. Earned premiums in 2014 were $7.13 billion, $199 million or 3% lower than in 2013. The changes in earned premiums in 2015 and 2014 reflected changes in net written premiums over the respective preceding twelve months.
Net investment income in 2015 was $332 million, $47 million or 12% lower than in 2014. Net investment income in 2014 was $379 million, $10 million or 3% higher than in 2013. Refer to the "Net Investment Income" section of "Consolidated Results of Operations" herein for a discussion of the changes in the Company's net investment income in 2015 and 2014 as compared with the respective prior year. In addition, refer to note 2 of notes to the consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
Claims and claim adjustment expenses of $4.22 billion in 2015 were comparable to 2014, primarily reflecting (i) higher net favorable prior year reserve development and (ii) lower catastrophe losses, largely offset by (iii) the impact of loss cost trends and (iv) higher volumes of insured exposures. Claims and claim adjustment expenses in 2014 were $4.24 billion, $83 million or 2% lower than in 2013, primarily reflecting (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 during the years ended December 31, 2015, 2014 and 2013 are discussed in more detail in note 7 of notes to the consolidated financial statements.
Amortization of deferred acquisition costs in 2015 was $1.16 billion, $10 million or 1% lower than in 2014. Amortization of deferred acquisition costs in 2014 was $1.17 billion, $112 million or 9% lower than in 2013. The decrease in 2014 primarily reflected a decline in commission expense due to lower commission rates, as well as a decline in earned premiums compared with 2013.
The combined ratio of 86.6% in 2015 was 2.1 points lower than the combined ratio of 88.7% in 2014.
The underwriting expense ratio of 28.5% in 2015 was 0.6 points lower than the underwriting expense ratio of 29.1% in 2014, primarily reflecting lower commission expenses.
The loss and loss adjustment expense ratio of 59.6% in 2014 was 0.5 points higher than the loss and loss adjustment expense ratio of 59.1% in 2013. Catastrophe losses accounted for 4.7 points and 3.4 points of the 2014 and 2013 loss and loss adjustment expense ratios, respectively. Net favorable prior year reserve development in 2014 and 2013 provided 2.4 points and 2.8 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2014 underlying loss and loss adjustment expense ratio was 1.2 points lower than the 2013 ratio on the same basis, primarily reflecting (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.
In 2015, net written premiums in the Agency Automobile line of business were 8% higher than in 2014. Business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 increased over 2014 driven by sales of the Company's private passenger automobile product, Quantum Auto 2.0. 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. New business premiums in 2014 were significantly higher than in 2013 as a result of Quantum Auto 2.0.
In 2015, net written premiums in the Agency Homeowners and Other line of business were 1% lower than in 2014. Business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 increased over 2014. In 2014, net written premiums in the Agency Homeowners and Other line of business were 2% lower than 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. New business premiums in 2014 were higher than in 2013.
For its Agency business, the Personal Insurance segment had approximately 6.2 million and 6.0 million active policies at December 31, 2015 and 2014, 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
• continued high level of litigation activity in certain jurisdictions involving individuals alleging serious asbestos-related illness, primarily involving mesothelioma claims;
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 and 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 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, in 2015 the Company paid a $502 million settlement related to the asbestos direct action litigation. That amount had been included in the Policyholders with Settlement Agreements category in the foregoing table at December 31, 2014.
dismissed. The agreement in principle with PPG is still subject to several conditions. Given the resolution of the objections to the Amended Plan the Company believes that the conditions will be satisfied and accordingly, the Company's obligations under this agreement in principle are included in the Policyholders with Settlement Agreements category at December 31, 2015. At December 31, 2014 those obligations were included in the Home Office and Field Office category described below.
The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. Mostly, these
claims are due to various legislative as well as regulatory efforts aimed at environmental remediation. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), enacted in 1980 and later modified, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute permits the recovery of response costs from some liable parties and may require liable parties to undertake their own remedial action. Liability under CERCLA may be joint and several with other responsible parties.
The resolution of environmental exposures by the Company generally occurs through settlements with policyholders as opposed to claimants. Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a "buy-back" of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including but not limited to asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which extinguish any liability arising from known specified sites or claims. Where appropriate, these agreements also include indemnities and hold harmless provisions to protect the Company. The Company's general purpose in executing these agreements is to reduce the Company's potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.
(1)Amounts in 2013 represent acquired reserves of Dominion at November 1, 2013.
The Company bases its investment decision on the underlying credit characteristics of the municipal security. While its municipal bond portfolio includes a number of securities that were enhanced by third-party insurance for the payment of principal and interest in the event of an issuer default, the Company does not rely on enhanced credit characteristics provided by such third-party insurance as part of its investing decisions. Of the insured municipal securities in the Company's investment portfolio at December 31, 2015, approximately 97% were rated at "A3" or above, and approximately 88% were rated at "Aa3" or above, without the benefit of insurance. The Company believes that a loss of the benefit of insurance would not result in a material adverse impact on the Company's results of operations, financial position or liquidity, due to the underlying credit strength of the issuers of the securities, as well as the Company's ability and intent to hold the securities. The average credit rating of the underlying issuers of these securities was "Aa2" at December 31, 2015. The average credit rating of the entire municipal bond portfolio was "Aa1" at December 31, 2015, with and without the enhancement provided by third-party insurance.
The following table shows the geographic distribution of the Company's long-term fixed maturity investments in debt securities issued by foreign governments at December 31, 2015.
(1)Rated using external rating agencies or by the Company when a public rating does not exist. The table includes $379 million of short-term securities which have the highest ratings issued by external rating agencies for short-term issuances. For purposes of this table, the short-term securities, which are rated "A-1+" and/or "P-1," are included as "Aaa" rated securities.
from credit losses as those losses are initially allocated to subordinated bondholders. The Company's investment strategy is to purchase CMO tranches that are expected to offer the most favorable return given the Company's assessment of associated risks. The Company does not purchase residual interests in CMOs. For more information regarding the Company's investments in residential mortgage-backed securities, see note 3 of notes to the consolidated financial statements herein.
interest. The Company has not incurred any investment losses in its securities lending program for the years ended December 31, 2015, 2014 and 2013.
Net unrealized investment gains at December 31, 2015 decreased from the prior year-end, primarily reflecting the impact of an increase in market interest rates in 2015. Net unrealized investment gains at December 31, 2014 increased over the prior year-end, primarily reflecting the impact of a decrease in market interest rates during 2014.
At December 31, 2015 and 2014, below investment grade securities comprised 2.8% and 3.0%, respectively, of the Company's fixed maturity investment portfolio. Included in below investment grade securities at December 31, 2015 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $937 million and a fair value of $855 million, resulting in a net pretax unrealized investment loss of $82 million. These securities in an unrealized loss position represented approximately 1.6% of the total amortized cost and 1.4% of the fair value of the fixed maturity portfolio at December 31, 2015 and accounted for 25.6% of the total gross pretax unrealized investment loss in the fixed maturity portfolio at December 31, 2015.
less than 10% of loss estimates. For further information regarding the Company's reinsurance, see "Item 1 - Reinsurance." The amounts for hurricanes reflect U.S. exposures and include property exposures, property residual market exposures and an adjustment for certain non-property exposures. The hurricane loss amounts are based on the Company's catastrophe risk model estimates and include losses from the hurricane hazards of wind and storm surge. The amounts for earthquakes reflect U.S. and Canadian property and workers' compensation exposures. The Company does not believe that the inclusion of hurricane or earthquake losses arising from other geographical areas or other exposures would materially change the estimated threshold loss amounts.
Severe weather events over the last several years have underscored the unpredictability of future climate trends and created uncertainty regarding insurers' exposures to financial loss as a result of catastrophes and other weather-related events. For example, over the last decade hurricane activity has impacted areas further inland than previously experienced, and demographic changes have resulted in larger populations in coastal areas which historically have been subject to severe storms, thus expanding the Company's potential for losses from hurricanes. Additionally, both the frequency and severity of tornado and hail storms in the United States have been more volatile during the last decade. Accordingly, the Company may be subject to increased losses from catastrophes and other weather-related events. Additionally, the Company's catastrophe models may be less reliable due to the increased unpredictability in frequency and severity of severe weather events or other emerging trends in climate conditions.
• Changing climate conditions could also impact the creditworthiness of issuers of securities in which the Company invests. For example, water supply adequacy could impact the creditworthiness of bond issuers in the Southwestern United States, and more frequent and/or severe hurricanes could impact the creditworthiness of issuers in the Southeastern United States, among other areas. See "Risk Factors-Our investment portfolio may suffer reduced returns or material realized or unrealized losses."
The Company reinsures a portion of the risks it underwrites in order to control its exposure to losses. For additional discussion regarding the Company's reinsurance coverage, see "Part I-Item 1 - Reinsurance."
The $376 million decline in net reinsurance recoverables from December 31, 2014 primarily reflected the impact of cash collections in 2015.
The following table presents the Company's top five reinsurer groups by reinsurance recoverable at December 31, 2015 (in millions). Also included is the A.M. Best rating of each reinsurer group at February 11, 2016:
At December 31, 2015, the Company held $1.10 billion of collateral in the form of letters of credit, funds and trust agreements held to fully or partially collateralize certain reinsurance recoverables.
Included in reinsurance recoverables are amounts related to structured settlements, which 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 amount due from the life insurance company related to the structured settlement is included in the Company's consolidated balance sheet as a reinsurance recoverable 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 covered by state guaranty associations. In the event that the life insurance company fails to make the required annuity payments, the Company would be required to make such payments. The following table presents the Company's top five groups by structured settlements at December 31, 2015 (in millions). Also included is the A.M. Best rating of the Company's predominant insurer from each insurer group at February 11, 2016:
(1)Fidelity & Guaranty Life (FGL) has entered into a definitive merger agreement with Anbang Insurance Group Co., Ltd. whereby Anbang will acquire all of the outstanding shares of FGL. The transaction is expected to close in the second quarter of 2016. A.M. Best's ratings of FGL were placed under review with developing implications following the announcement of the merger agreement. The Company does not have any structured settlements with Anbang.
(2)MetLife Inc. has announced a plan to pursue the separation of a substantial portion of its U.S. Retail segment. MetLife is currently evaluating structural alternatives for such a separation, including a public offering of shares in an independent, publicly-traded company, a spin-off, or a
For the last several years, the Company's results have included significant amounts of net favorable prior year reserve development driven by better than expected loss experience in all of the Company's segments. However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development in future periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.
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" herein.
In Business and International Insurance, the Company expects underlying underwriting margins in 2016 will be broadly consistent with those in 2015, reflecting lower (and more normalized) levels of what the Company defines as large losses and non-catastrophe weather-related losses.
In Personal Insurance, the Company expects underlying underwriting margins in 2016 will be lower than in 2015. In Agency Automobile, the Company expects underlying underwriting margins in 2016 will be slightly lower than in 2015, reflecting a higher mix of new business versus renewal business. In Agency Homeowners and Other, the Company expects underlying underwriting margins in 2016 will be lower than in 2015, reflecting higher (and more normalized) levels of loss activity. Also in Personal Insurance, the Company's direct to consumer initiative, the distribution channel that the Company launched in 2009, while intended to enhance the Company's long-term ability to compete successfully in a consumer-driven marketplace, is expected to remain modest with respect to premium volume and remain unprofitable for a number of years as this book of business grows and matures.
Investment Portfolio. The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration. The average effective duration of fixed maturities and short-term securities was 3.9 (4.2 excluding short-term securities) at December 31, 2015. From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At December 31, 2015, the Company had $400 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.
The Company had a net pretax unrealized investment gain of $1.78 billion ($1.16 billion after-tax) in its fixed maturity investment portfolio at December 31, 2015. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market
Consolidated Statement of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statement of Comprehensive Income for the years ended December 31, 2015, 2014 and
Consolidated Statement of Changes in Shareholders' Equity for the years ended December 31, 2015, 2014 and 2013
We have audited the accompanying consolidated balance sheet of The Travelers Companies, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Travelers Companies, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 11, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
(1)Total other-than-temporary impairment (OTTI) losses were $(54) million, $(22) million and $(10) million for the years ended December 31, 2015, 2014 and 2013, respectively. Of total OTTI, credit losses of $(52) million, $(26) million and $(15) million for the years ended December 31, 2015, 2014 and 2013, respectively, were recognized in net realized investment gains. In addition, unrealized gains (losses) from other changes in total OTTI of $(2) million, $4 million and $5 million for the years ended December 31, 2015, 2014 and 2013, respectively, were recognized in other comprehensive income (loss) as part of changes in net unrealized gains on investment securities having credit losses recognized in the consolidated statement of income.
On November 1, 2013, the Company acquired all of the issued and outstanding shares of The Dominion of Canada General Insurance Company (Dominion) for an aggregate purchase price of approximately $1.035 billion. Dominion primarily markets personal lines and small commercial insurance business in Canada. At the acquisition date, the Company recorded at fair value $3.91 billion of assets acquired and $2.88 billion of liabilities assumed as part of purchase accounting, including $16 million of identifiable intangible assets and $273 million of goodwill. Dominion is included in the Company's Business and International Insurance segment. The unearned premium reserve related to the acquired insurance and reinsurance contracts was carried over and included in the Company's unearned premium reserve. Premium revenue from the acquired business is recognized on a pro rata basis beginning with the acquisition date over the remaining policy terms in accordance with the Company's accounting policy. The Company recognized an intangible asset for the value of business acquired (VOBA) of $76 million at the acquisition date. VOBA represented the present value of future gross profits of the business acquired from Dominion, was reported as part of the Company's deferred acquisition costs, and was amortized in proportion to the premium revenue recognized from the acquired business.
Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
In April 2014, the Financial Accounting Standards Board (FASB) issued revised guidance to reduce diversity in practice for reporting discontinued operations. Under the previous guidance, any component of an entity that was a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group was eligible for discontinued operations presentation. The revised guidance only allows disposals of components of an entity that represent a strategic shift (e.g., disposal of a major geographical area, a major line of business, a major equity method investment or other major parts of an entity) and that have a major effect on a reporting entity's operations and financial results to be reported as discontinued operations. The revised guidance also requires expanded disclosure in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. The updated guidance was effective for the quarter ending March 31, 2015. The adoption of this guidance did not have any effect on the Company's results of operations, financial position or liquidity.
In July 2015, the FASB deferred the effective date of the updated guidance by one year. The updated guidance is effective for the quarter ending March 31, 2018. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.
The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. As such, the performance target that affects vesting should not be reflected in estimating the fair value of the award at the grant date. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest.
In August 2014, the FASB issued guidance to address the diversity in practice in determining when there is substantial doubt about an entity's ability to continue as a going concern and when an entity must disclose certain relevant conditions and events. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management's plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans. If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations and management's plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.
In November 2014, the FASB issued updated guidance to clarify when the separation of certain embedded derivative features in a hybrid financial instrument that is issued in the form of a share is required. That is, an entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is 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.
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
expected principal and interest payments; however, for securities for which the issuer is classified as bankrupt or in default, the present value calculation assumes no interest payments and a single recovery amount.
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, 2015 were as follows:
The Company performs a review, on at least an annual basis, of goodwill held by the reporting units which are the Company's three operating and reportable segments: Business and International Insurance; Bond & Specialty Insurance; and Personal Insurance. The Company estimates the fair value of its reporting units and compares it to their carrying value, including goodwill. If the carrying values of the reporting units were to exceed their fair value, the amount of the impairment would be calculated and goodwill adjusted accordingly.
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, 2015 and 2014. These discounted reserves totaled $2.13 billion and $2.01 billion at December 31, 2015 and 2014, respectively.
The Company performs a continuing review of its claims and claim adjustment expense reserves, including its reserving techniques and the impact of reinsurance. The reserves are also reviewed regularly by qualified actuaries employed by the Company. Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of operations in the period in which the estimates are changed. Such changes in estimates could occur in a future period and may be material to the Company's results of operations and financial position in such period.
•First Party provides traditional and customized property insurance programs to large and mid-sized customers through National Property, insurance for goods in transit and movable objects, as well as builders' risk insurance, through Inland Marine, insurance for the marine transportation industry and related services, as well as other businesses involved in international trade, through Ocean Marine, and comprehensive breakdown coverages for equipment, including property and business interruption coverages, through Boiler & Machinery.
•Specialized Distribution markets and underwrites its products to customers predominantly through brokers, wholesale agents, program managers and specialized retail agents that manage customers' unique insurance requirements. Specialized Distribution provides insurance coverage for the commercial transportation industry, as well as commercial liability and commercial property policies for small, difficult to place specialty classes of commercial business primarily on an excess and surplus lines basis, through Northland, and tailored property and casualty programs on an admitted basis for customers with common risk characteristics or coverage requirements through National Programs. Specialized Distribution also serves small to medium-sized agricultural businesses, including farms, ranches, wineries and related operations, through Agribusiness.
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.
The following tables summarize the components of the Company's operating revenues, operating income, net written premiums and total assets by reportable business segments.
Pre-refunded bonds of $6.06 billion and $7.56 billion at December 31, 2015 and 2014, respectively, were bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest.
Proceeds from sales of fixed maturities classified as available for sale were $1.95 billion, $1.05 billion and $1.64 billion in 2015, 2014 and 2013, respectively. Gross gains of $95 million, $44 million and $66 million and gross losses of $14 million, $12 million and $25 million were realized on those sales in 2015, 2014 and 2013, respectively.
Proceeds from sales of equity securities classified as available for sale were $59 million, $158 million and $86 million in 2015, 2014 and 2013, respectively. Gross gains of $16 million, $27 million and $16 million and gross losses of $10 million, $3 million and $1 million were realized on those sales in 2015, 2014 and 2013, respectively.
Proceeds from the sale of real estate investments were $31 million, $15 million and $18 million in 2015, 2014 and 2013, respectively. Gross gains of $4 million, $6 million and $7 million were realized on those sales in 2015, 2014 and 2013, respectively, and there were no gross losses. The Company had no real estate held for sale at December 31, 2015 and 2014. Accumulated depreciation on real estate held for investment purposes was $320 million and $290 million at December 31, 2015 and 2014, respectively.
The Company is a passive investor in limited partner equity interests issued by third party VIEs. These include certain of the Company's investments in private equity limited partnerships, hedge funds and real estate partnerships where the Company is not related to the general partner. These investments are generally accounted for under the equity method and reported in the Company's consolidated balance sheet as other investments unless the Company is deemed the primary beneficiary. These equity interests generally cannot be redeemed. Distributions from these investments are received by the Company as a result of liquidation of the underlying investments of the funds and/or as income distribution. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet and any unfunded commitment. Neither the carrying amounts nor the unfunded commitments related to these VIEs are material.
The following table summarizes, for all fixed maturities and equity securities reported at fair value for which fair value is less than 80% of amortized cost at December 31, 2015, the gross unrealized investment loss by length of time those securities have continuously been in an unrealized loss position of greater than 20% of amortized cost:
At December 31, 2015 and 2014, 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.
The Company purchases investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in net realized investment gains. Derivatives embedded in convertible debt securities are reported on a combined basis with their host instrument and are classified as fixed maturities. The Company also sells a small amount of U.S. equity index put option contracts that are settled for cash upon their expiration or when they are rolled over. Net realized investment gains (losses) related to these derivatives in 2015, 2014 and 2013 were not significant.
The following tables present the level within the fair value hierarchy at which the Company's financial assets and financial liabilities are measured on a recurring basis. An investment transferred between levels during a period is transferred at its fair value as of the beginning of that period.
The Company utilized a pricing service to estimate fair value for approximately 99% and 98% of short-term securities at December 31, 2015 and 2014, 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, 2015 and 2014.
The Company utilizes a corporate catastrophe excess-of-loss reinsurance treaty with unaffiliated reinsurers to manage its exposure to losses resulting from catastrophes and to protect its capital. In addition to the coverage provided under this treaty, the Company also utilizes catastrophe bonds to protect against certain weather-related and earthquake 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 certain 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
(1)Amount in 2015 represents acquired net claims and claim adjustment expense reserves of Travelers Participações em Seguros Brasil S.A. at October 1, 2015. Amount in 2013 represents acquired net claims and claim adjustment expense reserves of Dominion at November 1, 2013. Dominion's gross reserves on that date were $2,144 million. Dominion's reinsurance recoverables on unpaid losses on that date were $352 million.
reflecting the impact of (i) net favorable prior year reserve development and (ii) payments related to operations in runoff.
In 2015, estimated claims and claim adjustment expenses incurred included $897 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 $51 million of accretion of discount.
year reserve development impacting the Company's results of operations and $50 million of accretion of discount.
Personal Insurance. Net favorable prior year reserve development in 2014 totaled $169 million, primarily driven by better than expected loss experience in the Homeowners and Other product line for non-catastrophe weather-related losses for accident year 2013 and catastrophe losses for accident years 2011 through 2013.
in the Company's operations at Lloyd's. These factors contributing to net favorable prior year reserve development in 2013 were partially offset by $190 million and $65 million increases to asbestos and environmental reserves, respectively, which are discussed in further detail in the "Asbestos and Environmental Reserves" section below and by higher than expected loss experience in the public and product liability line of business in the United Kingdom.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2013 totaled $232 million, primarily driven by better than expected loss experience in the contract surety product line for accident years 2010 and prior.
At December 31, 2015 and 2014, the Company's claims and claim adjustment expense reserves included $2.17 billion and $2.70 billion, respectively, for asbestos and environmental-related claims, net of reinsurance.
In the third quarter of 2015, the Company completed its annual in-depth asbestos claim review, including a review of active policyholders and litigation cases for potential product and "non-product" liability, and noted the continuation of the following trends:
Net asbestos paid loss and loss expenses in 2015, 2014 and 2013 were $770 million, $242 million and $218 million, respectively. Net payments in 2015 included the payment of the $502 million settlement amounts related to the Settlement of Asbestos Direct Action Litigation as described in more detail in note 16. Approximately 69%, 8% and 1% of total net paid losses in 2015, 2014 and 2013, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company's liability.
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 methods are not used to estimate these reserves.
Asbestos and Environmental 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
2015 Debt Issuance. On August 25, 2015, the Company issued $400 million aggregate principal amount of 4.30% senior notes that will mature on August 25, 2045. The net proceeds of the issuance, after original issuance discount and the deduction of underwriting expenses and commissions and other expenses, totaled approximately $392 million. Interest on the senior notes is payable semi-annually in arrears on February 25 and August 25, commencing on February 25, 2016. Prior to February 25, 2045, the senior notes may be redeemed, in whole or in part, at the Company's option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest on any 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 rate of a treasury security having a maturity comparable to the remaining term of these senior notes, plus 25 basis points. On or after February 25,
2013 Debt Repayment. On March 15, 2013, the Company's $500 million, 5.00% senior notes matured and were fully paid.
Junior Subordinated Debentures-The Company's $107 million remaining aggregate principal amount of 6.25% fixed-to-floating rate debentures bear interest at an annual rate of 6.25% from the date of issuance to, but excluding, March 15, 2017, payable semi-annually in arrears on March 15 and September 15. From and including March 15, 2017, the debentures will bear interest at an annual rate equal to three-month LIBOR plus 2.215%, payable quarterly on March 15, June 15, September 15 and December 15 of each year. The Company can redeem the debentures at its option, in whole or in part, at any time on or after March 15, 2017 at a redemption price of 100% of the principal amount being redeemed plus accrued but unpaid interest. The Company can redeem the debentures at its option prior to March 15, 2017 (a) in whole at any time or in part from time to time or (b) in whole, but not in part, in the event of certain tax or rating agency events relating to the debentures, at a redemption price equal to the greater of 100% of the principal amount being redeemed and the applicable make-whole amount, in each case plus any accrued and unpaid interest.
The Company is party to a five-year, $1.0 billion revolving credit agreement with a syndicate of financial institutions that expires in June 2018. Pursuant to the credit agreement covenants, the Company must maintain a minimum consolidated net worth, defined as shareholders' equity determined in accordance with GAAP plus (a) trust preferred securities (not to exceed 15% of total capital) and (b) mandatorily convertible securities (combined with trust preferred securities, not to exceed 25% of total capital) less goodwill and other intangible assets, of $13.73 billion. In addition, the credit agreement contains other customary restrictive covenants as well as certain customary events of default, including with respect to a change in control, which is defined to include the acquisition of 35% or more of the Company's voting stock and certain changes in the composition of the Company's board of directors. At December 31, 2015, the Company was in compliance with these covenants. Generally, the cost of borrowing under this agreement will range from LIBOR plus 87.5 basis points to LIBOR plus 150 basis points, depending on the Company's credit ratings. At December 31, 2015, that cost would have been LIBOR plus 112.5 basis points, had there been any amounts outstanding under the credit agreement. This credit agreement also supports the Company's commercial paper program.
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.
For the years ended December 31, 2015, 2014 and 2013, TRV declared cash dividends per common share of $2.38, $2.15 and $1.96, respectively, and paid cash dividends of $739 million, $729 million and $729 milllion, respectively.
The following table presents the changes in the Company's accumulated other comprehensive income (AOCI) for the years ended December 31, 2015, 2014 and 2013.
(3)Increases (decreases) general and administrative expenses on the consolidated statement of income.
The Company also has a compensation program for non-employee directors (the Director Compensation Program). Under the Director Compensation Program, non-employee directors' compensation consists of an annual retainer, a deferred stock award, committee chair fees and a lead director fee. Each non-employee director may choose to receive all or a portion of his or her annual retainer in the form of cash or deferred stock units which vest upon grant. The annual deferred stock awards vest in full one day prior to the date of the Company's annual meeting of shareholders occurring in the year following the year of the grant date, subject to continued service. The deferred stock awards, including dividend equivalents, accumulate until distribution either in a lump sum six months after termination of service as a director or, if the director so elects, in annual installments beginning at least six months following termination of service as a director. The deferred stock units issued under the Director Compensation Program are awarded under the 2014 Incentive Plan.
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 of directors may allow in the future, stock options cannot be sold or transferred by the participant. Stock options outstanding under the 2014 Incentive Plan and the 2004 Incentive Plan vest three years after grant date (cliff vest).
The fair value of each option award is estimated on the date of grant by application of a variation of the Black-Scholes option pricing model using the assumptions noted in the following table. The expected term of newly granted stock options is the time to vest plus half the remaining time to expiration. This considers the vesting restriction and represents an even pattern of exercise behavior over the remaining term. The expected volatility assumption is based on the historical volatility of the Company's common stock for the same period as the estimated option term based on the mid-month of the option grant. The expected dividend is based upon the Company's current quarter dividend annualized and assumed to be constant over the expected option term. The risk-free interest rate for
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 units from (i) an annual award; (ii) deferred compensation (in lieu of cash retainer); and (iii) dividend equivalents earned on outstanding deferred compensation.
The Company also has a Performance Share Awards Program established pursuant to the 2004 Incentive Plan and which continues pursuant to the 2014 Incentive Plan. Under the program, the Company may issue performance share awards to certain employees of the Company who hold positions of Vice President (or its equivalent) or above. The performance share awards provide the recipient the right to earn shares of the Company's common stock based upon the Company's attainment of certain performance goals and the recipient meeting certain years of service criteria. The performance goals for performance share awards are based on the Company's adjusted return on equity over a three-year performance period. Vesting of performance shares is contingent upon the Company attaining the relevant performance period minimum threshold return on equity and the recipient meeting certain years of service criteria, generally three years for full vesting, subject to proration for certain termination conditions. If the performance period return on equity is below the minimum threshold, none of the performance shares will vest. If performance meets or exceeds the minimum performance threshold, a range of performance shares will vest (50% to 150% for awards granted in 2014, 2015 and 2016), depending on the actual return on equity attained.
(3)Represents the current year change in estimated performance shares to reflect the attainment of performance goals for the awards that were granted in each of the years 2013 through 2015.
In addition to the nonvested shares presented in the above table, there are related nonvested dividend equivalent shares. The number of nonvested dividend equivalent shares related to deferred stock units was 387 at the beginning of the year and 396 at the end of the year and the number of nonvested dividend equivalent shares related to performance shares was 38,738 at the beginning of the year and 40,663 at the end of the year. The dividend equivalent shares are subject to the same vesting terms as the deferred stock units and performance shares.
On February 2, 2016, the Company, under the 2014 Stock Incentive Plan, granted 1,094,685 common stock awards in the form of restricted stock units, deferred stock units and performance share awards to participating officers, non-employee directors and other key employees. The restricted stock units and deferred stock units totaled 618,274 shares while the performance share awards totaled 476,411 shares. The fair value per share attributable to the common stock awards on the date of grant was $106.03.
The Company sponsors a qualified non-contributory defined benefit pension plan (the qualified domestic pension plan), which covers substantially all U.S. domestic employees and provides benefits under a cash balance formula, except that employees satisfying certain age and service requirements remain covered by a prior final average pay formula. In addition, the Company sponsors a nonqualified defined benefit pension plan which covers certain highly-compensated employees, pension plans for employees of its foreign subsidiaries, and a postretirement health and life insurance benefit plan for employees satisfying certain age and service requirements and for certain retirees.
The total accumulated benefit obligation for the Company's defined benefit pension plans was $3.37 billion and $3.51 billion at December 31, 2015 and 2014, respectively. The qualified domestic pension plan accounted for $3.15 billion and $3.29 billion of the total accumulated benefit obligation at December 31, 2015 and 2014, respectively, whereas the nonqualified and foreign plans accounted for $0.22 billion of the total accumulated benefit obligation at both December 31, 2015 and 2014.
The Company has discretion regarding whether to provide additional funding and when to provide such funding to its qualified domestic pension plan. In 2015, 2014 and 2013, there were no required contributions to the qualified domestic pension plan. In 2015 and 2014, the Company voluntarily made contributions totaling $100 million and $200 million, respectively, to the qualified domestic pension plan. In 2013, the Company made no voluntary contributions to the qualified domestic pension plan. There is no required contribution to the qualified domestic pension plan during 2016, and the
For the defined benefit pension plans, the estimated net actuarial loss that will be reclassified (amortized) from accumulated other comprehensive income into net income as part of net periodic benefit cost over the next fiscal year is $66 million and the estimated prior service benefit to be amortized over the next fiscal year is $1 million. For the postretirement benefit plans, the estimated net actuarial loss that will be reclassified (amortized) from accumulated other comprehensive income into net income as part of net periodic benefit cost over the next fiscal year is less than $1 million, and the estimated prior service benefit to be amortized over the next fiscal year is $3 million.
In choosing the expected long-term rate of return on plan assets, the Company selected the rate that was set as the return objective by the Company's Benefit Plans Investment Committee, which had
considered the historical returns of equity and fixed maturity markets in conjunction with prevailing economic and financial market conditions.
The 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.
The balance of Level 3 fair value investments was $2 million at December 31, 2015 and the change in balance from the prior year was insignificant.
In response to these claims, TPC moved to enjoin the Statutory Actions and the Common Law Claims in the federal bankruptcy court that had presided over the bankruptcy of TPC's
Investment Commitments-The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.71 billion and $1.63 billion at December 31, 2015 and 2014, respectively.
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. 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, 2015, 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, 2015, all of which is indemnified by a third party.