• Repurchased 30.3 million common shares for total cost of $3.22 billion and paid $739 million of dividends to shareholders
The Company has insurance operations in Canada, the United Kingdom and the Republic of Ireland, as well as in Brazil, primarily through a joint venture. 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, 2015, 2014 and 2013, changes in foreign currency exchange rates had the impact of lowering the 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 the Business and International Insurance segment's operating income for the years reported.
Factors contributing to the changes in earned premiums in each segment in 2015 and 2014 compared with the respective prior year are discussed in more detail in the segment discussions that follow.
Net investment income in 2015 was $2.38 billion, $408 million or 15% lower than in 2014. Investment income from fixed maturity investments in 2015 was $2.09 billion, $153 million lower than in 2014. The decrease 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 $579 million payment in the first quarter of 2015 related to the settlement of the Asbestos Direct Action Litigation. Investment income generated by non-fixed maturity investments in 2015 was $317 million, $256 million lower than in 2014 due to lower private equity and hedge fund returns. Private equity returns in 2015 were impacted by lower valuations for energy-related investments.
Net investment income in 2014 was $2.79 billion, $71 million or 3% higher than in 2013. Investment income from fixed maturity investments in 2014 was $2.24 billion, $66 million lower than in 2013. The decrease primarily resulted from lower long-term reinvestment yields available in the market, partially offset by the impact of the acquisition of Dominion. Investment income generated by non-fixed maturity investments in 2014 was $573 million, $141 million higher than in 2013 due to higher private equity and real estate partnership returns.
Other net realized investment gains in 2015 included $81 million of net realized gains related to fixed maturity investments, $6 million of net realized investment gains related to equity securities, $2 million of net realized investment gains from real estate sales and $34 million of net realized investment losses related to other investments. The net realized investment losses related to other investments included $26 million of realized foreign exchange translation losses incurred in connection with the Company's increased ownership of Travelers Participações em Seguros Brasil S.A.
Other net realized investment gains in 2014 included $35 million of net realized gains resulting from the sale of substantially all of one of the Company's real estate joint venture investments. The remaining $70 million of other net realized gains in 2014 were primarily driven by $32 million of net realized investment gains related to fixed maturity investments, $24 million of net realized investment gains related to equity securities, $8 million of net realized investment gains related to other investments and $6 million of net realized investment gains from real estate sales.
Other net realized gains in 2013 of $181 million included $115 million of net realized gains associated with U.S. Treasury futures contracts, which require daily mark-to-market settlement and are used from time to time to shorten the duration of the Company's fixed maturity investment portfolio. The remaining $66 million of other net realized investment gains in 2013 were primarily driven by $41 million of net realized investment gains related to fixed maturity investments, $15 million of net realized investment gains related to equity securities and $10 million of net realized investment gains related to other investments.
Other revenues in all years presented included installment premium charges. Other revenues in 2014 and 2013 also included revenues associated with the runoff of the Company's National Flood Insurance Program (NFIP) business that was sold on a renewal rights basis in 2013. Other revenues in 2013 also included a $91 million gain from the settlement of a legal proceeding, which is discussed in more detail in note 16 of notes to the consolidated financial statements herein, and a $20 million gain from the sale of the NFIP renewal rights.
Amortization of deferred acquisition costs of $3.89 billion in 2015 was comparable to 2014. Amortization of deferred acquisition costs in 2014 was $3.88 billion, $61 million or 2% higher than in 2013, primarily reflecting the impact of the acquisition of Dominion, partially offset by declines in the Personal Insurance segment. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.
The Company's effective tax rate was 27%, 27% and 26% in 2015, 2014 and 2013, respectively. The effective tax rates in all years were lower than the statutory rate of 35% primarily due to the impact of tax-exempt investment income on the calculation of the Company's income tax provision.
The combined ratio of 88.3% in 2015 was 0.7 points lower than the combined ratio of 89.0% in 2014.
The loss and loss adjustment expense ratio of 56.6% in 2015 was 1.0 points lower than the loss and loss adjustment expense ratio of 57.6% in 2014. Catastrophe losses accounted for 2.1 points and 3.0 points of the 2015 and 2014 loss and loss adjustment expense ratios, respectively. Net favorable prior year reserve development in 2015 and 2014 provided 3.9 points of benefit to the loss and loss adjustment expense ratio in each year. The loss and loss adjustment expense ratio excluding catastrophe losses and prior year reserve development ("underlying loss and loss adjustment expense ratio") in 2015 was 0.1 points lower than the 2014 ratio on the same basis.
The loss and loss adjustment expense ratio of 57.6% in 2014 was 0.3 points lower than the loss and loss adjustment expense ratio of 57.9% in 2013. Catastrophe losses accounted for 3.0 points and 2.6 points of the 2014 and 2013 loss and loss adjustment expense ratios, respectively. Net favorable prior year reserve development in 2014 and 2013 provided 3.9 points and 3.7 points of benefit, respectively,
to the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in 2014 was 0.5 points lower than the 2013 ratio on the same basis, primarily reflecting the impact of earned pricing that exceeded loss cost trends, partially offset by the impact of an increase in non-catastrophe weather-related losses and a higher level of what the Company defines as large losses.
Results of the Company's Business and International Insurance segment were as follows:
Net investment income in 2015 was $1.82 billion, $332 million or 15% lower than in 2014. Net investment income in 2014 was $2.16 billion, $69 million or 3% higher than in 2013, primarily reflecting the impact of the acquisition of Dominion. Included in the Business and International Insurance segment are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. Refer to the "Net Investment Income" section of the "Consolidated Results of Operations" discussion herein for a description of the factors contributing to the changes in the Company's consolidated net investment income in 2015 and 2014 compared with the respective prior years. In addition, refer to note 2 of notes to the consolidated financial statements herein for a discussion of the Company's net investment income allocation methodology.
National Accounts is the primary source of fee income due to its service businesses, which include claim and loss prevention services to large companies that choose to self-insure a portion of their insurance risks, as well as claims and policy management services to workers' compensation residual market pools. Fee income in 2015 was $445 million, $7 million or 2% higher than in 2014. Fee income in 2014 was $438 million, $43 million or 11% higher than in 2013. The increases in both years primarily reflected higher serviced premium volume in workers' compensation residual market pools and higher claim volume in the large deductible business.
Amortization of deferred acquisition costs of $2.33 billion in 2015 was comparable to 2014. Amortization of deferred acquisition costs in 2014 was $2.32 billion, $163 million or 8% higher than in 2013, primarily reflecting the impact of the acquisition of Dominion.
The combined ratio of 92.1% in 2015 was 1.0 point lower than the combined ratio of 93.1% in 2014.
The loss and loss adjustment expense ratio of 59.6% in 2015 was 2.0 points lower than the loss and loss adjustment expense ratio of 61.6% in 2014. Catastrophe losses in 2015 and 2014 accounted for 1.7 points and 2.5 points, respectively, of the loss and loss adjustment expense ratio. Net favorable prior year reserve development in 2015 and 2014 provided 2.8 points and 2.2 points of benefit, respectively, to the loss and loss adjustment expense ratio. The 2015 underlying loss and loss adjustment expense ratio was 0.6 points lower than the 2014 ratio on the same basis, primarily reflecting lower non-catastrophe weather-related losses.
The underwriting expense ratio of 32.5% in 2015 was 1.0 point higher than the underwriting expense ratio of 31.5% in 2014, primarily reflecting the impact of the 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums and the increase in general and administrative expenses discussed above.
The combined ratio of 93.1% in 2014 was 0.3 points higher than the combined ratio of 92.8% in 2013.
The loss and loss adjustment expense ratio of 61.6% in 2014 was 0.8 points higher than the loss and loss adjustment expense ratio of 60.8% in 2013. Catastrophe losses in 2014 and 2013 accounted for 2.5 points of the loss and loss adjustment expense ratio in each year. Net favorable prior year reserve development in 2014 and 2013 provided 2.2 points and 3.0 points of benefit, respectively, to the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in 2014 was comparable to the 2013 ratio on the same basis, as the impact of earned pricing that exceeded loss cost trends was offset by higher non-catastrophe weather-related losses and a higher level of what the Company defines as large losses.
The Business and International Insurance segment's gross and net written premiums by market were as follows:
Gross written premiums in 2015 were 1% lower than in 2014, while net written premiums in 2015 were comparable to 2014. Gross and net written premiums in 2015 were negatively impacted by changes in foreign currency exchange rates. Excluding the International surety line of business, for which the following are not relevant measures, business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 decreased from 2014.
National Accounts. Net written premiums of $1.05 billion in 2015 were comparable to 2014. Business retention rates remained strong in 2015 and were higher than in 2014. Renewal premium changes in 2015 remained positive but were slightly lower than in 2014. New business premiums in 2015 increased over 2014. Net written premiums from the workers' compensation residual market pools in 2015 were lower than in 2014. Net written premiums of $1.05 billion in 2014 increased by 4% over 2013. Business retention rates in 2014 remained strong but were lower than in 2013. Renewal premium changes in 2014 remained positive but were slightly lower than in 2013. New business premiums in 2014 decreased from 2013. Workers' compensation residual market pools also contributed to premium growth in 2014.
Specialized Distribution. Net written premiums of $1.11 billion in 2015 increased by 3% over 2014. Business retention rates remained strong in 2015 and were higher than in 2014. Renewal premium changes remained positive in 2015 but were lower than in 2014. New business premiums in 2015 increased over 2014. Net written premiums of $1.07 billion in 2014 decreased by 1% from 2013, primarily driven by premium decreases in National Programs. Business retention rates in 2014 remained strong and were higher than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 decreased from 2013.
International. Net written premiums of $1.82 billion in 2015 decreased by 14% from 2014, primarily due to changes in foreign currency exchange rates. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in 2015 remained strong but were slightly lower than in 2014. Renewal premium changes in 2015 were slightly negative, compared with positive renewal premium changes in 2014. New business premiums in 2015 decreased from 2014. Net written premiums of $2.12 billion in 2014 increased by 66% over 2013, primarily reflecting the impact of the acquisition of Dominion. Excluding the surety line of business, business retention rates in 2014 remained strong and were higher than in 2013. Renewal premium changes in 2014 remained positive but were slightly lower than in 2013. New business premiums in 2014 increased over 2013, reflecting the impact of the acquisition of Dominion.
Operating income in 2015 was $633 million, $94 million or 13% lower than operating income of $727 million in 2014. The decrease primarily reflected the pretax impacts of (i) lower net favorable prior year reserve development and (ii) lower net investment income, partially offset by (iii) higher underlying underwriting margins. Net favorable prior year reserve development in 2015 and 2014 was $258 million and $450 million, respectively. Catastrophe losses in 2015 and 2014 were $3 million and $6 million, respectively. The higher underlying underwriting margins primarily resulted from lower loss estimates in certain management liability businesses. Partially offsetting this net pretax decrease in operating income was a related decrease in income tax expense. In addition, income tax expense in 2015 was reduced by $16 million as a result of the resolution of prior year tax matters.
Claims and claim adjustment expenses in 2015 were $643 million, $162 million or 34% higher than in 2014, primarily reflecting (i) lower net favorable prior year reserve development, partially offset by (ii) lower loss estimates in certain management liability businesses. Claims and claim adjustment expenses in 2014 were $481 million, $214 million or 31% lower than in 2013, primarily reflecting the impact of higher net favorable prior year reserve development. Factors contributing to net favorable prior year reserve development during the years ended December 31, 2015, 2014 and 2013 are discussed in more detail in note 7 of notes to the consolidated financial statements herein.
General and administrative expenses in 2015 were $389 million, $14 million or 3% lower than in 2014, primarily reflecting the impact of certain customer-related intangible assets becoming fully amortized during the second quarter of 2015. General and administrative expenses in 2014 were $403 million, $15 million or 4% higher than in 2013, primarily reflecting the impact of higher employee and technology related expenses.
The combined ratio of 60.8% in 2014 was 12.6 points lower than the combined ratio of 73.4% in 2013.
Gross written premiums in 2015 decreased by 1% from 2014. Gross written premiums in 2014 increased by 2% over 2013.
Net written premiums in 2015 were $2.08 billion, $22 million or 1% lower than in 2014. Excluding the surety line of business, for which the following are not relevant measures, business retention rates in 2015 remained strong and were higher than in 2014. Renewal premium changes in 2015 remained positive but were lower than in 2014. New business premiums in 2015 increased over 2014.
Operating income in 2015 was $889 million, $65 million or 8% higher than operating income of $824 million in 2014. The increase primarily reflected the pretax impacts of (i) higher net favorable prior year reserve development and (ii) lower catastrophe losses, partially offset by (iii) lower net investment income and (iv) a decline in other revenues. Net favorable prior year reserve development in 2015 was $278 million, compared with $169 million in 2014. Catastrophe losses in 2015 were $264 million, compared with $336 million in 2014. Partially offsetting this net pretax increase in operating income was a related increase in income tax expense. Income tax expense in 2015 was reduced by $4 million as a result of the resolution of prior year tax matters in the second quarter of 2015.
Operating income in 2014 was $824 million, $14 million or 2% lower than operating income of $838 million in 2013. The decrease primarily reflected the pretax impacts of (i) an increase in catastrophe losses, (ii) lower net favorable prior year reserve development and (iii) a decline in other revenues, partially offset by (iv) higher underlying underwriting margins and (v) higher net investment income. Catastrophe losses in 2014 and 2013 were $336 million and $250 million, respectively. Net favorable prior year reserve development in 2014 and 2013 was $169 million and $209 million, respectively. The higher underlying underwriting margins primarily reflected (i) earned pricing that exceeded loss cost trends and (ii) the benefit of the Company's previously announced expense reduction initiatives, partially offset by (iii) the impact of a higher mix of new business versus renewal business. Income tax expense in 2014 was comparable to 2013.
Other revenues in all years presented included installment premium charges. Other revenues in 2014 and 2013 also included revenues associated with the runoff of the Company's National Flood Insurance Program (NFIP) business that was sold on a renewal rights basis in 2013. Other revenues in 2013 also included a $20 million gain from the sale of those NFIP renewal rights. The Company was a participant in the NFIP Write Your Own Program administered by the Federal Emergency Management Agency (FEMA) and the Federal Insurance & Mitigation Administration.
General and administrative expenses of $973 million in 2015 and $977 million in 2014 were comparable to the respective prior year amounts.
Income tax expense in 2015 was $402 million, $36 million or 10% higher than in 2014, primarily reflecting the $101 million increase in income before income taxes, partially offset by the $4 million reduction in income tax expense resulting from the resolution of prior year tax matters in 2015. Income tax expense of $366 million in 2014 was comparable to 2013, as the tax effect of the $14 million decrease in income before income taxes was offset by the impact of a $5 million reduction in income tax expense in 2013 resulting from the resolution of prior year tax matters.
In 2015, gross and net Agency written premiums were both 3% higher than in 2014. In 2014, gross and net Agency written premiums were 4% and 1% lower, respectively, than in 2013. The higher rate of decrease in gross written premiums in 2014 was primarily driven by the impact of the sale of the Company's NFIP business in 2013 described above.
The operating loss in 2015 was $2 million lower than in 2014. The operating loss in 2014 was $9 million higher than in 2013. After-tax interest expense in 2015, 2014 and 2013 was $242 million, $240 million and $235 million, respectively. The increase in interest expense in both 2015 and 2014 compared with the respective prior years primarily reflected slightly higher average levels of debt outstanding.
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, and the Company made that payment in 2015. For a full discussion of these settlement agreements and related litigation, see the "Settlement of Asbestos Direct Action Litigation" section of note 16 of notes to the consolidated financial statements herein. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future. It is difficult to
In the Home Office and Field Office category, which accounts for the vast majority of policyholders with active asbestos-related claims, both the number of policyholders tendering asbestos claims for the first time and the number of policyholders with open asbestos claims declined when compared with 2014. Gross asbestos payments in this category were essentially unchanged when compared with 2014, while net asbestos-related payments increased in 2015 due to significant reinsurance billings relating to one policyholder in 2014. Payments on behalf of policyholders in this category continue to be influenced by the 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 completion of these reviews and analyses in 2015, 2014 and 2013 resulted in $224 million, $250 million and $190 million increases, respectively, in the Company's net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company's estimate of projected
settlement and defense costs related to a broad number of policyholders in the Home Office category due to a higher level of litigation activity surrounding mesothelioma claims than previously anticipated. In addition, the reserve increase in 2013 also reflected higher projected payments on assumed reinsurance accounts. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be higher than previously anticipated due to the impact of the current litigation environment discussed above. Notwithstanding these trends, the Company's overall view of the underlying asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.
Net asbestos paid loss and loss expenses in 2015, 2014 and 2013 were $770 million, $242 million and $218 million, respectively. Net payments in 2015 included the payment of the $502 million settlement amounts related to the Settlement of Asbestos Direct Action Litigation as described in more detail in note 16 of notes to the consolidated financial statements herein. Approximately 69%, 8% and 1% of total net paid losses in 2015, 2014 and 2013, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company's liability.
The Home Office and Field Office category relates to all other policyholders and also includes IBNR reserves and reserves for the costs of defending asbestos-related coverage litigation. IBNR reserves in the Home Office and Field Office category include amounts for new claims from and adverse development on existing Home Office and Field Office policyholders, as well as reserves for claims from policyholders reporting asbestos claims for the first time and for policyholders for which there is, or may be, litigation. Policyholders are identified for the annual home office review based upon, among other factors: a combination of past payments and current case reserves in excess of a specified threshold (currently $100,000), perceived level of exposure, number of reported claims, products/completed operations and potential "non-product" exposures, size of policyholder and geographic distribution of products or services sold by the policyholder. The Assumed Reinsurance and Other category primarily consists of reinsurance of excess coverage, including various pool participations.
The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1980s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims, when submitted, rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.
In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. The evaluation of the exposure presented by a policyholder can change as information concerning that policyholder and the many variables presented is developed. Conventional actuarial methods are not used to estimate these reserves.
In its review of environmental reserves, the Company considers: past settlement payments; changing judicial and legislative trends; its reserves for the costs of litigating environmental coverage matters; the potential for policyholders with smaller exposures to be named in new clean-up actions for both on-and off-site waste disposal activities; the potential for adverse development; the potential for additional new claims beyond previous expectations; and the potential higher costs for new settlements.
Net environmental paid loss and loss expenses were $55 million, $84 million and $84 million in 2015, 2014 and 2013, respectively. At December 31, 2015, approximately 93% of the net environmental reserve (approximately $335 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 7% of the net environmental reserve (approximately $26 million), consists of case reserves.
As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management's judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. The continuing uncertainties include, without limitation, the risks and lack of predictability inherent in complex litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in the cost to resolve, and/or the number of, asbestos and environmental claims beyond that which is anticipated, the emergence of a greater number of asbestos claims than anticipated as a result of extended life expectancies resulting from medical advances and lifestyle improvements, the role of any umbrella or excess policies the Company has issued, the resolution or adjudication of disputes pertaining to the amount of available coverage for asbestos and environmental claims in a manner inconsistent with the Company's previous assessment of these claims, the number and outcome of direct actions against the Company, future developments pertaining to the Company's ability to recover reinsurance for asbestos and environmental claims and the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers. In addition, uncertainties arise from the insolvency or bankruptcy of policyholders and other defendants. It is also not possible to predict changes in the legal, regulatory and legislative environment and their impact on the future development
of asbestos and environmental claims. This environment could be affected by changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.
The Company's invested assets at December 31, 2015 were $70.47 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.
The carrying value of the Company's fixed maturity portfolio at December 31, 2015 was $60.66 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company's insurance and debt obligations. The weighted average credit quality of the Company's fixed maturity portfolio, both including and excluding U.S. Treasury securities, was "Aa2" at both December 31, 2015 and 2014. Below investment grade securities represented 2.8% and 3.0% of the total fixed maturity investment portfolio at December 31, 2015 and 2014, respectively. The average effective duration of fixed maturities and short-term securities was 3.9 (4.2 excluding short-term securities) at December 31, 2015 and 3.5 (3.7 excluding short-term securities) at December 31, 2014.
The carrying values of investments in fixed maturities classified as available for sale at December 31, 2015 and 2014 were as follows:
(3)Included in commercial mortgage-backed securities and project loans at December 31, 2015 and 2014 were $295 million and $189 million of securities guaranteed by the U.S. government, respectively, and $8 million and $13 million of securities guaranteed by government sponsored enterprises, respectively.
The Company's fixed maturity investment portfolio at December 31, 2015 and 2014 included $31.41 billion and $33.57 billion, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at December 31, 2015 and 2014 were $6.06 billion and $7.56 billion, respectively, of pre-refunded bonds, which are bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities, which were created to satisfy their responsibility for payments of principal and interest. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee. All of the Company's holdings of securities issued by Puerto Rico and related entities have been pre-refunded and therefore are defeased by U.S. Treasury securities.
The following table shows the geographic distribution of the $25.35 billion of municipal bonds at December 31, 2015 that were not pre-refunded.
The following table shows the Company's Eurozone exposure at December 31, 2015 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.
In addition to fixed maturities noted in the foregoing table, the Company has exposure totaling $187 million to private equity limited partnerships and real estate partnerships (both of which are included in other investments in the Company's consolidated balance sheet) whose primary investing focus is across Europe. The Company has unfunded commitments totaling $129 million to these partnerships. The Company also has $5 million of non-redeemable preferred stock (included in equity securities on the Company's consolidated balance sheet) issued by companies in the Eurozone.
The Company's fixed maturity investment portfolio at December 31, 2015 and 2014 included $1.98 billion and $2.21 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, 2015 and 2014, the Company held commercial mortgage-backed securities (including FHA project loans) of $865 million and $715 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 herein.
See note 1 of notes to the consolidated financial statements herein for further information about these invested asset classes.
The Company also invests in private equity limited partnerships, hedge funds, and real estate partnerships. Also included in other investments are non-public common and preferred equities and derivatives. These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility. At December 31, 2015 and 2014, the carrying value of the Company's other investments was $3.45 billion and $3.59 billion, respectively.
The Company has 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, 2015 and 2014, the Company had $269 million and $296 million of securities on loan, respectively, as part of a tri-party lending agreement. The average monthly balance of securities on loan during 2015 and 2014 was $268 million and $228 million, respectively. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued
The net unrealized investment gains that were included as a separate component of accumulated other comprehensive income were as follows:
These unrealized investment losses at December 31, 2015 represent less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders' equity on an after-tax basis.
Following are the pretax realized losses on investments sold during the year ended December 31, 2015:
The tables below set forth the probabilities that estimated losses, comprising claims and allocated claim adjustment expenses (but excluding unallocated claim adjustment expenses), from a single event occurring in a one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars and as a percentage of the Company's common equity), based on the current version of the proprietary and third-party computer models utilized by the Company at December 31, 2015. For example, on the basis described below the tables, the Company estimates that there is a one percent chance that the Company's loss from a single U.S. hurricane in a one-year timeframe would equal or exceed $1.2 billion, or 5% of the Company's common equity at December 31, 2015.
The threshold loss amounts in the tables above, which are based on the Company's in-force portfolio at December 31, 2015 and catastrophe reinsurance program at January 1, 2016, are net of reinsurance, after-tax and exclude unallocated claim adjustment expenses, which historically have been
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-risk.
liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance" and "-Outlook-Underwriting Gain/Loss."
• The full range of potential liability exposures related to climate change continues to evolve. Through the Company's Emerging Issues Committee and its Committee on Climate, Energy and the Environment, the Company works with its business units and corporate groups, as appropriate, to identify and try to assess climate change-related liability issues, which are continually evolving and often hard to fully evaluate. See "Risk Factors-The effects of emerging claim and coverage issues on our business are uncertain."
sale. A.M. Best's ratings of MetLife Inc. and its subsidiaries were placed under review with developing implications following the announcement of this plan.
(3)Symetra Financial Corporation became a wholly-owned subsidiary of Sumitomo Life Insurance Company on February 1, 2016 upon the closing of a previously announced merger agreement. A.M. Best's ratings of Symetra were unchanged following the completion of the merger. The Company does not have any structured settlements with Sumitomo Life.
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 the Business and International Insurance segment, 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.
Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards. In the Business and International Insurance segment, the Company expects that domestic renewal premium changes during 2016 will remain positive but will be slightly lower than the levels attained in 2015. Given the relatively smaller amount of premium that the Company generates from outside the United States and the transactional nature of some of those markets, particularly Lloyd's, international renewal premium changes during 2016 could be somewhat higher, broadly consistent with or somewhat lower than the levels attained in 2015. In the Bond & Specialty Insurance segment, the Company expects that renewal premium changes with respect to management liability business during 2016 will remain positive, but will be slightly lower than the levels attained in 2015. With respect to surety business, within the Bond & Specialty Insurance segment, the Company expects that net written premium volume during 2016 will be slightly higher than the levels attained in 2015. In the Personal Insurance segment, the Company expects that Agency Auto renewal premium changes during 2016 will remain positive and will be slightly higher than the levels attained in 2015, and Agency Homeowners and Other renewal premium changes during 2016 will remain positive, but will be lower than the levels attained in 2015. The need for state regulatory approval for changes to personal property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes.
Property and casualty insurance market conditions are expected to remain competitive in 2016 for new business, not only in Business and International Insurance and Bond & Specialty Insurance, but especially in Personal Insurance, where price comparison technology used by agents and brokers, sometimes referred to as "comparative raters," has facilitated the process of generating multiple quotes, thereby increasing price comparison on new business and, increasingly, on renewal business. The Company expects that its Quantum Auto 2.0 product in the Personal Insurance segment's Agency
General uncertainty regarding a variety of domestic and international matters, such as the U.S. Federal budget and taxes, implementation of the Affordable Care Act, the regulatory environment, geopolitical instability, slow growth and economic uncertainty in the United States and in various parts of the world, rapid changes in commodity prices, such as in oil, and fluctuations in interest rates and foreign currency exchange rates has added to the uncertainty regarding economic conditions generally. If economic conditions deteriorate, the resulting low levels of economic activity could impact exposure changes at renewal and the Company's ability to write business at acceptable rates. Additionally, low levels of economic activity could adversely impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could adversely impact net written premiums in 2016, and because earned premiums are a function of net written premiums, earned premiums could be adversely impacted on a lagging basis.
Consolidation within the insurance industry, including among insurance companies, reinsurance companies and brokers and independent insurance agencies, could alter the competitive environment in which the Company operates, positively or negatively, which may impact the Company's premium volume, the rate it can charge for its products, and the terms on which its products are offered.
Net investment income is a material contributor to the Company's results of operations. Interest rates remain at very low levels by historical standards. Based on the current interest rate environment, the Company estimates that the impacts of lower reinvestment yields and a lower level of fixed maturity investments could, in 2016, result in approximately $25 million to $30 million of lower after-tax net investment income from that portfolio on a quarterly basis as compared to the corresponding periods of 2015. Net investment income from the non-fixed maturity investment portfolio in 2015 was lower than in 2014. Particularly given the recent levels of market volatility, there is more than the usual uncertainty as to the impact of future market conditions on net investment income from the non-fixed maturity investment portfolio in 2016. If general economic conditions and/or investment market conditions deteriorate during 2016, the Company could experience a further reduction in net investment income and/or significant realized investment losses, including impairments.
Consolidated Statement of Cash Flows for the years ended December 31, 2015, 2014 and 2013
The consolidated financial statements include the accounts of The Travelers Companies, Inc. (together with its subsidiaries, the Company). The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to the 2014 and 2013 financial statements to conform to the 2015 presentation. All material intercompany transactions and balances have been eliminated.
In May 2014, the FASB issued updated guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's fee income related to providing claims and policy management services as well as claim and loss prevention services will be subject to this updated guidance.
In February 2015, the FASB issued updated guidance that makes targeted amendments to the current consolidation accounting guidance. The update is in response to accounting complexity concerns, particularly from the asset management industry. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation, provides a scope exception to registered money market funds and similar unregistered money market funds and ends the indefinite deferral granted to investment companies from applying the variable interest entity guidance. The updated guidance is effective for annual and interim periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.
In April 2015, the FASB issued updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The updated guidance is effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The updated guidance is consistent with the Company's accounting policy and its adoption will not have any effect on the Company's results of operations, financial position or liquidity.
In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively. The acquirer is also required to recognize, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date. The updated guidance is to be applied prospectively effective for annual and interim periods beginning after December 15, 2015. In connection with business combinations which have already been completed, the adoption of this guidance is not expected to have a material 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. 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 require recognition of a cumulative effect adjustment at adoption. The Company will not be able to determine the impact that the updated guidance will have on its results of operations until the updated guidance is adopted, but does not currently expect the adoption of this guidance to impact its financial position or liquidity.
The Company's real estate investments include warehouses, office buildings and other commercial land and properties that are directly owned. Real estate is recorded on the purchase date at the purchase price, which generally represents fair value, and is supported by internal analysis or external appraisals that use discounted cash flow analyses and other acceptable valuation techniques. Real estate held for investment purposes is subsequently carried at cost less accumulated depreciation.
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 statement of income in net realized investment gains (losses). For a further discussion of the derivatives used by the Company, see note 3.
Investment income from fixed maturities is recognized based on the constant effective yield method which includes an adjustment for estimated principal pre-payments, if any. The effective yield used to determine amortization for fixed maturities subject to prepayment risk (e.g., asset-backed, loan-backed and structured securities) is recalculated and adjusted periodically based upon actual historical and/or projected future cash flows, which are obtained from a widely-accepted securities data provider. The adjustments to the yield for highly rated prepayable fixed maturities are accounted for using the retrospective method. The adjustments to the yield for non-highly rated prepayable fixed maturities are accounted for using the prospective method. Dividends on equity securities (including those with transfer restrictions) are recognized in income when declared. Rental income on real estate is recognized on a straight-line basis over the lease term. See note 3 for further discussion. Investments in private equity limited partnerships, hedge funds, real estate partnerships and joint ventures are accounted for using the equity method of accounting, whereby the Company's share of the investee's earnings or losses in the fund is reported in net investment income.
Accrual of income is suspended on non-securitized fixed maturities that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in 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.
For non-structured fixed maturities (U.S. Treasury securities, obligations of U.S. government and government agencies and authorities, obligations of states, municipalities and political subdivisions, debt securities issued by foreign governments and certain corporate debt), the estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. The determination of recovery value incorporates an issuer valuation assumption utilizing one or a combination of valuation methods as deemed appropriate by the Company. The Company determines the undiscounted recovery value by allocating the estimated value of the issuer to the Company's assessment of the priority of claims. The present value of the cash flows is determined by applying the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment) and an estimated recovery time frame. Generally, that time frame for securities for which the issuer is in bankruptcy is 12 months. For securities for which the issuer is financially troubled but not in bankruptcy, that time frame is generally 24 months. Included in the present value calculation are
The Company may, from time to time, sell invested assets subsequent to the balance sheet date that it did not intend to sell at the balance sheet date. Conversely, the Company may not sell invested assets that it asserted that it intended to sell at the balance sheet date. Such changes in intent are due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the invested asset (e.g., a downgrade or upgrade from a rating agency), significant unforeseen changes in liquidity needs, or changes in tax laws or the regulatory environment.
Incremental direct costs of acquired, new and renewal insurance contracts, consisting of commissions (other than contingent commissions) and premium-related taxes, are capitalized and charged to expense pro rata over the contract periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. Future investment income attributable to related premiums is taken into account in measuring the recoverability of the carrying value of this asset. All other acquisition expenses are charged to operations as incurred.
determined during its reviews for each year that its other indefinite-lived intangible assets and finite-lived intangible assets were not impaired.
well as in the United Kingdom, the Republic of Ireland, Brazil and throughout other parts of the world as a corporate member of Lloyd's. Business and International Insurance is organized as follows:
•Middle Market provides mid-sized businesses with property and casualty products, including commercial multi-peril, commercial property, general liability, commercial auto and workers' compensation insurance, as well as risk management, claims handling and other services. Middle Market generally provides these products to mid-sized businesses through Commercial Accounts, as well as to targeted industries through Construction, Technology, Public Sector Services and Oil & Gas. Middle Market also provides mono-line umbrella and excess coverage insurance through Excess Casualty and insurance coverages for foreign organizations with United States exposures through Global Partner Services.
•National Accounts provides large companies with casualty products and services, including workers' compensation, general liability and automobile liability, generally utilizing loss-sensitive products, on both a bundled and unbundled basis. National Accounts also includes the Company's commercial residual market business, which primarily offers workers' compensation products and services to the involuntary market.
•International, through its operations in Canada, the United Kingdom and the Republic of Ireland, offers property and casualty insurance and risk management services to several customer groups, including, among others, those in the technology, public services, and financial and professional services industry sectors. In addition, International markets personal lines and small
commercial insurance business in Canada through Dominion, which the Company acquired on November 1, 2013. International, through its Lloyd's syndicate (Syndicate 5000), for which the Company provides 100% of the capital, underwrites five principal businesses-marine, global property, accident & special risks, power & utilities and aviation.
The Bond & Specialty Insurance segment provides surety, fidelity, management liability, professional liability, and other property and casualty coverages and related risk management services to a wide range of primarily domestic customers, 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 and not-for-profit organizations; professional liability coverage for a variety of professionals including, among others, lawyers and design professionals; and management liability, professional liability, property, workers' compensation, auto and general liability for financial institutions.
(1)The primary component of Interest Expense and Other was after-tax interest expense of $242 million, $240 million and $235 million in 2015, 2014 and 2013, respectively.
(1)The primary components of other assets at December 31, 2015 and 2014 were other intangible assets and deferred taxes.
The Company's fixed maturity investment portfolio at December 31, 2015 and 2014 included $1.98 billion and $2.21 billion, respectively, of residential mortgage-backed securities, which include pass-through securities and collateralized mortgage obligations (CMOs). Included in the totals at December 31, 2015 and 2014 were $676 million and $872 million, respectively, of GNMA, FNMA, FHLMC (excluding FHA project loans) and Canadian government guaranteed residential mortgage-backed pass-through securities classified as available for sale. Also included in those totals were residential CMOs classified as available for sale with a fair value of $1.30 billion and $1.34 billion at December 31, 2015 and 2014, respectively. Approximately 48% and 46% of the Company's CMO holdings at December 31, 2015 and 2014, respectively, were guaranteed by or fully collateralized by securities issued by GNMA, FNMA or FHLMC. The average credit rating of the $683 million and $725 million of non-guaranteed CMO holdings at December 31, 2015 and 2014, respectively, was "Baa2" and "Ba1," respectively. The average credit rating of all of the above securities was "Aa3" at both December 31, 2015 and 2014.
At December 31, 2015 and 2014, the Company had $269 million and $296 million, respectively, of securities on loan as part of a tri-party lending agreement.
At December 31, 2015 and 2014, the Company's insurance subsidiaries had $4.66 billion and $4.78 billion, respectively, of securities on deposit at financial institutions in certain states pursuant to the respective states' insurance regulatory requirements. Funds deposited with third parties to be used as collateral to secure various liabilities on behalf of insureds, cedants and other creditors had a fair value of $28 million and $39 million at December 31, 2015 and 2014, respectively. Other investments pledged as collateral securing outstanding letters of credit had a fair value of $21 million and $22 million at December 31, 2015 and 2014, respectively. In addition, the Company utilized a Lloyd's trust deposit at December 31, 2015 and 2014, whereby owned securities with a fair value of approximately $140 million and $151 million, respectively, held by an insurance subsidiary were pledged into a Lloyd's trust account to support capital requirements for the Company's operations at Lloyd's.
Future minimum rental income on operating leases relating to the Company's real estate properties is expected to be $92 million, $74 million, $61 million, $49 million and $36 million for 2016, 2017, 2018, 2019 and 2020, respectively, and $59 million for 2021 and thereafter.
The Company's short-term securities consist of Aaa-rated registered money market funds, U.S. Treasury securities, high-quality commercial paper (primarily A1/P1) and high-quality corporate securities purchased within a year to their maturity with a combined average of 67 days to maturity at December 31, 2015. The amortized cost of these securities, which totaled $4.67 billion and $4.36 billion at December 31, 2015 and 2014, respectively, approximated their fair value.
The following tables present the cumulative amount of and the changes during the reporting period in the credit losses of other-than-temporary impairments (OTTI) on fixed maturities recognized in the consolidated statement of income for which a portion of the OTTI was recognized in other comprehensive income:
Included in fixed maturities are below investment grade securities totaling $1.71 billion and $1.91 billion at December 31, 2015 and 2014, 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.
From time to time, the Company enters into U.S. Treasury note futures contracts to modify the effective duration of specific assets within the investment portfolio. U.S. Treasury futures contracts require a daily mark-to-market and settlement with the broker. At December 31, 2015 and 2014, the Company had $400 million and $350 million notional value of open U.S. Treasury futures contracts, respectively. Net realized investment gains in 2015, 2014 and 2013 included net losses of $5 million, net losses of $1 million and net gains of $115 million, respectively, related to U.S. Treasury futures contracts.
The pricing service utilized by the Company has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for any market-based inputs that were unavailable due to market conditions. The Company reviews the estimates of fair value provided by the pricing service and compares the estimates to the Company's knowledge of the market to determine if the estimates obtained are representative of the prices in the market. In addition, the Company has periodic discussions with the pricing service to discuss and understand any changes in process and their responsiveness to changes occurring in the markets. In addition, the Company has implemented various other processes including randomly selecting purchased or sold securities and comparing execution prices to the estimates from the pricing service as well as reviewing reports that contain securities whose valuation did not change from their previous valuation (stale price review). The Company also uses an additional independent pricing service to further test the primary pricing service's valuation of the Company's fixed maturity portfolio.
While the vast majority of the Company's fixed maturities are included in Level 2, the Company holds a number of municipal bonds and corporate bonds which are not valued by the pricing service and estimates the fair value of these bonds using an internal pricing matrix with some unobservable inputs that are significant to the valuation. Due to the limited amount of observable market information, the Company includes the fair value estimates for these particular bonds in Level 3. The fair value of the fixed maturities for which the Company used an internal pricing matrix was $101 million and $92 million at December 31, 2015 and 2014, 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 $117 million and $140 million at December 31, 2015 and 2014, 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.
The Company holds investments in various publicly-traded securities which are reported in other investments. These investments include mutual funds and other small holdings. The $18 million and $19 million fair value of these investments at December 31, 2015 and 2014, respectively, was disclosed in Level 1. At December 31, 2015 and 2014, the Company held investments in non-public common and preferred equity securities, with fair value estimates of $38 million and $36 million, respectively, reported in other investments, where the fair value estimate is determined either internally or by an external fund manager based on recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments at December 31, 2015 and 2014 in the amount disclosed in Level 3.
At December 31, 2015 and 2014, the Company held $2 million and $4 million, respectively, of convertible bonds containing embedded conversion options that are valued separately from the host bond contract in the amount disclosed in Level 2-fixed maturities.
During the year ended December 31, 2015, the Company's transfers between Level 1 and Level 2 were not significant.
During the year ended December 31, 2014, the Company's transfers between Level 1 and Level 2 were not significant.
The Company uses various financial instruments in the normal course of its business. The Company's insurance contracts are excluded from fair value of financial instruments accounting guidance and, therefore, are not included in the amounts discussed below. The following tables present the carrying value and fair value of the Company's financial assets and financial liabilities disclosed, but not carried, at fair value, and the level within the fair value hierarchy at which such assets and liabilities are categorized.
The Company utilized a pricing service to estimate fair value for 100% of its debt, including commercial paper, at December 31, 2015 and 2014. The pricing service utilizes market quotations for debt 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 fair value estimates are based on market observable inputs and disclosed in Level 2 of the hierarchy.
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 insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect the Company, at a cost, from losses in excess of the amount it is prepared to accept and to protect the Company's capital. Reinsurance is placed on both a quota-share and excess-of-loss basis. Ceded reinsurance arrangements do not discharge the Company as the primary insurer, except for instances where the primary policy or policies have been novated, such as in certain structured settlement agreements.
In order for a loss to be covered under the program (subject losses), the loss must meet certain aggregate industry loss minimums and must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of the Treasury, in consultation with the Secretary of Homeland
Security and the Attorney General of the United States. The annual aggregate industry loss minimum under the program is $120 million for 2016, but will increase over the life of the program to $200 million by December 31, 2020. The program excludes from participation the following types of insurance: Federal crop insurance, private mortgage insurance, financial guaranty insurance, medical malpractice insurance, health or life insurance, flood insurance, reinsurance, commercial automobile, professional liability (other than directors and officers'), surety, burglary and theft, and farm-owners multi-peril. In the case of a war declared by Congress, only workers' compensation losses are covered by the program. All commercial property and casualty insurers licensed in the United States are generally required to participate in the program. Under the program, a participating insurer, in exchange for making terrorism insurance available, is entitled to be reimbursed by the Federal Government for 84% of subject losses in 2016, after an insurer deductible, subject to an annual cap. This reimbursement percentage will decrease over the remaining five-year life of the program to 80% of subject losses by December 31, 2020.
(1)Intangible assets subject to amortization are comprised of fair value adjustments on claims and claim adjustment expense reserves, reinsurance recoverables and other contract and customer-related intangibles. At December 31, 2014, the Company had certain customer-related intangibles with a gross carrying amount of $460 million and accumulated amortization of $446 million which became fully amortized during the second quarter of 2015. Fair value adjustments of $5 million and $191 million were recorded in connection with the acquisition of Dominion in 2013 and in connection with the merger of The St. Paul Companies, Inc. and Travelers Property Casualty Corp. in 2004, respectively, and were based on management's estimate of nominal claims and claim adjustment expense reserves and reinsurance recoverables. The method used calculated a risk adjustment to a risk-free discounted reserve that would, if reserves ran off as expected, produce results that yielded the assumed cost-of-capital on the capital supporting the loss reserves. The fair value adjustments are reported as other intangible assets on the consolidated balance sheet, and the amounts measured in accordance with the acquirer's accounting policies for insurance contracts have been reported as part of the claims and claim adjustment expense reserves and reinsurance recoverables. The intangible assets are being recognized into income over the expected payment pattern. Because the time value of money and the risk adjustment (cost of capital) components of the intangible assets run off at different rates, the amount recognized in income may be a net benefit in some periods and a net expense in other periods. Additionally, $5 million of contract-related intangibles were recorded related to operating leases in connection with the acquisition of Dominion in 2013.
Amortization expense of intangible assets was $26 million, $46 million and $46 million for the years ended December 31, 2015, 2014 and 2013, respectively. Intangible asset amortization expense is estimated to be $11 million in 2016, $9 million in 2017, $8 million in 2018, $6 million in 2019 and $5 million in 2020.
Gross claims and claim adjustment expense reserves at December 31, 2015 decreased by $1.55 billion from December 31, 2014, primarily reflecting the impact of (i) payments related to operations in runoff, including a $579 million payment related to the settlement of the Asbestos Direct Action Litigation as described in more detail in note 16, (ii) net favorable prior year reserve development and (iii) changes in foreign currency exchange rates. Gross claims and claim adjustment expense reserves at December 31, 2014 decreased by $1.04 billion from December 31, 2013, primarily
Reinsurance recoverables on unpaid losses at December 31, 2015 decreased by $339 million from December 31, 2014, primarily reflecting the impact of cash collections in 2015. Reinsurance recoverables on unpaid losses at December 31, 2014 declined by $492 million from December 31, 2013, reflecting the impacts of (i) net favorable prior year reserve development, (ii) cash collections, (iii) commutation agreements, as well as (iv) a slightly lower level of reinsurance purchased in 2014.
Business and International Insurance. Net favorable prior year reserve development in 2015 totaled $405 million, primarily driven by better than expected loss experience in (i) the general liability product line (excluding increases to asbestos and environmental reserves discussed below), for both primary and excess coverages for accident years 2005 through 2013, reflecting a more favorable legal environment than the Company previously expected, (ii) the workers' compensation line of business for accident years 2006 and prior, (iii) the property product line related to catastrophe losses for accident years 2011, 2012 and 2014 and non-catastrophe losses for accident years 2013 and 2014 and (iv) the Company's operations in Canada and at Lloyd's. These factors contributing to net favorable prior year reserve development in 2015 were partially offset by $224 million and $72 million increases to asbestos and environmental reserves, respectively, which are discussed in further detail in the "Asbestos and Environmental Reserves" section below.
Bond & Specialty Insurance. Net favorable prior year reserve development in 2015 totaled $258 million, primarily driven by better than expected loss experience in the fidelity and surety product line for accident years 2008 through 2014, which was partially driven by a reduction in outstanding exposures related to the financial crisis that commenced in 2007.
In 2014, estimated claims and claim adjustment expenses incurred included $957 million of net favorable development for claims arising in prior years, including $941 million of net favorable prior
Business and International Insurance. Net favorable prior year reserve development in 2014 totaled $322 million, primarily driven by (i) better than expected loss experience in the general liability product line (excluding increases to asbestos and environmental reserves discussed below), primarily related to excess coverages for accident years 2008 through 2012, reflecting a more favorable legal environment than the Company previously expected, (ii) a $162 million benefit resulting from better than expected loss experience related to, and the commutation of reinsurance treaties associated with, a workers' compensation reinsurance pool for accident years 1996 and prior, (iii) better than expected loss experience in the property product line for accident years 2010 through 2013, including catastrophe losses from Storm Sandy for accident year 2012 and (iv) better than expected loss experience in the commercial auto product line for accident years 2011 and 2012. These factors contributing to net favorable prior year reserve development in 2014 were partially offset by (i) $250 million and $87 million increases to asbestos and environmental reserves, respectively, which are discussed in further detail in the "Asbestos and Environmental Reserves" section below, (ii) an increase in unallocated loss adjustment expense reserves of $77 million for interest awarded as part of damages pursuant to a court decision in the third quarter of 2014 related to a legal matter, which is discussed in more detail in the "Settlement of Asbestos Direct Action Litigation" section of note 16 and (iii) higher than expected loss experience for liability coverages in the commercial multi-peril product line for accident years 2010 through 2013.
Personal Insurance. Net favorable prior year reserve development in 2013 totaled $209 million, primarily driven by better than expected loss experience in the Homeowners and Other product line for catastrophe losses incurred in 2012, and non-catastrophe weather-related losses and non-weather-related losses for accident years 2012 and 2011.
The completion of these reviews and analyses in 2015, 2014 and 2013 resulted in $224 million, $250 million and $190 million increases, respectively, in the Company's net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company's estimate of projected settlement and defense costs related to a broad number of policyholders in the Home Office category due to a higher level of litigation activity surrounding mesothelioma claims than previously anticipated. In addition, the reserve increase in 2013 also reflected higher projected payments on assumed reinsurance accounts. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be higher than previously anticipated due to the impact of the current litigation environment discussed above. Notwithstanding these trends, the Company's overall view of the underlying asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.
Environmental Reserves. In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the
The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated. As a result of these factors, in 2015, 2014 and 2013, the Company increased its net environmental reserves by $72 million, $87 million and $65 million, respectively.
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.
2015 Debt Repayment. On December 1, 2015, the Company's $400 million, 5.50% senior notes matured and were fully paid.
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 2015 ranged from 0.09% to 0.30%, and in 2014 ranged from 0.08% to 0.15%.
The Company's consolidated balance sheet includes the debt instruments acquired in the merger, which were recorded at fair value as of the acquisition date. The resulting fair value adjustment is being amortized over the remaining life of the respective debt instruments using the effective-interest method. The amortization of the fair value adjustment reduced interest expense by $1 million for each of the years ended December 31, 2015 and 2014.
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: 2016, $400 million; 2017, $450 million; 2018, $500 million; 2019, $500 million; and 2020, $500 million.
The Company's board of directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company's financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company's desired ratings from independent rating agencies, funding of the Company's qualified pension plan, capital requirements of the Company's operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. In April 2015, the board of directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity. The following table summarizes repurchase activity in 2015 and remaining repurchase capacity at December 31, 2015.
The Company's Amended and Restated 2004 Stock Incentive Plan and the 2014 Stock Incentive Plan provide settlement alternatives to employees in which the Company retains shares to cover tax withholding costs and exercise costs. During the years ended December 31, 2015 and 2014, the Company acquired $74 million and $58 million, respectively, of its common stock under this plan.
The Company's U.S. insurance subsidiaries, domiciled principally in the State of Connecticut, are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid by each insurance subsidiary to its respective parent company without prior approval of insurance regulatory authorities. A maximum of $3.81 billion is available by the end of 2016 for such dividends to the holding company, TRV, without prior approval of the Connecticut Insurance Department. The Company may choose to accelerate the timing within 2016 and/or increase the amount of dividends
from its insurance subsidiaries in 2016, which could result in certain dividends being subject to approval by the Connecticut Insurance Department.
TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company's foreign operations are not material and are intended to be permanently reinvested in those operations.
TRV and its two non-insurance holding company subsidiaries received dividends of $3.75 billion, $4.10 billion and $2.90 billion from their U.S. insurance subsidiaries in 2015, 2014 and 2013, respectively.
The following table presents the pretax components of the Company's other comprehensive income (loss) and the related income tax expense (benefit).
The following table presents the pretax and related income tax (expense) benefit components of the amounts reclassified from the Company's AOCI to the Company's consolidated statement of income.
(1)(Increases) decreases net realized investment gains on the consolidated statement of income.
The Company paid income taxes of $1.21 billion, $1.15 billion and $1.06 billion during the years ended December 31, 2015, 2014 and 2013, respectively. The current income tax payable was $50 million and $139 million at December 31, 2015 and 2014, respectively, and was included in other liabilities in the consolidated balance sheet.
For tax return purposes, as of December 31, 2015, the Company had net operating loss (NOL) carryforwards in the United States, Brazil and the United Kingdom. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. The benefits of the NOL carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets. The NOL amounts by jurisdiction and year of expiration are as follows:
U.S. income taxes have not been recognized on $383 million of the Company's foreign operations' undistributed earnings as of December 31, 2015, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on any dividend distributions from such earnings.
The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2015 and 2014:
Included in the balances at December 31, 2015 and 2014 were $4 million and $2 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $12 million and $21 million, respectively, of tax positions for which the ultimate deductibility is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility would not affect the annual effective tax rate.
The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2015, 2014 and 2013, the Company recognized approximately $(32) million, $31 million and $(67) million in interest, respectively. The Company had approximately $26 million and $58 million accrued for the payment of interest at December 31, 2015 and 2014, respectively.
The IRS is conducting an examination of the Company's U.S. income tax returns for 2013 and 2014. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.
The Company has a share-based incentive compensation plan, The Travelers Companies, Inc. 2014 Stock Incentive Plan (the 2014 Incentive Plan), the purposes of which are to align the interests of the Company's non-employee directors, executive officers and other employees with those of the Company's shareholders and to attract and retain personnel by providing incentives in the form of share-based awards. The 2014 Incentive Plan permits grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock, deferred stock units, performance awards and other share-based or share-denominated awards with respect to the Company's common stock. The number of shares of the Company's common stock authorized for grant under the 2014 Incentive Plan is 10 million shares, subject to additional shares that may be available for awards as described below. The Company has a policy of issuing new shares to settle the exercise of stock option awards and the vesting of other equity awards.
In connection with the adoption of the 2014 Incentive Plan, The Travelers Companies, Inc. Amended and Restated 2004 Stock Incentive Plan, as amended (the 2004 Incentive Plan) was terminated, joining several other legacy share-based incentive compensation plans that had been terminated in prior years (together, the legacy plans). Outstanding grants were not affected by the termination of the legacy plans.
each option is the interpolated market yield for the mid-month of the option grant on a U.S. Treasury bill with a term comparable to the expected option term of the granted stock option. 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, 2015 is as follows:
The Company issues restricted stock unit awards to eligible officers and key employees under the Equity Awards program established pursuant to the 2014 Incentive Plan. A restricted stock unit
The total fair value of shares that vested during the years ended December 31, 2015, 2014 and 2013 was $179 million, $147 million and $151 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, 2015 is as follows:
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 4.5% 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, 2015, 2014 and 2013 was $141 million, $138 million and $129 million, respectively. Included in these amounts are compensation cost adjustments of $8 million, $14 million and $8 million, for the years ended December 31, 2015, 2014 and 2013, 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 $47 million, $47 million and $45 million for the years ended December 31, 2015, 2014 and 2013, respectively.
At December 31, 2015, there was $124 million of total unrecognized compensation cost related to all nonvested share-based incentive compensation awards. This includes stock options, restricted and deferred stock units and performance shares granted under the 2014 Incentive Plan and the 2004 Incentive Plan. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.7 years. Cash received from the exercise of employee stock options under share-based compensation plans totaled $183 million and $195 million in 2015 and 2014, respectively. The tax benefit realized for tax deductions from employee stock options exercised during 2015 and 2014 totaled $41 million and $40 million, respectively.
For pension plans with an accumulated benefit obligation in excess of plan assets, the aggregate projected benefit obligation was $3.47 billion and $3.53 billion at December 31, 2015 and 2014, respectively, and the aggregate accumulated benefit obligation was $3.36 billion and $3.43 billion at December 31, 2015 and 2014, respectively. The fair value of plan assets for the above plans was $3.23 billion and $3.27 billion at December 31, 2015 and 2014, respectively.
Company has not determined whether or not additional funding will be made during 2016. With respect to the Company's foreign pension plans, there are no significant required contributions in 2016.
The following table summarizes assumptions used with regard to the Company's qualified and nonqualified domestic pension plans and the domestic postretirement benefit plans.
The discount rate assumption used to determine the benefit obligation is based on a yield-curve approach. Under this approach, individual spot rates from the yield curve of a hypothetical portfolio of high quality fixed maturity corporate bonds (rated Aa) available at the year-end valuation date, for which the timing and amount of cash outflows correspond with the timing and amount of the estimated benefit payouts of the Company's benefit plan, 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. For 2015, separate discount rate assumptions were used for the qualified domestic pension plan, nonqualified domestic plan and the domestic postretirement plan reflecting the different expected duration of cash flows of each plan to provide a better estimate of the benefit obligation for these plans.
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% would have increased the accumulated postretirement benefit obligation by $25 million at December 31, 2015, and the aggregate of the service and interest cost components of net postretirement benefit expense by $1 million for the year ended December 31, 2015. Decreasing the assumed health care cost trend rate by 1% would have decreased the accumulated postretirement benefit obligation at December 31, 2015 by $21 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, 2015.
The Company's overall investment strategy for the qualified domestic pension plan is to achieve a mix of approximately 85% to 90% of investments for long-term growth and 10% to 15% for near-term benefit payments with a diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 55% to 65% equity securities and 20% to 40% fixed income securities, with the remainder allocated to short-term securities. Equity securities primarily include investments in large, medium and small-cap companies primarily located in the United States. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities, U.S. Treasury securities and debt securities issued by foreign governments. Other investments include two private equity funds held by the Company's qualified defined benefit pension plan. One private equity fund is focused on financial companies, and the other is focused on real estate-related investments.
The Company's overall investment strategy is to achieve a mix of approximately 35% to 65% of investments for long-term growth and 35% to 60% for near-term insurance payments with a wide diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 25% to 75% fixed income securities, with the remainder allocated to short-term securities. Fixed income securities include corporate bonds of companies from diversified industries, mortgage-backed securities and U.S. Treasuries.
The Company's other postretirement benefit plan had financial assets of $15 million and $16 million at December 31, 2015 and 2014, 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.
The Company has a savings plan, The Travelers 401(k) Savings Plan (the Savings Plan), in which substantially all U.S. domestic Company employees are eligible to participate. Under the Savings Plan, the Company matches employee contributions up to 5% of eligible pay, with a maximum annual match of $6,000 which becomes 100% vested after three years of service. The Company's matching contribution is made in cash and invested according to the employee's current investment elections and can be reinvested into other investment options in accordance with the terms of the plan. The Company's non-U.S. employees participate in separate savings plans. The total expense related to all of the savings plans was $109 million, $103 million and $100 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Rent expense was $202 million, $215 million and $196 million in 2015, 2014 and 2013, respectively.
Future minimum annual rental payments under noncancellable operating leases for 2016, 2017, 2018, 2019 and 2020 are $159 million, $139 million, $102 million, $80 million and $60 million, respectively, and $114 million for 2021 and thereafter. Future sublease rental income aggregating approximately $6 million will partially offset these commitments.
In the ordinary course of its insurance business, the Company has received and continues to receive claims for insurance arising under policies issued by the Company asserting alleged injuries and damages from asbestos- and environmental-related exposures that are the subject of related coverage litigation. The Company is defending asbestos- and environmental-related litigation vigorously and believes that it has meritorious defenses; however, the outcomes of these disputes are uncertain. In this regard, the Company employs dedicated specialists and aggressive resolution strategies to manage asbestos and environmental loss exposure, including settling litigation under appropriate circumstances. Currently, it is not possible to predict legal outcomes and their impact on the future development of claims and litigation relating to asbestos and environmental claims. Any such development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. Because of these uncertainties, additional liabilities may arise for amounts in excess of the Company's current reserves. In addition, the Company's estimate of ultimate 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 results of operations in future periods.
In October 2001 and April 2002, two purported class action suits (Wise v. Travelers and Meninger v. Travelers) were filed against Travelers Property Casualty Corp. (TPC), a wholly-owned subsidiary of the Company, and other insurers (not including The St. Paul Companies, Inc. (SPC), which was acquired by TPC in 2004) in state court in West Virginia. These and other cases subsequently filed in West Virginia were consolidated into a single proceeding in the Circuit Court of Kanawha County, West Virginia. The plaintiffs alleged that the insurer defendants engaged in unfair trade practices in violation of state statutes by inappropriately handling and settling asbestos claims. The plaintiffs sought to reopen large numbers of settled asbestos claims and to impose liability for damages, including punitive damages, directly on insurers. Similar lawsuits alleging inappropriate handling and settling of asbestos claims were filed in Massachusetts and Hawaii state courts. These suits are collectively referred to as the Statutory and Hawaii Actions.
In March 2002, the plaintiffs in consolidated asbestos actions pending before a mass tort panel of judges in West Virginia state court amended their complaint to include TPC as a defendant, alleging that TPC and other insurers breached alleged duties to certain users of asbestos products. The plaintiffs sought damages, including punitive damages. Lawsuits seeking similar relief and raising similar allegations, primarily violations of purported common law duties to third parties, were also asserted in various state courts against TPC and SPC. The claims asserted in these suits are collectively referred to as the Common Law Claims.
former policyholder Johns-Manville Corporation on the ground that the suits violated injunctions entered in connection with confirmation of the Johns-Manville bankruptcy (the 1986 Orders). The bankruptcy court issued a temporary restraining order and referred the parties to mediation. In November 2003, the parties reached a settlement of the Statutory and Hawaii Actions, which included a lump-sum payment of up to $412 million by TPC, subject to a number of significant contingencies. In May 2004, the parties reached a settlement resolving substantially all pending and similar future Common Law Claims against TPC, which included a payment of up to $90 million by TPC, subject to similar contingencies.
The plaintiffs in the Statutory and Hawaii Actions and the Common Law Claims actions thereafter filed motions in the bankruptcy court to compel TPC to make payment under the settlement agreements, arguing that all conditions precedent to the Settlements had been met. On December 16, 2010, the bankruptcy court granted the plaintiffs' motions and ruled that TPC was required to fund the Settlements. The court entered judgment against TPC on January 20, 2011 in accordance with this ruling and ordered TPC to pay the Settlements plus prejudgment interest. The bankruptcy court's judgment was reversed by the district court on March 1, 2012, the district court having found that the conditions to the Settlements had not been met. The plaintiffs appealed the district court's March 1, 2012 decision to the Second Circuit Court of Appeals. On July 22, 2014, the Second Circuit issued an opinion reversing the district court's decision and reinstating the bankruptcy court's January 20, 2011 order which ordered TPC to pay the Settlements plus prejudgment interest. On August 5, 2014, TPC filed a Petition for Rehearing and Rehearing En Banc with the Second Circuit, which was denied on January 5, 2015. On January 15, 2015, the bankruptcy court entered an order directing TPC to pay $579 million to the plaintiffs, comprising the $502 million settlement amount described above, plus pre-judgment and post-judgment interest totaling $77 million, and the Company made that payment in January 2015. The payment was fully accrued in the Company's financial statements at December 31, 2014.
On August 17, 2010, in a reinsurance dispute in New York state court captioned United States Fidelity & Guaranty Company v. American Re-Insurance Company, et al., the trial court granted summary judgment for United States Fidelity and Guaranty Company (USF&G), a subsidiary of the Company, and denied summary judgment for American Re-Insurance Company, a subsidiary of Munich Re (American Re), and three other reinsurers. That summary judgment was largely affirmed on appeal, but the Court of Appeals remanded the case for trial on two discrete issues. On June 3, 2015, the trial court entered orders on pretrial motions filed by all parties in advance of the August 3, 2015 trial date and determined that the issues for trial will be limited to the two discrete issues remanded by the Court of Appeals. The reinsurers appealed the trial court's orders to the Appellate Division, First Department and were granted a stay of the trial date pending the outcome of their appeal. On August 12, 2015, USF&G filed a motion to dismiss the reinsurers' appeal. On October 29, 2015, the Appellate Division denied USF&G's motion to dismiss the reinsurers' appeal, but also unanimously ruled in USF&G's favor and affirmed the rulings limiting the issues for trial to the two discrete issues remanded by the Court of Appeals. On October 30, 2015, the reinsurers appealed the Appellate Division's decision to the New York Court of Appeals. On November 9, 2015, the Clerk of the Court of Appeals directed the parties to submit letter briefs addressing whether the Court of Appeals has jurisdiction to decide the reinsurers' appeal. On November 19, 2015, USF&G and the reinsurers filed their respective letter briefs, and the parties await a decision from the Court of Appeals as to whether the reinsurers' appeal may proceed. At December 31, 2015, the claim totaled $509 million, comprising $238 million of reinsurance recoverable plus interest amounting to $271 million as of that date. Interest will continue to accrue at an annual rate of 9% until the claim is paid. The $238 million of reinsurance recoverable owed to USF&G under the terms of the disputed reinsurance contract has been reported as part of reinsurance recoverables in the Company's consolidated balance sheet. The interest that would be owed as part of any judgment ultimately entered in favor of USF&G is treated for accounting purposes as a gain contingency in accordance with FASB Topic 450, Contingencies, and accordingly has not been recognized in the Company's consolidated financial statements.
In 2013, the Company favorably resolved a class action lawsuit captioned Safeco Insurance Company of America, et al. v American International Group, Inc. et al. (U.S. District Court, N.D. Ill.). The plaintiffs, including the Company, alleged that the defendants had engaged in the under-reporting of workers' compensation premium in connection with a workers' compensation reinsurance pool in which several subsidiaries of the Company participated. The Company received two payments totaling approximately $93 million, comprising its allocation as a plaintiff class member from the settlement fund, less approximately $2 million remitted to another insurer, resulting in a net gain of $91 million that was reported in "Other revenues" in the Company's consolidated statement of income for the year ended December 31, 2013.
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 and the imposition of additional taxes due to either a change in the tax law or an adverse interpretation of the tax law. Such indemnification provisions generally are applicable from the closing date to the expiration of the relevant statutes of limitations, although, in some cases, there may be agreed upon term limitations or no term limitations. Certain of these contingent obligations are subject to deductibles which have to be incurred by the obligee before the Company is obligated to make payments. The maximum amount of the Company's contingent obligation for indemnifications related to the sale of businesses that are quantifiable was $391 million at December 31, 2015, of which $2 million was recognized on the balance sheet at that date.
Certain of the guarantees and indemnifications described above have no stated or notional amounts or limitation to the maximum potential future payments, and, accordingly, the Company is unable to develop an estimate of the maximum potential payments for such arrangements.
The following consolidating financial statements of the Company have been prepared pursuant to Rule 3-10 of Regulation S-X. These consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the consolidated financial statements. The Travelers Companies, Inc. (excluding its subsidiaries, TRV) has fully and
unconditionally guaranteed certain debt obligations of Travelers Property Casualty Corp. (TPC), which totaled $700 million at December 31, 2015.