The Loss and loss expense ratio is calculated by dividing losses and loss expenses, excluding the Life Insurance segment, by Net premiums earned - excluding Life Insurance segment. Losses and loss expenses for the Life Insurance segment were $739 million, $663 million, $601 million, $589 million, and $582 million for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the year ended December 31, 2017. This discussion should be read in conjunction with the consolidated financial statements and related Notes, under Item 8 of this Form 10-K.
actual loss experience from insured or reinsured events and the timing of claim payments;
developments in global financial markets, including changes in interest rates, stock markets, and other financial markets, increased government involvement or intervention in the financial services industry, the cost and availability of financing, and foreign currency exchange rate fluctuations (which we refer to in this report as foreign exchange and foreign currency exchange), which could affect our statement of operations, investment portfolio, financial condition, and financing plans;
material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;
the effects of investigations into market practices in the property and casualty (P&C) industry;
North America Personal P&C Insurance: Fireman's Fund Insurance Company high net worth personal lines insurance business in the U.S. (April 1, 2015).
2016 "comparative basis" results: The combined company results do not include the impact of the unearned premium reserves intangible amortization and the elimination of the historical policy acquisition costs as a result of purchase accounting related to the Chubb Corp acquisition. The combined company results for the year ended December 31, 2016 are inclusive of the first 14 days of January 2016 (the Chubb Corp acquisition closed January 14, 2016).
2015 "comparative basis" results: Legacy ACE plus legacy Chubb Corp historical results after accounting policy alignment adjustments, including reclassifying certain legacy Chubb Corp corporate expenses to administrative expenses and redefining legacy Chubb Corp segment underwriting income by allocating the amortization of deferred policy acquisition costs to each segment. 2015 "comparative basis" results exclude purchase accounting adjustments related to the Chubb Corp acquisition.
Net income was $3,861 million compared with $4,135 million last year. Net income in 2017 was adversely impacted by significant catastrophe losses in the year of $2,171 million after-tax and favorably impacted by a provisional tax benefit of $450 million, related to the 2017 U.S. Tax Cuts and Jobs Act (2017 Tax Act). Net income included a one-time contribution of $50 million ($32.5 million after-tax) to the Chubb Charitable Foundation.
Total company and P&C net premiums written were $29.2 billion and $27.1 billion, respectively, up 3.9 percent and 4.2 percent, respectively.
Total pre-tax and after-tax catastrophe losses, including reinstatement premiums, were $2,746 million (10.2 percentage points of the combined ratio) and $2,171 million, respectively, compared with $1,060 million (4.0 percentage points of the combined ratio) and $844 million, respectively, in 2016. Pre-tax catastrophe losses, net of reinsurance and including reinstatement premiums, included $650 million, $880 million, and $201 million from Hurricanes Harvey, Irma, and Maria, respectively, $277 million and $157 million from the northern and southern California wildfires, respectively, and $556 million from other catastrophe losses, principally U.S. weather-related events.
P&C combined ratio was 94.7 percent compared with 88.7 percent in 2016. P&C current accident year combined ratio excluding catastrophe losses was 87.6 percent compared with 89.0 percent in 2016.
Total pre-tax and after-tax favorable prior period development was $829 million (3.1 percentage points of the combined ratio) and $634 million, respectively, compared with $1,135 million pre-tax (4.3 percentage points of the combined ratio) and $898 million after-tax in 2016.
Net investment income was $3,125 million compared with $2,865 million in 2016. Excluding the amortization of the fair value adjustment on acquired invested assets of Chubb Corp, net investment income was $3,457 million, compared with $3,258 million in 2016, up 6.1 percent.
Share repurchases totaled $830 million, or approximately 5.9 million shares for the year.
In 2017, we produced net income per share of $8.19 and book value per share growth of 6.5 percent, despite large natural catastrophe events in the year, including Hurricanes Harvey, Irma, and Maria in the U.S and Caribbean, large earthquakes in Mexico, and multiple large wildfires in California. We had strong net premiums written of $29.2 billion, up nearly 4 percent. We are optimistic about our growth prospects for 2018 given strengthening economies in the U.S. and globally, an improving pricing environment, and because our merger-related underwriting actions and their impact on revenue growth are largely behind us. In particular, we expect our commercial P&C business to continue to grow and benefit from improving pricing conditions in a number of our businesses globally in 2018. We also expect growth to improve in our U.S. middle market and small commercial business, and expect good growth in this area outside the U.S. as well. We also expect good growth in our global A&H and personal lines business from investments we are making in marketing and technology to provide a more digital experience for customers and business partners. One of our strategic focus areas is to transform ourselves to thrive in a digital age. We expect this to significantly enhance our competitive profile and contribute revenue growth and efficiencies in the medium and longer term.
We achieved annualized run rate integration-related savings of $875 million by the end of 2017, ahead of schedule and above initial projections. Through 2017 we have realized $766 million of savings, of which 63 percent favorably impacted administrative expenses. The expected incremental realized savings in 2018 is more highly weighted to claims expense savings than the administrative expense savings experienced to date. While incremental savings are expected to benefit us in 2018, these savings will be partially offset by increased spending to support growth, including our continued investment in marketing, technology and digitization, and strategic partnerships, such as those mentioned above.
The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments based on circumstances underlying the insured loss known at the date of accrual. For example, the reserves established for high excess casualty claims, asbestos and environmental claims, claims from major catastrophic events, or for our various product lines each require different assumptions and judgments to be made. Necessary judgments are based on numerous factors and may be revised as additional experience and other data become available and are reviewed, as new or improved methods are developed, or as laws change. Hence, ultimate loss payments may differ from the estimate of the ultimate liabilities made at the balance sheet date. Changes to our previous estimates of prior period loss reserves impact the reported calendar year underwriting results, adversely if our estimates increase and favorably if our estimates decrease. The potential for variation in loss reserve estimates is impacted by numerous factors. Reserve estimates for casualty lines are particularly uncertain given the lengthy reporting patterns and corresponding need for IBNR.
While we believe that our reserve for unpaid losses and loss expenses at December 31, 2017, is adequate, new information or emerging trends that differ from our assumptions may lead to future development of losses and loss expenses that is significantly greater or less than the recorded reserve, which could have a material effect on future operating results. As noted previously, our best estimate of required loss reserves for most portfolios is judgmentally selected for each origin year after considering the results from a number of reserving methods and is not a purely mechanical process. Therefore, it is difficult to convey, in a simple and quantitative manner, the impact that a change to a single assumption will have on our best estimate. In the examples below, we attempt to give an indication of the potential impact by isolating a single change for a specific reserving method that would be pertinent in establishing the best estimate for the product line described. We consider each of the following sensitivity analyses to represent a reasonably likely deviation in the underlying assumption.
Certain long-tail lines, such as casualty and professional lines, are particularly susceptible to changes in loss trend and claim inflation. Heightened perceptions of tort and settlement awards around the world can increase the demand for these products as well as contributing to the uncertainty in the reserving estimates. Our reserving methods rely on loss development patterns estimated from historical data and while we attempt to adjust such factors for known changes in the current tort environment, it is possible that such factors may not entirely reflect all recent trends in tort environments. For example, when applying the reported loss development method, the lengthening of our selected loss development patterns by six months would increase reserve estimates on long-tail casualty and professional lines for accident years 2015 and prior by approximately $484
million. This represents an impact of 13.7 percent relative to recorded net loss and loss expense reserves of approximately $3.5 billion.
Typically, there is inherent uncertainty around the length of paid and reported development patterns, especially for certain casualty lines such as excess workers' compensation or general liability, which may take decades to fully develop. This uncertainty is accentuated by the need to supplement client development patterns with industry development patterns due to the sometimes low statistical credibility of the data. The underlying source and selection of the final development patterns can thus have a significant impact on the selected ultimate net losses and loss expenses. For example, a 20 percent shortening or lengthening of the development patterns used for U.S. long-tail lines would cause the loss reserve estimate derived by the reported Bornhuetter-Ferguson method for these lines to change by approximately $458 million. This represents an impact of 52 percent relative to recorded net loss and loss expense reserves of approximately $888 million.
On occasion, there will be differences between our carried loss reserves and unearned premium reserves and the amount of loss reserves and unearned premium reserves reported by the ceding companies. This is due to the fact that we receive consistent and timely information from ceding companies only with respect to case reserves. For IBNR, we use historical experience and other statistical information, depending on the type of business, to estimate the ultimate loss. We estimate our unearned premium reserve by applying estimated earning patterns to net premiums written for each treaty based upon that treaty's coverage basis (i.e., risks attaching or losses occurring). At December 31, 2017, the case reserves reported to us by our ceding
With respect to ceded reinsurance, we entered into a few multi-year excess of loss retrospectively-rated contracts, principally in 2002. These contracts primarily provided severity protection for specific product divisions. Because traditional one-year reinsurance coverage had become relatively costly, these contracts were generally entered into in order to secure a more cost-effective reinsurance program. All of these contracts transferred risk and were accounted for as reinsurance. In addition, we maintain a few aggregate excess of loss reinsurance contracts that were principally entered into prior to 2003, such as the National Indemnity Company (NICO) contracts referred to in the section entitled, “Asbestos and Environmental (A&E)”. We have not purchased any other retroactive ceded reinsurance contracts since 1999.
For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, we establish a default factor and resulting provision for uncollectible reinsurance based on specific facts and circumstances surrounding each company. Upon initial notification of an insolvency, we generally recognize expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for
The following table summarizes reinsurance recoverables and the provision for uncollectible reinsurance for each type of recoverable balance at December 31, 2017:
At December 31, 2017, the use of different assumptions within our approach could have a material effect on the provision for uncollectible reinsurance. To the extent the creditworthiness of our reinsurers were to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our provision for uncollectible reinsurance. Such an event could have a material adverse effect on our financial condition, results of operations, and our liquidity. Given the various considerations used to estimate our uncollectible provision, we cannot precisely quantify the effect a specific industry event may have on the provision for uncollectible reinsurance. However, based on the composition (particularly the average credit quality) of the reinsurance recoverable balance at December 31, 2017, we estimate that a ratings downgrade of one notch for all rated reinsurers (i.e., from A to A- or A- to BBB+) could increase our provision for uncollectible reinsurance by approximately $64 million or approximately 0.4 percent of the gross reinsurance recoverable balance, assuming no other changes relevant to the calculation. While a ratings downgrade would result in an increase in our provision for uncollectible reinsurance and a charge to earnings in that period, a downgrade in and of itself does not imply that we will be unable to collect all of the ceded reinsurance recoverable from the reinsurers in question. Refer to Note 5 to the Consolidated Financial Statements for additional information.
many new provisions. Until additional guidance is issued, there are many uncertainties relating to its ultimate application. Refer to Note 8 to the Consolidated Financial Statements for additional information.
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction, principally derived from business plans and available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If our assumptions and estimates that resulted in our forecast of future taxable income for each tax-paying component prove to be incorrect, an additional valuation allowance could become necessary, which could have a material adverse effect on our financial condition, results of operations, and liquidity. At December 31, 2017, the valuation allowance of $99 million reflects management's assessment that it is more likely than not that a portion of the deferred tax asset will not be realized due to the potential inability to utilize foreign tax credits in the U.S. and the inability of certain foreign subsidiaries to generate sufficient taxable income.
Chubb reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States and Japan. We ceased writing this business in 2007. Guarantees which are payable on death are referred to as guaranteed minimum death benefits (GMDB). Guarantees on living benefits (GLB) includes guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB). For further description of this product and related accounting treatment, refer to Note 1 j) to the Consolidated Financial Statements.
Estimates of the average modeled value of future cash outflows is recorded as incurred losses (i.e., benefit reserves). Cash inflows or revenue are reported as net premiums earned and changes in the benefit reserves are reflected as Policy benefits expense in the Consolidated statements of operations, which is included in underwriting income.
Management established benefit reserves based on a long-term benefit ratio (or loss ratio) calculated using assumptions reflecting management’s best estimate of the future short-term and long-term performance of the variable annuity line of business. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be transient. Management regularly examines both qualitative and quantitative analysis, including a review of the differential between the benefit ratio used at the most recent valuation date and the benefit ratio calculated on subsequent dates. Management regularly evaluates its estimates and uses judgment to determine the extent to which assumptions underlying the benefit ratio calculation should be adjusted. For the year ended December 31, 2017, management determined that no change to the benefit ratio was warranted.