• Net favorable prior year reserve development of $592 million ($378 million after-tax)
• Total debt of $6.57 billion, resulting in a debt-to-total capital ratio of 21.7% (22.5% excluding net unrealized investment gains, net of tax, included in shareholders' equity)
• Repurchased 11.4 million common shares for total cost of $1.44 billion and paid $789 million of dividends to shareholders
The following discussions of the Company's net income and segment income are presented on an after-tax basis. Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted. Discussions of earnings per common share are presented on a diluted basis.
Diluted net income per share of $10.28 in 2016 decreased by 6% from diluted net income per share of $10.88 in 2015. Net income of $3.01 billion in 2016 decreased by 12% from net income of $3.44 billion in 2015. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in net income primarily reflected the pre-tax impacts of (i) higher catastrophe losses, (ii) lower underlying underwriting margins, (iii) lower net favorable prior year reserve development and (iv) lower net investment income, partially offset by (v) higher other revenues and (vi) higher net realized investment gains. Catastrophe losses in 2016 and 2015 were $877 million and $514 million, respectively. Net favorable prior year reserve development in 2016 and 2015 was $771 million and $941 million, respectively. The lower underlying underwriting margins primarily resulted from (i) higher loss estimates in the personal automobile product line for bodily injury liability coverages, (ii) the impact of loss cost trends that modestly exceeded earned pricing in Business Insurance and (iii) higher general and administrative expenses, partially offset by (iv) lower non-catastrophe fire-related losses and other loss activity in Business Insurance. Partially offsetting this net pre-tax decrease in income was a related decrease in income tax expense. Income tax expense in 2015 was also reduced by $32 million as a result of the resolution of prior year tax matters.
The Company has insurance operations in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd's, as well as in Brazil and Colombia, primarily through joint ventures. Because these operations are conducted in local currencies other than the U.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the years ended December 31, 2017, 2016 and 2015, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company's net income or segment income for the periods reported.
Net investment income in 2016 was $2.30 billion, $77 million or 3% lower than in 2015. Net investment income from fixed maturity investments in 2016 was $1.98 billion, $110 million lower than in 2015. The decrease in net investment income from fixed maturity investments primarily resulted from lower long-term reinvestment rates available in the market and a modestly lower amount of fixed income investments that were impacted by the Company's $524 million payment related to the settlement of the PPG Industries, Inc. litigation in the second quarter of 2016. Net investment income from short-term securities in 2016 was $29 million, $17 million higher than in 2015, primarily due to higher short-term interest rates. Net investment income generated by non-fixed maturity investments in 2016 was $330 million, $13 million higher than in 2015, primarily due to higher returns from private equity limited partnerships, partially offset by lower returns from real estate partnerships.
Other net realized investment gains in 2017 included $236 million of net realized investment gains related to equity securities, $10 million of net realized investment gains from real estate sales, $4 million of net realized gains related to fixed maturity investments and $20 million of net realized investment losses related to other investments.
Amortization of deferred acquisition costs in 2017 was $4.17 billion, $181 million or 5% higher than in 2016. Amortization of deferred acquisition costs in 2016 was $3.99 billion, $100 million or 3% higher than in 2015. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.
Income tax expense in 2017 was $674 million, $365 million or 35% lower than in 2016, primarily reflecting the impact of the $1.32 billion decrease in income before income taxes in 2017 and the $39 million reduction in income tax expense resulting from the resolution of prior year tax matters, partially offset by the net charge of $129 million as part of the TCJA described above. Income tax expense in 2016 was $1.04 billion, $262 million or 20% lower than in 2015, primarily reflecting the impact of the $687 million decrease in income before income taxes in 2016.
The combined ratio of 97.9% in 2017 was 5.9 points higher than the combined ratio of 92.0% in 2016.
Gross and net written premiums in 2017 increased by 4% and 5%, respectively, over 2016. Gross and net written premiums in 2016 both increased by 3% over 2015. Factors contributing to the changes in gross and net written premiums in each segment in 2017 and 2016 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Segment income in 2017 was $1.61 billion, $369 million or 19% lower than segment income of $1.98 billion in 2016, primarily reflecting the pre-tax impacts of (i) significantly higher catastrophe losses, (ii) lower other income due to a favorable settlement of a reinsurance dispute in 2016 and (iii) lower underlying underwriting margins, partially offset by (iv) higher net investment income. Catastrophe losses in 2017 and 2016 were $858 million and $463 million, respectively. Net favorable prior year reserve development in 2017 and 2016 was $439 million and $424 million, respectively. The lower underlying underwriting margins primarily resulted from the impacts of (i) loss cost trends that modestly exceeded earned pricing and (ii) higher non-catastrophe fire-related losses. Partially offsetting this net pre-tax decrease in segment income was a related decrease in income tax expense. In addition, income tax expense in 2017 was reduced by $15 million as a result of the resolution of prior year tax matters.
Segment income in 2016 was $1.98 billion, $95 million or 5% lower than segment income of $2.08 billion in 2015, primarily reflecting the pre-tax impacts of (i) higher catastrophe losses, (ii) lower underlying underwriting margins and (iii) lower net investment income, partially offset by (iv) higher other revenues and (v) higher net favorable prior year reserve development. Catastrophe losses in 2016 and 2015 were $463 million and $245 million, respectively. Net favorable prior year reserve development in 2016 and 2015 was $424 million and $332 million, respectively. The lower underlying underwriting margins primarily resulted from (i) the impact of loss cost trends that modestly exceeded earned pricing and (ii) higher general and administrative expenses, partially offset by (iii) lower non-catastrophe fire-related losses and other loss activity. Partially offsetting this net pre-tax decrease in segment income was a related decrease in income tax expense.
Net investment income in 2017 was $1.79 billion, $85 million or 5% higher than in 2016. Net investment income in 2016 was $1.70 billion, $56 million or 3% lower than in 2015. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2017 and 2016 compared with the respective prior years. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company's net investment income allocation methodology.
Claims and claim adjustment expenses in 2017 were $9.52 billion, $768 million or 9% higher than in 2016, primarily reflecting the impacts of (i) significantly higher catastrophe losses, (ii) loss cost trends, (iii) higher volumes of insured exposures and (iv) higher non-catastrophe fire-related losses. Claims and claim adjustment expenses in 2016 were $8.75 billion, $344 million or 4% higher than in 2015, primarily reflecting the impacts of (i) loss cost trends and (ii) higher catastrophe losses, partially offset by (iii) lower non-catastrophe fire-related losses and other loss activity.
Amortization of deferred acquisition costs in 2017 was $2.29 billion, $65 million or 3% higher than in 2016. Amortization of deferred acquisition costs in 2016 was $2.22 billion, $39 million or 2% higher than in 2015. The increases in both 2017 and 2016 were generally consistent with the increases in earned premiums.
General and administrative expenses in 2017 were $2.56 billion, which were comparable with 2016. General and administrative expenses in 2016 were $2.55 billion, $49 million or 2% higher than in 2015, primarily reflecting higher employee and technology related expenses.
The loss and loss adjustment expense ratio of 65.9% in 2017 was 4.2 points higher than the loss and loss adjustment expense ratio of 61.7% in 2016. Catastrophe losses in 2017 and 2016 accounted for 6.0 points and 3.4 points of the loss and loss adjustment expense ratio, respectively. Net favorable prior year reserve development provided 3.1 points of benefit to the loss and loss adjustment expense ratio in both 2017 and 2016. The underlying loss and loss adjustment expense ratio in 2017 was 1.6 points higher than the 2016 ratio on the same basis, primarily reflecting the impacts of (i) loss cost trends that modestly exceeded earned pricing and (ii) higher non-catastrophe fire-related losses.
The underwriting expense ratio of 31.9% in 2017 was 0.5 points lower than the underwriting expense ratio of 32.4% in 2016.
The combined ratio of 94.1% in 2016 was 2.1 points higher than the combined ratio of 92.0% in 2015.
Business Insurance's gross and net written premiums by market were as follows:
Gross written premiums in 2017 increased by 2% over 2016. Gross written premiums in 2016 were comparable with 2015. Net written premiums in 2017 and 2016 increased by 3% and 1%, respectively, over the respective prior year amounts.
Select Accounts. Net written premiums of $2.80 billion in 2017 increased by 3% over 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive but were lower than in 2016. New business premiums in 2017 increased over 2016. Net written premiums of $2.73 billion in 2016 were comparable with 2015. Business retention rates remained strong
Middle Market. Net written premiums of $7.76 billion in 2017 increased by 5% over 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive and were higher than in 2016. New business premiums in 2017 increased slightly over 2016. Net written premiums of $7.38 billion in 2016 increased by 3% over 2015. Business retention rates remained strong in 2016. Renewal premium changes in 2016 remained positive but were slightly lower than in 2015. New business premiums in 2016 increased over 2015.
National Accounts. Net written premiums of $1.01 billion in 2017 decreased by 5% from 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained slightly positive but were lower than in 2016. New business premiums in 2017 decreased from 2016. Net written premiums of $1.06 billion in 2016 increased by 1% over 2015. Business retention rates remained strong in 2016. Renewal premium changes in 2016 remained positive but were lower than in 2015. New business premiums in 2016 increased over 2015.
Claims and claim adjustment expenses in 2017 were $899 million, $266 million or 42% higher than in 2016, primarily reflecting (i) lower net favorable prior year reserve development and (ii) a higher level of international surety losses. Claims and claim adjustment expenses in 2016 were $633 million, $86 million or 12% lower than in 2015, primarily reflecting higher net favorable prior year reserve development.
General and administrative expenses in 2017 were $464 million, $19 million or 4% higher than in 2016, primarily reflecting higher employee and technology related expenses. General and administrative expenses in 2016 were $445 million, $5 million or 1% higher than in 2015.
The underwriting expense ratio of 38.8% in 2017 was 0.5 points higher than the underwriting expense ratio of 38.3% in 2016.
The combined ratio of 65.7% in 2016 was 3.4 points lower than the combined ratio of 69.1% in 2015.
International. Net written premiums of $199 million in 2017 increased by 16% over 2016, driven by increases in the United Kingdom and Canada. Net written premiums in 2016 were $172 million, $20 million or 10% lower than in 2015, primarily driven by the impacts of changes in foreign currency exchange rates.
Earned premiums in 2017 were $9.23 billion, $811 million or 10% higher than in 2016. Earned premiums in 2016 were $8.42 billion, $510 million or 6% higher than in 2015. The increase in earned premiums in both 2017 and 2016 reflected increases in net written premiums over the preceding twelve months.
Net investment income in 2017 was $383 million, $21 million or 6% higher than in 2016. Net investment income in 2016 was $362 million, $6 million or 2% lower than in 2015. Refer to the "Net Investment Income" section of "Consolidated Results of Operations" for a discussion of the changes in the Company's net investment income in 2017 and 2016 as compared with the respective prior year. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company's net investment income allocation methodology.
Net prior year reserve development in 2017 and 2016 was not significant. Factors contributing to prior year reserve development during the year ended December 31, 2015 are discussed in more detail in note 7 of notes to the consolidated financial statements.
The underwriting expense ratio of 26.8% in 2017 was 1.5 points lower than the underwriting expense ratio of 28.3% in 2016, primarily reflecting the impact of higher levels of earned premiums.
The combined ratio of 95.8% in 2016 was 8.4 points higher than the combined ratio of 87.4% in 2015.
The underwriting expense ratio of 28.3% in 2016 was 1.0 points lower than the underwriting expense ratio of 29.3% in 2015, primarily reflecting the impact of higher levels of earned premiums.
Domestic Agency Automobile net written premiums in 2017 were 13% higher than in 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive and were higher than in 2016. New business premiums in 2017 decreased from 2016.
Domestic Agency Homeowners and Other net written premiums in 2017 were 4% higher than in 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive but were lower than in 2016. New business premiums in 2017 increased over 2016.
Domestic Agency gross and net written premiums in 2016 were both 9% higher than in 2015.
Domestic Agency Homeowners and Other net written premiums in 2016 were 2% higher than in 2015. Business retention rates remained strong in 2016. Renewal premium changes in 2016 remained positive but were lower than in 2015. New business premiums in 2016 increased over 2015.
Direct-to-Consumer net written premiums in 2017 were 17% higher than in 2016. Direct-to-Consumer net written premiums in 2016 were 31% higher than in 2015. The increases in both 2017 and 2016 were primarily driven by growth in automobile net written premiums.
For its international and direct-to-consumer business, Personal Insurance had approximately 878,000 and 860,000 active policies at December 31, 2017 and 2016, 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 policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Company's asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.
The Company continues to be involved in coverage litigation concerning a number of policyholders, some of whom have filed for bankruptcy, who in some instances have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage. In these instances, policyholders also may assert that each individual bodily injury claim should be treated as a separate occurrence under the policy. It is difficult to predict whether these policyholders will be successful on both issues. To the extent both issues are resolved in a policyholder's favor and other Company defenses are not successful, the Company's coverage obligations under the policies at issue would be materially increased and bounded only by the applicable per-occurrence limits and the number of asbestos bodily injury claims against the policyholders. Although the Company has seen a reduction in the overall risk associated with these lawsuits, it remains difficult to predict the ultimate cost of these claims.
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, comprised of the $502 million settlement amounts, plus pre- and post-judgment interest of $77 million, which the Company paid in 2015. 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 would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions.
On January 29, 2009, the Company and PPG Industries, Inc. (PPG), along with approximately 30 other insurers of PPG, agreed in principle to settle asbestos-related coverage litigation under insurance policies issued to PPG (the "Agreement"). The Agreement was 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 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), receive protections afforded by Section 524(g) of the Bankruptcy Code from certain asbestos-related bodily injury claims. Under the Agreement, the Company had the option to make a series of payments over 20 years totaling approximately $620 million to the trust created under the Amended Plan, or it could elect to make a discounted payment. On January 7, 2016, the remaining objections to the Amended Plan were dismissed. On April 27, 2016, the Amended Plan became effective and all the remaining conditions to the Agreement were satisfied. The Company fully satisfied its obligation under the Agreement by making a discounted payment in the second quarter of 2016. The Company's payment totaled $524 million, of which $518 million was related to asbestos reserves. The Company's obligations under the Agreement were included in its claims and claim adjustment expense reserves at December 31, 2015.
In the Home Office and Field Office category, which accounts for the vast majority of policyholders with active asbestos-related claims, the number of policyholders tendering asbestos claims for the first time and the number of policyholders with open asbestos claims declined slightly when compared to 2016 while gross asbestos-related payments were higher. Payments on behalf of policyholders in this category continue to be influenced by a high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily mesothelioma, continue to target defendants who were not traditionally primary targets of asbestos litigation.
The Policyholders with Settlement Agreements category includes structured settlements, coverage in place arrangements and, with respect to TPC, Wellington accounts (as discussed below). 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. In 2016, the Company paid the $518 million settlement related to asbestos-related coverage litigation under insurance policies issued to PPG, as described above.
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 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.
Net asbestos paid loss and loss expenses in 2017, 2016 and 2015 were $271 million, $708 million and $770 million, respectively. Net payments in 2016 included the $458 million payment related to the PPG settlement, as described above. Net payments in 2015 included the $502 million payment related to the Direct Action Settlements as described above. Approximately 4%, 69% and 69% of total net paid losses in 2017, 2016 and 2015, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company's liability.
Net environmental paid loss and loss expenses were $88 million, $61 million and $55 million in 2017, 2016 and 2015, respectively. At December 31, 2017, approximately 94% of the net environmental reserve (approximately $340 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 6% of the net environmental reserve (approximately $20 million), consists of case reserves.
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.
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company's current insurance reserves. In addition, the Company's estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company's operating results in future periods.
The carrying values of investments in fixed maturities classified as available for sale at December 31, 2017 and 2016 were as follows:
(3)Included in commercial mortgage-backed securities and project loans at December 31, 2017 and 2016 were $471 million and $285 million of securities guaranteed by the U.S. government, respectively, and $4 million and $5 million of securities guaranteed by government sponsored enterprises, respectively.
The following table displays the funding sources for the $11.63 billion of municipal bonds identified as revenue bonds in the foregoing table at December 31, 2017.
(1)Rated using external rating agencies or by the Company when a public rating does not exist. Ratings shown are the higher of the rating of the underlying issuer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default.
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, 2017.
(2)The Company does not have direct exposure to sovereign debt issued by the Republic of Ireland, Italy, Greece, Portugal or Spain.
The following table shows the Company's Eurozone exposure at December 31, 2017 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.
The Company's fixed maturity investment portfolio at December 31, 2017 and 2016 included $2.41 billion and $1.71 billion, respectively, of residential mortgage-backed securities, including pass-through-securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company's investment strategy generally favors securities that reduce this risk within expected interest rate ranges. The Company makes investments in residential CMOs that are either guaranteed by GNMA, FNMA or FHLMC, or if not guaranteed, are senior or super-senior positions within their respective securitizations. Both guaranteed and non-guaranteed residential CMOs allocate the distribution of payments from the underlying mortgages among different classes of bondholders. In addition, non-guaranteed residential CMOs provide structures that allocate the impact of credit losses to different classes of bondholders. Senior and super-senior CMOs are protected, to varying degrees,
At December 31, 2017 and 2016, 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 $111 million and $142 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 weighted average credit rating on these securities and obligations held by the Company was "B1" and "Ba3" at December 31, 2017 and 2016, respectively. 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, 2017 and 2016, the Company held commercial mortgage-backed securities (including FHA project loans) of $1.17 billion and $938 million, respectively. 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. For more information regarding the Company's investments in commercial mortgage-backed securities, see note 3 of notes to the consolidated financial statements.
The Company has, from time to time, engaged in securities lending activities from which it generates net investment income by lending certain of its investments to other institutions for short periods of time. At December 31, 2017 and 2016, the Company had $304 million and $286 million of securities on loan, respectively, as part of a tri-party lending agreement. The average monthly balance of securities on loan during 2017 and 2016 was $318 million and $346 million, respectively. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities
plus accrued interest. The Company has not incurred any investment losses in its securities lending program for the years ended December 31, 2017, 2016 and 2015.
(2)The percentage of common equity is calculated by dividing (a) indicated loss amounts in dollars by (b) total common equity excluding net unrealized investment gains and losses, net of taxes, included in shareholders' equity. Net unrealized investment gains and losses can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. Accordingly, the Company's management uses the percentage of common equity calculated on this basis as a metric to evaluate the potential impact of a single hurricane or single earthquake on the Company's financial position for purposes of making underwriting and reinsurance decisions.
Moreover, the Company is exposed to the risk of material losses from other than property and workers' compensation coverages arising out of hurricanes and earthquakes, and it is exposed to catastrophe losses from perils other than hurricanes and earthquakes, such as tornadoes and other windstorms, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions and other naturally-occurring events, such as solar flares, as well as acts of terrorism and cyber events.
The Company discusses how potentially changing climate conditions may present other issues for its business under "Item 1A - Risk Factors" and "Outlook." For example, among other things:
• 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 is subject to credit and interest rate risk, and may suffer reduced returns or material realized or unrealized losses."
The following table presents the Company's top five reinsurer groups by reinsurance recoverable at December 31, 2017 (in millions). Also included is the A.M. Best rating of each reinsurer group at February 15, 2018:
Premiums. The Company's earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the life of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations. Property and casualty insurance market conditions are expected to remain competitive. Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.
Property and casualty insurance market conditions are expected to remain competitive during 2018 for new business. In each of the Company's business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time.
Economic conditions in the United States and elsewhere could change, due to a variety of factors, including the political and regulatory environment, the U.S. Federal budget and further potential changes in tax laws in the United States, the repeal, replacement or modification of the Affordable Care Act, the imposition of tariffs or other barriers to international trade, the United Kingdom's
withdrawal from the European Union, rapid changes in commodity prices and fluctuations in interest rates and foreign currency exchange rates. The resulting changes in levels of economic activity could positively or negatively impact exposure changes at renewal and the Company's ability to write business at acceptable rates. Additionally, changes in levels of economic activity could positively or negatively impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could positively or negatively impact net written premiums during 2018, and because earned premiums are a function of net written premiums, earned premiums could be impacted on a lagging basis.
Catastrophe losses and non-catastrophe weather-related losses are inherently unpredictable from period to period. The Company's results of operations could be adversely impacted if significant catastrophe and non-catastrophe weather-related losses were to occur.
In Business Insurance, the Company expects underlying underwriting margins in 2018 will be higher than in 2017, and the underlying combined ratio will be slightly lower than in 2017, assuming lower (and more normalized) levels of non-catastrophe weather-related losses and other loss activity.
In Personal Insurance, the Company expects underlying underwriting margins in 2018 will be higher than in 2017, and the underlying combined ratio will be slightly lower than in 2017. In Agency Automobile, the Company expects that underlying underwriting margins and the underlying combined ratio will improve during 2018 compared with 2017, reflecting actions taken to improve profitability. In Agency Homeowners and Other, the Company expects that underlying underwriting margins and the underlying combined ratio in 2018 will be broadly consistent with 2017, assuming lower (and more normalized) levels of non-catastrophe weather-related losses and other loss activity.
Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Statements of Changes in Shareholders' Equity for the years ended December 31, 2017, 2016 and
We have audited the accompanying consolidated balance sheets of The Travelers Companies, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules as listed in the accompanying index to consolidated financial statements and schedules (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, 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) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 15, 2018 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 $(13) million, $(40) million and $(54) million for the years ended December 31, 2017, 2016 and 2015, respectively. Of total OTTI, credit losses of $(14) million, $(29) million and $(52) million for the years ended December 31, 2017, 2016 and 2015, respectively, were recognized in net realized investment gains. In addition, unrealized gains (losses) from other changes in total OTTI of $1 million, $(11) million and $(2) million for the years ended December 31, 2017, 2016 and 2015, 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 statements of income.
On August 4, 2017, the Company completed its previously announced acquisition of all issued and outstanding shares of Simply Business Holdings Ltd (Simply Business), a leading provider of small business insurance policies in the United Kingdom, for a purchase price of approximately $464 million, which included the repayment of debt and other obligations of Simply Business. In addition, the Company issued 95,953 shares of restricted common stock valued at approximately $12 million to certain employees of Simply Business who were equity holders of Simply Business. Subject to the satisfaction of certain conditions, 50% of the restricted stock will vest two years from the issuance date and the remainder will vest three years from the issuance date. The Company used a portion of the net proceeds from the issuance of senior notes in May 2017 (described in more detail in note 8) and internal resources to fund this transaction.
In March 2016, the FASB issued updated guidance clarifying that when a call (put) option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call (put) option is related to interest rates or credit risk in determining whether the option should be accounted for separately. The updated guidance was effective for reporting periods beginning after December 15,
2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.
The updated guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively with respect to the presentation of service and non-service costs, and prospectively with respect to service costs only being eligible for capitalization. Early adoption is permitted as of the first interim period of an annual period if an entity issues interim financial statements.
The updated guidance is effective for the quarter ending March 31, 2018. The update is to be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted in any interim periods for which financial statements have not yet been made available for issuance.
services will, to the extent such services are not related to the insurance contracts issued by the Company, be subject to this updated guidance.
The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.
The updated guidance is effective for the quarter ending March 31, 2018. The adoption of this guidance is not expected to have any effect on the Company's results of operations, financial position or liquidity.
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Such equity investments are no longer required to be classified as available for sale or trading securities. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance is effective for the quarter ending March 31, 2018 and will result in the recognition of $22 million of net after-tax unrealized gains on equity investments as a cumulative effect adjustment that will increase retained earnings as of January 1, 2018 and decrease accumulated other comprehensive income by a corresponding amount.
In February 2016, the FASB issued updated guidance to require lessees to recognize a right-to-use asset and a lease liability for leases with terms of more than 12 months. The updated guidance retains the two classifications of a lease as either an operating or finance lease (previously referred to as a capital lease). Both lease classifications require the lessee to record the right-to-use asset and the lease liability based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-to-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance requires expanded qualitative and quantitative disclosures, including additional information about the amounts recorded in the financial statements.
The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of
The updated guidance also amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security's amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists.
In January 2017, the FASB issued updated guidance that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge by comparing a reporting unit's fair value with its carrying amount and recognizing an impairment charge for the excess of the carrying amount over estimated fair value (i.e., Step 1 of current guidance). The implied fair value of goodwill is currently determined in Step 2 by deducting the fair value of all assets and liabilities of the reporting unit (determined in the same manner as a business combination) from the reporting unit's fair value as determined in Step 1 (including any corporate-level assets or liabilities that were included in the determination of the carrying amount and fair value of the reporting unit in Step 1). The updated guidance requires an entity to perform its annual, or interim, impairment test by either: (1) an initial qualitative assessment of factors (such as changes in management, key personnel, strategy, key technology or customers) that may impact a reporting unit's fair value and lead to the
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities, including instruments subject to securities lending agreements, are classified as available for sale and are reported at fair value, with unrealized investment gains and losses, net of income taxes, charged or credited directly to other comprehensive income. Equity securities, which include public common and non-redeemable preferred stocks, are classified as available for sale and are reported at fair value with unrealized gains and losses, net of income taxes, charged or credited directly to other comprehensive income.
The Company uses the equity method of accounting for investments in private equity limited partnerships, hedge funds and real estate partnerships. The partnerships and the hedge funds generally report investments on their balance sheet at fair value. The financial statements prepared by the investee are received by the Company on a lag basis, with the lag period generally dependent upon the type of underlying investments. The private equity and real estate partnerships provide financial information quarterly which is generally available to investors, including the Company, within three to six months following the date of the reporting period. The hedge funds provide financial information monthly, which is generally available to investors within one month following the date of the reporting period. The Company regularly requests financial information from the partnerships prior to the receipt of the partnerships' financial statements and records any material information obtained from these requests in its consolidated financial statements.
Also included in other investments are non-public common equities, preferred equities and derivatives. Non-public common equities 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. The Company's derivative financial instruments are carried at fair value, with the changes in fair value reflected in the consolidated statements of income in net realized investment gains (losses). For a further discussion of the derivatives used by the Company, see note 3.
default is recognized only when payments are received. Investments included in the consolidated balance sheet that were not income-producing for the preceding 12 months were not material.
The Company conducts a periodic review to identify and evaluate invested assets having other-than-temporary impairments. Some of the factors considered in identifying other-than-temporary impairments include: (1) for fixed maturity investments, whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the investment prior to an anticipated recovery in value; (2) for non-fixed maturity investments, the Company's ability and intent to retain the investment for a reasonable period of time sufficient to allow for an anticipated recovery in value; (3) the likelihood of the recoverability of principal and interest for fixed maturity securities (i.e., whether there is a credit loss) or cost for equity securities; (4) the length of time and extent to which the fair value has been less than amortized cost for fixed maturity securities or cost for equity securities; and (5) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices.
key assumptions made for the Prime, Alt-A and first-lien Sub-Prime mortgage-backed securities at December 31, 2017 were as follows:
Under certain workers' compensation insurance contracts with deductible features, the Company is obligated to pay the claimant for the full amount of the claim. The Company is subsequently reimbursed by the policyholder for the deductible amount. These amounts are included on a gross basis in the consolidated balance sheets in contractholder payables and contractholder receivables, respectively.
As a result of the reviews performed for the years ended December 31, 2017, 2016 and 2015, the Company determined that the estimated fair value substantially exceeded the respective carrying value of its reporting units for those years and that goodwill was not impaired. The Company also determined during its reviews for each year that its other indefinite-lived intangible assets and finite-lived intangible assets were not impaired.
Included in other liabilities in the consolidated balance sheets 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,
and 2016, the Company had a liability of $231 million and $242 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $16 million at both dates. The liability for such assessments and the related recoverables are not discounted for the time value of money. The loss-based assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers' compensation claimants and the recoveries are expected to occur over the same period of time.
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, 2017, 2016 and 2015, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled $67 million and $62 million at December 31, 2017 and 2016, respectively.
Permitted statutory accounting practices are those practices that differ either from state-prescribed statutory accounting practices or NAIC statutory accounting practices.
Effective April 1, 2017, the Company's results are reported in the following three business segments-Business Insurance, Bond & Specialty Insurance and Personal Insurance, reflecting a change in the manner in which the Company's businesses were being managed as of that date, as well as 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. While the segmentation of the Company's domestic businesses was unchanged, the Company's international businesses, which were previously managed and reported in total within the Business and International Insurance segment, were disaggregated by product type among the three newly aligned reportable business segments. All prior periods presented have been reclassified to conform to this presentation. In connection with these changes, the Company revised the names and descriptions of certain businesses comprising the Company's segments and has reflected other related changes. The reportable business segments are as follows:
Business Insurance offers a broad array of property and casualty insurance and insurance related services to its customers, primarily in the United States, as well as in Canada, the United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world as a corporate member of Lloyd's. Business Insurance is organized as follows:
•International, through its operations in Canada, the United Kingdom, the Republic of Ireland and Brazil, provides property and casualty insurance and risk management services to several customer groups, including, among others, those in the technology, manufacturing and public services industry sectors. International also provides insurance for both the foreign exposures of United States organizations and the United States exposures of foreign organizations through Global Services. Through its Lloyd's syndicate (Syndicate 5000), for which the Company provides 100% of the capital, International underwrites five principal businesses-marine, global property, accident & special risks, power & utilities and aviation.
Bond & Specialty Insurance provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to its customers in the United States and certain specialty insurance products in Canada, the United Kingdom, the Republic of Ireland and Brazil, utilizing various degrees of financially-based underwriting approaches. The range of coverages includes performance, payment and commercial surety and fidelity bonds for construction and general commercial enterprises; management liability coverages including directors' and officers' liability, employee dishonesty, employment practices liability, fiduciary liability and cyber risk for public corporations, private companies, not-for-profit organizations and financial institutions; professional liability coverage for a variety of professionals including, among others, lawyers and design professionals; and in the United States only, property, workers' compensation, auto and general liability for financial institutions.
Bond & Specialty Insurance surety business in Brazil and Colombia is conducted through J. Malucelli Participações em Seguros e Resseguros S.A. (JMalucelli) and J. Malucelli Latam S.A. in Brazil. The Company owns 49.5% of both JMalucelli, a market leader in surety coverages in Brazil, and J. Malucelli Latam S.A., which in September 2015 acquired a majority interest in JMalucelli Travelers Seguros S.A., a Colombian start-up surety provider. These joint venture investments are accounted for using the equity method and are included in "other investments" on the consolidated balance sheet.
Personal Insurance writes a broad range of property and casualty insurance covering individuals' personal risks, primarily in the United States, as well as in Canada. The primary products of automobile and homeowners insurance are complemented by a broad suite of related coverages.
(1)The primary components of other assets at December 31, 2017 were accrued over-funded benefit plan assets related to the Company's qualified domestic pension plan, other intangible assets and deferred taxes. The primary components of other assets at December 31, 2016 were other intangible assets and deferred taxes.
Proceeds from sales of fixed maturities classified as available for sale were $1.85 billion, $1.42 billion and $1.95 billion in 2017, 2016 and 2015, respectively. Gross gains of $42 million, $79 million and $95 million and gross losses of $38 million, $20 million and $14 million were realized on those sales in 2017, 2016 and 2015, respectively.
Proceeds from sales of equity securities classified as available for sale were $765 million, $92 million and $59 million in 2017, 2016 and 2015, respectively. Gross gains of $239 million, $17 million and $16 million and gross losses of $3 million, $3 million and $10 million were realized on those sales in 2017, 2016 and 2015, respectively.
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. The Company considers an investment in a VIE in which it has a 20% or greater equity interest as a significant VIE. Neither the Company's carrying amounts nor the unfunded commitments related to these significant VIE's are material individually or in the aggregate.
The following tables summarize, for all investments in an unrealized loss position at December 31, 2017 and 2016, 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.
Impairment charges included in net realized investment gains in the consolidated statements of income were as follows:
The following tables present the cumulative amount of and the changes during the year in credit losses on fixed maturities held at December 31, 2017 and 2016, that were recognized in the consolidated statements of income from other-than-temporary impairments (OTTI) and for which a portion of the OTTI was recognized in other comprehensive income (loss) in the consolidated balance sheet.
Included in fixed maturities are below investment grade securities totaling $1.67 billion and $1.76 billion at December 31, 2017 and 2016, respectively. The Company defines its below investment grade securities as those securities rated below investment grade by external rating agencies, or the equivalent by the Company when a public rating does not exist. Such securities include below investment grade bonds that are publicly traded and certain other privately issued bonds that are classified as below investment grade loans.
For investments that have quoted market prices in active markets, the Company uses the unadjusted quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from third party, nationally recognized pricing services. When quoted market prices are unavailable, the Company utilizes these pricing services to determine an estimate of fair value. The fair value estimates provided from these pricing services are included in the amount disclosed in Level 2 of the hierarchy. If quoted market prices and an estimate from a pricing service are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third-party market participant would be willing to pay in an arm's length transaction.
The Company utilized a pricing service to estimate fair value measurements for approximately 98% of its fixed maturities at both December 31, 2017 and 2016. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.
$127 million and $99 million at December 31, 2017 and 2016, respectively. Additionally, the Company holds a small amount of other fixed maturity investments that have characteristics that make them unsuitable for matrix pricing. For these fixed maturities, the Company obtains a quote from a broker (primarily the market maker). The fair value of the fixed maturities for which the Company received a broker quote was $77 million and $85 million at December 31, 2017 and 2016, respectively. Due to the disclaimers on the quotes that indicate that the price is indicative only, the Company includes these fair value estimates in Level 3.
During the years ended December 31, 2017 and 2016, the Company's transfers between Level 1 and Level 2 were not significant.
The following tables present the changes in the Level 3 fair value category for the years ended December 31, 2017 and 2016.
The Company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) the Company has underwritten to other
The Company monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to evaluate the collectability of amounts due from reinsurers and as a basis for determining the reinsurers with which the Company conducts ongoing business. In addition, in the ordinary course of business, the Company may become involved in coverage disputes with its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the Company's rights and obligations under the various reinsurance agreements. The Company employs dedicated specialists and strategies to manage reinsurance collections and disputes.
The following is a summary of reinsurance financial data reflected in the consolidated statements of income:
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 $2.46 billion for 2018. 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)On August 4, 2017, the Company acquired Simply Business for strategic opportunities related to the potential growth of the small commercial business market through advancements in its product and underwriting technology, including a distribution model that provides the capability to better assess and prepare for the demands of small business owners who prefer to shop, purchase and service their insurance needs online. At December 31, 2017, goodwill related to the acquisition of Simply Business was $354 million. The total amount of goodwill expected to be deductible for tax purposes related to Simply Business is $466 million, which includes certain acquisition costs and intangible assets.
Amortization expense of intangible assets was $13 million, $11 million and $26 million for the years ended December 31, 2017, 2016 and 2015, respectively. Intangible asset amortization expense is estimated to be $15 million in 2018, $14 million in 2019, $13 million in 2020, $12 million in 2021 and $11 million in 2022.
Gross claims and claim adjustment expense reserves at December 31, 2017 increased by $1.70 billion over December 31, 2016, primarily reflecting the impacts of (i) catastrophe losses in the second half of 2017 and (ii) higher volumes of insured exposures and loss cost trends for the current accident year, partially offset by the impacts of (iii) payments related to operations in runoff and (iv) net favorable prior year reserve development. Gross claims and claim adjustment expense reserves at December 31, 2016 decreased by $343 million from December 31, 2015, primarily reflecting the impacts of (i) payments related to operations in runoff, including the Company's $524 million payment related to the settlement of the PPG Industries, Inc. litigation and (ii) net favorable prior year reserve development, partially offset by the impact of (iii) higher volumes of insured exposures and loss cost trends for the current accident year.
Included in the claims and claim adjustment expense reserves are reserves for long-term disability and annuity claim payments, primarily arising from workers' compensation insurance and workers' compensation excess insurance policies, that are discounted to the present value of the estimated future payments. The discount rate used was 5% at both December 31, 2017 and 2016. Total reserves net of the discount were $2.32 billion and $2.17 billion, and the related amount of discount was $1.10 billion and $1.08 billion, at December 31, 2017 and 2016, respectively. Accretion of the discount is reported as part of "claims and claim adjustment expenses" in the consolidated statements of income and was $50 million, $50 million and $51 million in 2017, 2016 and 2015, respectively.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2017 totaled $140 million, primarily driven by better than expected loss experience in the segment's domestic operations in the general liability product line for multiple accident years.
In 2015, estimated claims and claim adjustment expenses incurred included $817 million of net favorable development for claims arising in prior years, including $941 million of net favorable prior year reserve development and $51 million of accretion of discount that impacted the Company's results of operations.
Business Insurance. Net favorable prior year reserve development in 2015 totaled $332 million, primarily driven by better than expected loss experience in the Company's domestic operations in (i) the general liability product line (excluding increases to asbestos and environmental reserves), for both primary and excess coverages for multiple accident years, (ii) the workers' compensation line of business for accident years 2006 and prior, (iii) the property product line related to catastrophe losses for recent accident years and non-catastrophe losses for recent accident years, partially offset by (iv) a $224 million increase to asbestos reserves and (v) a $72 million increase to environmental reserves, as well as net favorable prior year reserve development in the Company's operations at Lloyd's.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2015 totaled $281 million, primarily driven by better than expected loss experience in the Company's domestic operations in the fidelity and surety product line for multiple accident years, which was partially driven by a reduction in outstanding exposures related to the financial crisis that commenced in 2007.
Personal Insurance. Net favorable prior year reserve development in 2015 totaled $328 million, primarily driven by better than expected loss experience in the Company's domestic operations in (i) the Homeowners and Other product line for liability coverages for recent accident years, for non-catastrophe weather-related losses and non-weather-related losses for accident year 2014 and (ii) the Automobile product line for liability coverages for recent accident years, as well as in the Company's international operations in Canada.
The following is a summary of claims and claim adjustment expense reserves, including certain components, for the Company's major product lines by reporting segment at December 31, 2017.
(1)Net discount amount includes discount of $72 million on reinsurance recoverables for long-term disability and annuity claim payments.
(2)Primarily includes residual market, international (other than operations in Canada within the Personal Insurance segment) and runoff assumed reinsurance business.
(4)Total reinsurance recoverables (on paid and unpaid losses) at December 31, 2017 were $8.31 billion.
For Business Insurance and for Personal Insurance, claim file information is summarized such that the Company generally recognizes one count for each policy claim event by internal regulatory line of business, regardless of the number of claimants or coverages involved. The claims counts are then accumulated and reported by product line. While the methodology is generally consistent within each segment for the product lines displayed, there are some minor differences between and within segments. For Bond & Specialty Insurance, the Company recognizes one count per coverage per policy claim event.
claim development tables above, as the risks, average values and other dynamics of the claim process can vary materially by the cause of loss and coverage within product line. For example, in Personal Automobile, the introduction of a new roadside assistance coverage feature several years ago resulted in a significant increase in claim counts with a low average claim cost. For this reason the Company varies its approach to, and in many cases the level of aggregation for, counting claims for internal analysis purposes depending on the particular granular analysis performed.
In the third quarter of 2017, 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:
• while overall payment patterns have been generally stable, there has been an increase in severity for certain policyholders due to a high level of litigation activity; and
In the Home Office and Field Office category, which accounts for the vast majority of policyholders with active asbestos-related claims, the number of policyholders tendering asbestos claims for the first time and the number of policyholders with open asbestos claims declined slightly when compared to 2016 while gross asbestos-related payments were higher. Payments on behalf of policyholders in this category continue to be influenced by a high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily
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 and the Company's evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment.
The completion of these reviews and analyses in 2017, 2016 and 2015 resulted in $225 million, $225 million and $224 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 than previously anticipated level of litigation activity surrounding mesothelioma claims. This 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. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company's overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company's overall view of the current 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.
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.
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.
option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
2016 Debt Issuance. On May 11, 2016, the Company issued $500 million aggregate principal amount of 3.75% senior notes that will mature on May 15, 2046. The net proceeds of the issuance, after the deduction of underwriting and other expenses, totaled approximately $491 million. Interest on the senior notes is payable semi-annually in arrears on May 15 and November 15. Prior to November 15, 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 Treasury Rate (as defined in the senior notes), plus 20 basis points. On or after November 15, 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 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
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. 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 Treasury Rate (as defined in the senior notes), plus 25 basis points. On or after 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 100% of the principal amount of any senior notes to be redeemed.
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 2017 ranged from 0.65% to 1.17%, and in 2016 ranged from 0.35% to 0.55%.
The Travelers Companies, Inc. fully and unconditionally guarantees the payment of all principal, premiums, if any, and interest on certain debt obligations of its subsidiaries TPC and Travelers Insurance Group Holdings, Inc. The guarantees pertain to the $200 million 7.75% notes due 2026 and the $500 million 6.375% notes due 2033.
Maturities-The amount of debt obligations, other than commercial paper, that become due in each of the next five years is as follows: 2018, $500 million; 2019, $500 million; 2020, $500 million; 2021, $0; and 2022, $0.
The Company is party to a five-year, $1.0 billion revolving credit agreement with a syndicate of financial institutions that expires on June 7, 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, 2017, 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, 2017, 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 August 2017, the Company issued 95,953 shares of restricted stock valued at approximately $12 million in connection with a business acquisition to certain employees of the acquired business. The restricted stock is subject to service conditions and as such is recognized as share-based compensation; 50% of the restricted stock will vest two years from the issuance date and the remainder will vest three years from the issuance date. The value will be recognized over the respective vesting periods and included with the share-based compensation cost of awards that are issued under the Company's share-based incentive compensation plan (see note 13). The recipients generally have all the rights of a shareholder of the Company including the right to vote the applicable shares of common stock and to receive dividends on such shares, if and as declared by the Board of Directors. The restricted stock is held under the Company's control with the Company's transfer agent and will be released upon vesting.
TRV and its two non-insurance holding company subsidiaries received dividends of $2.33 billion, $3.05 billion and $3.75 billion from their U.S. insurance subsidiaries in 2017, 2016 and 2015, respectively.
For the years ended December 31, 2017, 2016 and 2015, TRV declared cash dividends per common share of $2.83, $2.62 and $2.38, respectively, and paid cash dividends of $785 million, $757 million and $739 million, respectively.
(1)(Increases) decreases net realized investment gains on the consolidated statements of income.
(2)(Increases) decreases income tax expense on the consolidated statements of income.
The following is a reconciliation of income tax expense at the U.S. federal statutory income tax rate to the income tax expense reported in the Company's consolidated statements of income:
The Company paid income taxes of $514 million, $892 million and $1.21 billion during the years ended December 31, 2017, 2016 and 2015, respectively. The current income tax refundable of $65 million at December 31, 2017 was included in other assets in the consolidated balance sheet. The current income tax payable of $72 million at December 31, 2016 was included in other liabilities in the consolidated balance sheet.
In computing taxable income, property and casualty insurers reduce underwriting income by claims and claim adjustment expenses incurred. The deduction for claims incurred is discounted at the interest rates and for the claim payment patterns prescribed by the U.S. Treasury. TCJA changes the prescribed interest rates to rates based on corporate bond yield curves and extends the applicable time periods for the claim payment pattern. These changes are effective for tax years beginning after 2017 and are subject to a transition rule that spreads the additional tax payment from the amount determined by applying these changes over the subsequent eight years beginning in 2018. This item is a taxable temporary difference and has no direct impact on total tax expense for 2017 and future years. The required additional tax payments are currently estimated to approximate $70 million per year over the eight-year period and will result in a modest reduction in net investment income. The Company's tax payments will reflect the amounts due under the transition rule beginning in 2018.
December 2017. These undistributed foreign earnings are intended to be permanently reinvested in those operations.
The IRS has completed examinations of the Company's U.S. income tax returns for all years through 2014. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.
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 generally using the volatility of the week prior to the stock 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 each option is the interpolated market yield of a U.S. Treasury bill with a term comparable to the expected option term for the same week used for measuring volatility. The following table provides information about options granted:
A summary of stock option activity under the 2014 Incentive Plan and the legacy plans as of and for the year ended December 31, 2017 is as follows:
On February 6, 2018, the Company, under the 2014 Incentive Plan, granted 1,632,361 stock option awards with an exercise price of $140.85 per share. The fair value attributable to the stock option awards on the date of grant was $20.13 per share.
performance threshold, a range of performance shares will vest (50% to 150% for awards granted in 2016, 2017 and 2018), depending on the actual return on equity attained.
The total fair value of shares that vested during the years ended December 31, 2017, 2016 and 2015 was $166 million, $175 million and $179 million, respectively.
A summary of restricted stock units, deferred stock units and performance share activity under the 2014 Incentive Plan and the legacy plans as of and for the year ended December 31, 2017 is as follows:
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 408 at the beginning of the year and 379 at the end of the year and the number of nonvested dividend equivalent shares related to performance shares was 28,480 at the beginning of the year and 26,584 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.
The amount of compensation cost for awards subject to a service condition is based on the number of shares expected to be issued and is recognized over the time period for which service is to be provided (requisite service period). Awards granted to retiree-eligible employees or to employees who become retiree-eligible before an award's vesting date are considered to have met the requisite service condition. The compensation cost for awards subject to a performance condition is based upon the probable outcome of the performance condition, which on the grant date reflects an estimate of attaining 100% of the performance shares granted. The compensation cost reflects an estimated annual forfeiture rate from 3.0% to 4.0% over the requisite service period of the awards. That estimate is revised if subsequent information indicates that the actual number of instruments expected to vest is likely to differ from previous estimates. Compensation costs for awards are recognized on a straight-line basis over the requisite service period. For awards that have graded vesting terms, the compensation cost is recognized on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award was, in substance, multiple awards. The total compensation cost for all share-based incentive compensation awards recognized in earnings for the years ended December 31, 2017, 2016 and 2015 was $136 million, $155 million and $141 million, respectively. Included in these amounts are compensation cost adjustments of $3 million, $11 million and $8 million, for the years ended December 31, 2017, 2016 and 2015, respectively, that reflected the cost associated with the updated estimate of performance shares due to attaining certain performance levels from the date of the initial grant of the performance awards. The related tax benefits recognized in earnings were $45 million, $52 million and $47 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The following tables summarize the funded status, obligations and amounts recognized in the consolidated balance sheets for the Company's benefit plans. The Company uses a December 31 measurement date for its pension and postretirement benefit plans.
The total accumulated benefit obligation for the Company's defined benefit pension plans was $3.77 billion and $3.48 billion at December 31, 2017 and 2016, respectively. The qualified domestic pension plan accounted for $3.55 billion and $3.26 billion of the total accumulated benefit obligation at December 31, 2017 and 2016, respectively, whereas the nonqualified and foreign plans accounted for $0.22 billion of the total accumulated benefit obligation at both December 31, 2017 and 2016.
The following table summarizes the components of net periodic benefit cost and other amounts recognized in other comprehensive income related to the benefit plans.
amortized over the next fiscal year is $1 million. For the postretirement benefit plans, the estimated net actuarial gain 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 $4 million.
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, are applied to expected future benefits payments in measuring the projected benefit obligation. The discount rate assumption used to determine benefit obligations disclosed above represents the weighted average of the individual spot rates.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have increased the accumulated postretirement benefit obligation by $22 million at December 31, 2017, and the aggregate of the service and interest cost components of net postretirement benefit expense by $1 million for the year ended December 31, 2017. Decreasing the assumed health care cost trend rate by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2017 by $19 million and the aggregate of the service and interest cost components of net postretirement benefit expense by $1 million for the year ended December 31, 2017.
The Company's other postretirement benefit plans had financial assets of $13 million and $14 million at December 31, 2017 and 2016, respectively, which are measured at fair value on a recurring basis. The assets are primarily corporate bonds and short-term securities and categorized as level 2 in the fair value hierarchy.
Rent expense was $188 million, $197 million and $202 million in 2017, 2016 and 2015, respectively.
Future minimum annual rental payments under noncancellable operating leases for 2018, 2019, 2020, 2021 and 2022 are $130 million, $108 million, $91 million, $75 million and $51 million, respectively, and $103 million for 2023 and thereafter. Future sublease rental income aggregating approximately $4 million will partially offset these commitments.
The Company is involved in other lawsuits, including lawsuits alleging extra-contractual damages relating to insurance contracts or reinsurance agreements, that do not arise under insurance contracts or reinsurance agreements. The legal costs associated with such lawsuits are expensed in the period in which the costs are incurred. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company's results of operations or would have a material adverse effect on the Company's financial position or liquidity.
On November 7, 2016, the Company agreed to a settlement with one of the three defendants then remaining in this dispute. The Company received payment under the settlement in the fourth quarter of 2016 and, as a result, recognized a $126 million pre-tax ($82 million after-tax) gain in the fourth quarter, which was included in "other revenues" in the consolidated statement of income for the year ended December 31, 2016. In connection with that settlement, the reinsurance recoverable balance related to this case was reduced from approximately $238 million to approximately $31 million in the Company's consolidated balance sheet. At March 31, 2017, the claim related to the remaining defendants totaled $71 million, comprising the $31 million of reinsurance recoverable plus interest amounting to $40 million as of that date. The interest was treated for accounting purposes as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly was not recognized in the Company's consolidated financial statements.
Investment Commitments-The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.56 billion and $1.60 billion at December 31, 2017 and 2016, 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 and, in certain cases, obligations arising from certain liabilities. 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 $358 million at December 31, 2017, of which $2 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. 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 $45 million at December 31, 2017, approximately $23 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, 2017, all of which is indemnified by a third party.
There were no material noncash financing or investing activities during the years ended December 31, 2017, 2016 and 2015.
(2)Due to the use of an average number of shares for each quarter, the sum of the quarterly earnings per share may not equal the total earnings per share for the full year.