The purpose of Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s consolidated results of operations and financial condition. Our Management’s Discussion and Analysis should be read in conjunction with Item 6, Selected Financial Data, and Item 8, Consolidated Financial Statements and related Notes. We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and stock dividends.
Combined ratio - We believe our underwriting philosophy and initiatives can drive performance to achieve our underwriting profitability target of a GAAP combined ratio over any five-year period that consistently averages within the range of 95 percent to 100 percent. Our GAAP combined ratio averaged 97.2 percent over the five-year period 2011 through 2015. Performance as measured by the combined ratio is discussed in Consolidated Property Casualty Insurance Results. Our statutory combined ratio averaged 96.5 percent over the five-year period 2011 through 2015 compared with an estimated 100.2 percent for the property casualty industry. The industry’s ratio again excludes its mortgage and financial guaranty lines of business.
Investment income growth, on a pretax basis, had a compound annual growth rate of 2.0 percent over the five-year period 2011 through 2015. It has grown every year since 2009, except for 2013 with its slight decrease of less than 1 percent.
Over the five years ended December 31, 2015, our equity portfolio compound annual total return was 10.9 percent compared with a compound annual total return of 12.6 percent for the Index. Our equity portfolio favors larger-capitalization, high-quality, dividend growing stocks with a value orientation. In recent years, returns for this type of stocks have generally lagged the broader market. For the year 2015, our annual equity portfolio total return was negative 3.6 percent, compared with positive 1.4 percent for the Index.
The amount of our debt obligations decreased by $14 million in 2015, compared with 2014. Our 11.3 percent ratio of debt to total capital (debt plus shareholders’ equity) at year-end 2015 matched the prior-year ratio and remained comfortably within our target range.
Net income in 2015 rose $109 million or 21 percent compared with 2014, due primarily to an increase in property casualty underwriting income of $130 million after taxes, including $28 million from lower catastrophe losses and $20 million from lower noncatastrophe weather losses described below in Consolidated Property Casualty Insurance Results. In 2015, after-tax net realized investment gains were $40 million less than in 2014 while investment income rose $18 million after taxes.
Net income increased $8 million in 2014, compared with 2013, reflecting the after-tax net effect of two major contributing items: a $31 million increase in net realized investment gains, offset by a $31 million reduction in property casualty underwriting results.
Property casualty net written premiums grew 5 percent in 2015 and earned premiums grew 6 percent, reflecting average renewal price increases, a higher level of insured exposures and premium growth initiatives. That growth lagged the trend experienced in 2014, largely due to price increases that averaged a lower rate than in 2014. Trends and related factors are discussed in Commercial Lines, Personal Lines and Excess and Surplus Lines Insurance Results, respectively.
Our property casualty insurance operations generated significant underwriting profits for each of the three years ending in 2015. The $200 million increase in 2015, compared with 2014, included a $43 million decrease in losses from natural catastrophe events and $31 million decrease in other weather-related losses. The $47 million decrease in 2014, compared with 2013, included a $32 million increase in losses from natural catastrophe events and $52 million increase in other weather-related losses.
We measure property casualty underwriting profitability primarily by the combined ratio. Our combined ratio measures the percentage of each earned premium dollar spent on claims plus all expenses related to our property casualty operations, all on a pretax basis. A lower ratio indicates more favorable results and better underlying performance. A ratio below 100 percent represents an underwriting profit. Initiatives to improve our combined ratio are discussed in Item 1, Our Business and Our Strategy, Strategic Initiatives. In 2015, 2014 and 2013, favorable development on reserves for claims that occurred in prior accident years helped offset other incurred losses and loss expenses. Reserve development is discussed further in Property Casualty Loss and Loss Expense Obligations and Reserves. Losses from weather-related catastrophes are another important item influencing the combined ratio and are discussed along with other factors in Financial Results for our property casualty business and related segments.
Our life insurance segment reported a $2 million loss in 2015 and a $5 million loss in 2014. We discuss results for the segment in Life Insurance Results. Most of this segment’s investment income is included in our investments segment results. In addition to investment income, realized investment gains from the life insurance investment portfolio are also included in our investments segment results.
Drive premium growth - Implementation of these initiatives is intended to further penetrate each market we serve through our independent agencies. Strategies aimed at specific market opportunities, along with service enhancements, can help our agents grow and increase our share of their business. Diversified growth also may reduce variability of losses from weather-related catastrophes.
Our field claims representatives establish case reserves when claims are reported to the company to provide for our unpaid loss and loss expense obligation associated with individual claims. Field claims managers supervise and review all claims with case reserves less than $100,000. Additionally, a headquarters supervisor and regional manager review all claims under $100,000 if litigation or a certain specialty claim is involved. All claims with case reserves of $100,000 or greater are reviewed and approved by an experienced headquarters supervisor and regional claims manager - up from a threshold amount of $35,000 for several years prior to 2015. Upper-level headquarters claims managers also review case reserves of $175,000 or more - up from a threshold amount of $100,000 for several years prior to 2015.
For events designated as natural catastrophes, we calculate bulk reserves directly as a result of an estimated IBNR claim count and an estimated average claim amount for each event. Once case reserves are established for a catastrophe event, we reduce the bulk reserves. Our claims department management coordinates the assessment of these events and prepares the related bulk reserve estimates. Such an assessment involves a comprehensive analysis of the nature of the event, of policyholder exposures within the affected geographic area and of available claims intelligence. Depending on the nature of the event, available claims intelligence could include surveys of field claims associates within the affected geographic area, feedback from a catastrophe claims team sent into the area, as well as data on claims reported as of the financial statement date. To determine whether an event is designated as a catastrophe, we generally use the catastrophe
For all other claims and events, including reinsurance assumed, IBNR reserves are calculated as the difference between an actuarial estimate of the ultimate cost of total loss and loss expenses incurred reduced by the sum of total loss and loss expense payments and total case reserves estimated for individual claims. We discuss below the development of actuarially based estimates of the ultimate cost of total loss and loss expenses incurred.
Claims having atypical emergence patterns. Characteristics of certain subsets of claims, such as high frequency, high severity, or mass tort claims, have the potential to distort patterns contained in historical paid loss, reported
loss and paid DCCE data. When testing indicates this to be the case for a particular subset of claims, our actuaries segregate these claims from the data and analyze them separately. Subsets of claims that could fall into this category include hurricane claims or claims for other weather events where total losses we incurred were very large, individual large claims and asbestos and environmental claims.
Paid losses, reported losses and paid DCCE are subject to random as well as systematic influences. As a result, actual paid losses, reported losses and paid DCCE are virtually certain to differ from projections. Such differences are consistent with what specific models for our business lines predict and with the related patterns in the historical data used to develop these models. As a result, management does not closely monitor statistically insignificant differences between actual and projected data.
Our fixed-maturity and equity investment portfolios are our largest assets. The company’s asset impairment committee continually monitors the holdings in these portfolios and all other assets for signs of other-than-temporary or permanent impairment. The committee monitors decreases in the fair value of invested assets; an accumulation of company costs in excess of the amount originally expected to acquire or construct an asset; uncollectability of all receivable assets; or other factors such as bankruptcy, deterioration of creditworthiness, failure
The application of our impairment policy resulted in other-than-temporary impairment (OTTI) charges that reduced our income before income taxes by $52 million in 2015, $24 million in 2014 and $2 million in 2013. OTTI losses represent noncash charges to income and are reported as realized investment losses.
Our internal investment portfolio managers monitor their assigned portfolios. If a security is valued below cost or amortized cost, the portfolio managers undertake additional reviews. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing organization. Managers review quantitative measurements such as a declining trend in fair value, the extent of the fair value decline and the length of time the value of the security has been depressed, as well as qualitative measures such as pending events, credit ratings and issuer liquidity. We are even more proactive when these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. We provide information about valuations of our invested assets in Item 8, Note 2 of the Consolidated Financial Statements.
Securities that have previously been other-than-temporarily impaired are evaluated based on their adjusted cost or amortized cost and further written down if deemed appropriate. We provide detailed information about securities fair valued in a continuous loss position at year-end 2015 in Item 7A, Application of Asset Impairment Policy.
For each of our equity securities in an unrealized loss position at December 31, 2015, we applied the objective quantitative and qualitative criteria of our invested asset impairment policy for OTTI. Based on the individual qualitative and quantitative factors, as discussed above, we evaluate and determine an expected recovery period for each security. A change in the condition of a security can warrant impairment before the expected recovery period. If the security has not recovered cost within the expected recovery period, the security is other-than-temporarily impaired. Our long-term equity investment philosophy, emphasizing companies with strong indications of paying and growing dividends, combined with our strong statutory capital and surplus, liquidity and
cash flow, provide us the ability to hold these investments through what we believe to be slightly longer recovery periods during times of historic levels of market volatility.
Over 99 percent of the $14.356 billion of securities in our investment portfolio at year-end 2015, measured at fair value, are classified as Level 1 or Level 2. Financial assets that fall within Level 1 and Level 2 are priced according to observable data from identical or similar securities that have traded in the marketplace. Also within Level 2 are securities that are valued by outside services or brokers where we have evaluated and verified the pricing methodology and determined that the inputs are observable.
At December 31, 2015, total Level 3 assets were less than 1 percent of our investment portfolio measured at fair value. Financial assets that fall within the Level 3 hierarchy are valued based upon unobservable market inputs, normally because they are not actively traded on a public market. Pricing for each Level 3 security is based upon inputs that are market driven, including third-party reviews provided to the issuer or broker quotes. We placed in the Level 3 hierarchy securities for which we were unable to obtain the pricing methodology or we could not consider the price provided as binding. Pricing for securities classified as Level 3 could not be corroborated by similar securities priced using observable inputs.
Key assumptions used in developing the benefit obligation at year-end 2015 for our qualified plan were a 4.55 percent discount rate and rates of compensation increases ranging from 2.75 percent to 3.25 percent. To determine the discount rate, a theoretical settlement portfolio of high-quality, rated corporate bonds was chosen to provide payments approximately matching the plan’s projected benefit payments. A single interest rate was determined, resulting in a discounted value of the plan’s benefit payments that equates to the market value of the selected bonds. The discount rate is reflective of current market interest rate conditions and our plan's liability characteristics.
Key assumptions used in developing the 2015 net pension expense for our qualified plan were a 4.25 percent discount rate, a 7.25 percent expected return on plan assets and rates of compensation increases ranging from 2.75 percent to 3.25 percent.
In 2015, the net pension expense was $15 million. In 2016, we expect the net pension expense to be approximately $9 million.
The fair value of the plan assets were less than the accumulated benefit obligation by $15 million and exceeded the accumulated benefit obligation by $4 million at year-end 2015 and 2014, respectively. The fair value of the plan assets was $45 million and $31 million less than the projected plan benefit obligation at year-end 2015 and at year-end 2014, respectively. Market conditions and interest rates significantly affect future assets and liabilities of the pension plan. During the first quarter of 2016, we contributed $5 million to our qualified plan.
We measure profit or loss for our commercial lines, personal lines and excess and surplus lines and life insurance segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses and underwriting expenses on a pretax basis. We also evaluate results for our consolidated property casualty insurance operations. That is the total of our standard market segments (commercial lines and personal lines), our excess and surplus lines insurance segment and our reinsurance assumed operations. Underwriting results and segment pretax operating income are not substitutes for net income determined in accordance with GAAP.
Earned and net written premiums for our consolidated property casualty operations grew in 2015, reflecting average renewal price increases, a higher level of insured exposures and strategic initiatives for targeted growth. A key measure of property casualty profitability is underwriting profit or loss. Our 2015 underwriting profit of $386 million was $200 million more than in 2014. Underwriting profit included a $43 million favorable effect from a lower amount of natural catastrophe losses, mostly caused by severe weather. It also included a $31 million favorable effect from a lower amount of weather-related losses not identified as part of designated catastrophe events for the property casualty industry, typically referred to as noncatastrophe weather losses. The benefits of higher pricing, and our ongoing initiatives to improve pricing precision and loss experience related to claims and loss control practices, were largely responsible for the remainder of the 2015 underwriting profit improvement. That improvement is discussed further below and includes prior accident year loss experience before catastrophes during 2015 that was more favorable than in 2014.
Premiums - Growth of $131 million in agency renewal written premiums was the primary contributor of 2015 increases in earned premiums and net written premiums, rising in each of our property casualty segments. That growth was largely due to average renewal price increases and a higher level of insured exposures. Price increases with enhanced precision continue to benefit operating results.
Growth initiatives also favorably affect growth in subsequent years, particularly as newer agency relationships mature over time. New business written premiums in 2014 were down $40 million, compared with the record-high amount we reported in 2013.
Net written premiums increased $33 million in 2015 from expansion of reinsurance assumed operations, known as Cincinnati ReSM. Cincinnati Re assumes risks through reinsurance treaties and in some cases cedes part of the risk and related premiums to one or more unaffiliated reinsurance companies through transactions known as retrocessions. In 2015, earned premiums for Cincinnati Re totaled $10 million.
Combined ratio - The 2015 combined ratio improved 4.5 percentage points compared with 2014. In addition to the effects of more favorable weather, the improvement reflected recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices. Compared with 2014, the 2015 ratio for natural catastrophe losses decreased by 1.4 percentage points, while the ratio for noncatastrophe weather losses decreased by 0.9 points. The remainder of the combined ratio improvement included 2.1 percentage-points more benefit in the ratio for prior accident year losses and loss expenses before catastrophes. In 2014, that ratio was less favorable primarily due to higher estimates of reserves for incurred but not reported (IBNR) losses and loss expenses for our commercial casualty line of business, as discussed in Commercial Lines Insurance Results. We further discuss ratios related to reserve development in the sections that follow the Catastrophe Losses Incurred table below.
Our statutory combined ratio was 90.6 percent in 2015 compared with 95.1 percent in 2014 and 92.7 percent in 2013. The estimated statutory combined ratio for the property casualty industry, with the industry’s ratio excluding its mortgage and financial guaranty lines of business, was 98.0 percent in 2015, 97.2 percent in 2014 and 96.4 percent in 2013. The contribution of catastrophe losses to our statutory combined ratio was 3.7 percentage points in 2015, 5.1 percentage points in 2014 and 4.6 percentage points in 2013, compared with industry estimates of 3.1, 4.0 and 3.5 percentage points, respectively. Components of the combined ratio are discussed below.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For all property casualty lines of business in aggregate, net loss and loss expense reserves at December 31, 2015, were $223 million higher than at year-end 2014, including $125 million for IBNR reserves. The $223 million reserve increase raised year-end 2015 net loss and loss expense reserves by 5 percent, compared with a 6 percent increase in 2015 earned premiums.
For both our commercial auto and personal auto lines of business in 2015, we experienced a rising trend in paid losses and loss expenses that was more than we expected. As a result, we increased our actuarial best estimate of ultimate loss and loss expense ratios for both lines at the end of 2015, compared with year-end 2014. Net loss and loss expense reserves at December 31, 2015, for our auto lines in aggregate, were $80 million higher than at year-end 2014. The IBNR portion of the reserve increase was $36 million.
Catastrophe loss trends, discussed above, accounted for some of the movement in current accident year loss and loss expense ratios for 2015 compared with 2014. For 2014 compared to either 2015 or 2013, noncatastrophe weather losses and higher commercial casualty IBNR reserves, noted above, also accounted for some of the change. Catastrophe losses added 4.1 percentage points in 2015, 5.7 points in 2014 and 5.4 points in 2013 to the respective consolidated property casualty current accident year loss and loss expense ratios in the table above.
The 60.4 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2015 decreased 1.3 percentage points compared with the 61.7 percent accident year 2014 ratio measured as of December 31, 2014. Higher noncatastrophe weather losses and higher commercial casualty IBNR reserves in 2014, noted above, accounted for some of the decrease and were partially offset by the 2015 increase in reserves for our auto lines of business. Other contributors to the decrease included favorable effects from initiatives, such as ones to improve pricing precision and loss experience related to claims and loss control practices, and also less current accident year losses of $1 million or more per claim, shown in the table below.
Reserve development on prior accident years continued to net to a favorable amount in 2015. We recognized $184 million of favorable development in 2015, compared with $98 million in 2014 and $147 million in 2013. Of the $86 million increase in 2015, compared with 2014, $68 million was attributable to our commercial casualty line of business. Approximately 85 percent of our net favorable reserve development on prior accident years recognized during 2015 occurred in our commercial casualty and workers’ compensation lines of business. In 2014, our workers' compensation and commercial property lines of business were responsible for approximately 87 percent of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2013 was also primarily from our commercial casualty and workers’ compensation lines of business. Development by line of business is further analyzed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.
In 2015, total large losses incurred increased by $8 million, or 4 percent, net of reinsurance. The corresponding ratio decreased 0.1 percentage points, due to 6 percent growth in earned premiums. Our analysis of large losses incurred indicated no unexpected concentration of these losses and reserve increases by geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Consolidated property casualty commission expenses rose $48 million, or 6 percent, in 2015, with profit-sharing commissions for agencies rising by $12 million. Commission expenses as a percent of earned premiums resulted in a ratio that was only 0.1 percentage-points higher than in 2014, as earned premiums also rose 6 percent. The 2015 ratio for other underwriting expenses was 0.3 percentage-points higher than 2014, reflecting an 8 percent increase in those expenses that outpaced growth in earned premiums. During 2015, we continued to carefully manage expenses while also making strategic investments that include enhancement of underwriting expertise, such as personal lines staff additions to support high net worth market expansion.
Salaries, benefits and payroll taxes for our associates account for approximately half of our property casualty other underwriting expenses. Most of our associates either provide direct service to the property casualty portion of our agencies’ businesses or provide support to those associates.
Premiums - Earned premiums and net written premiums rose in 2015, primarily due to a $78 million increase in renewal written premiums that continued to include price increases on average. New business written premiums in 2015 were up $5 million, or 1 percent, compared with 2014. The increase was driven by production from agencies appointed since the beginning of 2014, offsetting effects of a softening commercial insurance market.
Combined ratio - The 2015 combined ratio improved 6.5 percentage points compared with 2014, including a 1.2 percentage-point decrease in the ratio for natural catastrophe losses and a 0.6 point decrease for noncatastrophe weather losses. In addition to more favorable weather effects, the ratio benefited from higher pricing and from recent-year initiatives to improve pricing precision and loss experience related to claims and loss control practices. The 2015 ratio for current accident year losses and loss expenses before catastrophes improved by 2.1 percentage points. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2015 was 3.2 percentage points more favorable than in 2014, including 2.9 points from re-estimates of IBNR reserves for losses and loss expenses.
Our largest commercial line of business, commercial casualty, decreased our 2015 commercial lines insurance segment total loss and loss expense ratio by 2.1 percentage points, compared with 2014. That line experienced a significant increase in its 2014 total loss and loss expense ratio, largely due to reserve increases discussed below.
emerged at levels higher than we expected, particularly for accident years 2005 and 2007. Considering that new data at December 31, 2014, we estimated commercial casualty IBNR reserves for subsequent accident years at levels more likely to be adequate, compared with estimates at the end of 2013. During 2015, net reserve development on prior accident years for commercial casualty was favorable.
Our commercial lines statutory combined ratio was 88.3 percent in 2015, compared with 94.3 percent in 2014 and 91.8 percent in 2013. The estimated commercial lines combined ratio for the industry was 98.1 percent in 2015, 97.1 percent in 2014 and 98.3 percent in 2013. The industry’s ratio excludes its mortgage and financial guaranty lines of business. The contribution of catastrophe losses to our commercial lines statutory combined ratio was 3.1 percentage points in 2015, 4.3 percentage points in 2014 and 3.7 percentage points in 2013, compared with industry estimates of 2.0, 2.4 and 3.5 percentage points, respectively.
Our 3 percent increase in 2015 agency renewal written premiums included higher average pricing. We measure average changes in commercial lines renewal pricing as the rate of change in renewal premium for the new policy period compared with the premium for the expiring policy period, assuming no change in the level of insured exposures or policy coverage between those periods for respective policies. In 2015, our standard commercial lines policies averaged an estimated pricing change that increased near the middle of the low-single-digit range, compared with near the high end of that range in 2014 and in a mid-single-digit range in both 2013 and 2012. Our average commercial lines pricing change includes the flat pricing effect of certain coverages within package policies written for a three-year term that were in force but did not expire during the period being measured. Therefore, the average commercial lines pricing change we report reflects a blend of policies that did not expire and other policies that did expire during the measurement period.
For only those commercial lines policies that did expire and were then renewed during 2015, we estimate that the average price increase was near the low end of the mid-single-digit range, lower in that range than in 2014. During 2015, we continued to further segment our commercial lines policies, emphasizing identification and retention of policies we believed had relatively stronger price adequacy. Conversely, we continued to seek more aggressive renewal terms and conditions on policies we believed had relatively weaker pricing, in turn retaining
fewer of those policies. As a result, the average change in commercial lines renewal pricing tended to be lower than in 2014.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. For our commercial auto line of business in 2015, we experienced a rising trend in paid losses and loss expenses that was more than we expected. As a result, we increased our actuarial best estimate of ultimate loss and loss expense ratios for that line at the end of 2015, compared with year-end 2014. Net loss and loss expense reserves for our commercial auto line of business at December 31, 2015, were $49 million, or 11 percent, higher than at year-end 2014. The IBNR portion of the reserve increase was $20 million.
Most of the incurred losses and loss expenses shown in the commercial lines insurance segment three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than half of our commercial lines insurance segment current accident year incurred losses and loss expenses represents net paid amounts, the majority represents reserves for our estimate of ultimate losses and loss expenses. These reserves develop over time, and we re-estimate previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 65.5 percent accident year 2014 loss and loss expense ratio reported as of December 31, 2014, developed favorably by 1.0 percentage points to 64.5 percent due to claims settling for less than previously estimated, or due to updates to reserve estimates for unpaid claims, as of December 31, 2015. Accident years 2014 and 2013 for the commercial lines insurance segment have both developed favorably, as indicated by the progression over time of the ratios in the table.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in current accident year loss and loss expense ratios for accident years for 2015 compared with 2014. Catastrophe losses added 3.5 percentage points in 2015, 4.8 points in 2014 and 4.3 points in 2013 to the respective commercial lines current accident year loss and loss expense ratios in the table above.
Commercial lines reserve development on prior accident years of $154 million in 2015 continued to net to a favorable amount, and provided a larger benefit than the $57 million recognized in 2014. The $97 million increase in 2015 included $68 million from our commercial casualty line of business. Most of our commercial lines reserve net favorable development on prior accident years recognized during 2015 occurred in our commercial casualty and workers’ compensation lines of business, with workers' compensation representing 60 percent. In 2014, commercial casualty experienced net unfavorable development of $5 million. More than 85 percent of our commercial lines reserve net favorable development on prior accident years recognized during 2014 occurred in our workers’ compensation line of business. Favorable development recognized during 2013 was mostly from our commercial casualty and workers’ compensation lines of business. Development by line of business and other trends for commercial lines loss and loss expenses and the related ratios are further analyzed in Commercial Lines of Business Analysis and in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Approximately 95 percent of our commercial lines premiums relate to accounts with coverages from more than one of our business lines. As a result, we believe that the commercial lines insurance segment is best measured and evaluated on a segment basis. However, we provide line-of-business data to analyze growth and profitability trends separately for each line.
Commercial auto, representing 19 percent of earned premiums for our commercial lines insurance segment, was the only commercial line of business with a 2015 total loss and loss expense ratio significantly higher than we desired. During 2015, our commercial auto policies experienced average renewal price percentage increases near the low end of the mid-single-digit range, which we believe will help improve profitability in future quarters. As discussed below, we are taking actions to improve commercial auto pricing to benefit future profitability trends.
Commercial casualty has experienced a satisfactory total loss and loss expense ratio for many years. Premium growth continued in 2015, reflecting modest average price increases and an increase in premiums from audits that confirmed or adjusted initial premium estimates. Premium growth in 2014 was largely due to factors similar to 2015.
Commercial property net written premiums and earned premiums continued to rise in 2015, but at a slower rate than in 2014. Increases for both years reflected higher pricing, rising insured exposures and the migration to this
line of certain polices formerly in our other commercial lines category. That ongoing migration pertains to property coverages in CinciPakTM, a newer program designed to replace many of our former specialty products.
The total loss and loss expense ratio improved 3.9 percentage points in 2015, compared with 2014, primarily due to improved loss experience for the current accident year before catastrophe losses. Higher pricing and profit improvement initiatives described below contributed to that ratio improvement, along with a 1.9 percentage-point decrease in the ratio for noncatastrophe weather losses. The total loss and loss expense ratio improved 1.4 percentage points in 2014, compared with 2013, primarily due to more favorable development on prior accident year reserves before catastrophe losses. Noncatastrophe weather losses in 2014 caused a 2.9 percentage-point increase in the ratio.
Commercial auto net written premiums and earned premiums rose in 2015 and 2014, largely due to higher pricing in both years.
Development trends are further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year. The workers’ compensation business line includes our longest tail exposures, making initial estimates of accident year loss and loss expenses incurred more uncertain. Due to the lengthy payout period of workers’ compensation claims, small shifts in medical cost inflation and payout periods could have a significant effect on our potential future liability compared with our current projections.
Other commercial lines includes policies with various insurance coverages, including various specialty packages designed for certain classes of business. Also included are policies providing management liability or surety coverages, in addition to policies with specific coverages for machinery and equipment.
Net written premiums and earned premiums for our other commercial lines decreased in both 2015 and 2014, driven by a decrease in our specialty packages policies. Premiums for specialty packages decreased largely due to the introduction of CinciPak, a newer program designed to replace many of our specialty products. Premiums for CinciPak are included in our commercial casualty or commercial property lines of business.
Premiums - Earned premiums and net written premiums continued to grow in 2015, primarily due to higher renewal written premiums that included price increases. Renewal written premiums rose $36 million, or 4 percent, in 2015, compared with 2014.
Combined ratio - The 2015 combined ratio rose 2.1 percentage points, compared with 2014, largely due to a 1.3 percentage-point increase in the underwriting expense ratio as explained below. In addition, the total large loss ratio for losses of $1 million or more per claim, shown in the table below, rose 2.1 percentage points, largely due to higher losses for personal umbrella claims related to auto accidents. Those ratio increases were partially offset by a 1.6 percentage-point decrease in the ratio for 2015 natural catastrophe losses and a 1.7 percentage-point decrease in noncatastrophe weather losses that were not identified as part of designated catastrophe events for the property casualty industry.
Personal lines new business written premiums grew $19 million, or 21 percent, during 2015, compared with 2014. Key factors contributing to this growth included an increase in larger-sized policy submissions due to underwriting appetite and pricing changes made to our existing personal lines products, increased visibility of underwriters and additional marketing efforts directed toward our agencies. Some of what we report as new business came from accounts that were not new to our agents. We believe our agents’ seasoned accounts tend to be priced more accurately than business that may be less familiar to them. We estimate that growth in premiums for high net worth clients of our agencies contributed $4 million of the 2015 increase in overall personal lines new business written premiums. In addition, in 2014 we began rolling out advanced quote discounts for home and auto and new home purchase discounts in most states, allowing us to compete more effectively in the comparative rater environment.
Other written premiums primarily consist of premiums that are ceded to reinsurers and that lower our net written premiums. A decrease in ceded premiums contributed $5 million to net written premium growth for 2015, compared with 2014.
In 2015, personal lines total large losses incurred increased by $24 million, or 114 percent, compared with 2014, net of reinsurance. The ratio for 2015 large losses as a percent of earned premiums increased 2.1 percentage points. The 2015 increases on both a dollar and ratio basis were largely due to higher amounts of personal umbrella claims related to auto accidents. In 2014, total large losses decreased, compared with 2013, primarily due to lower amounts for our personal auto line of business. Our analysis indicated no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory. We believe the inherent volatility of aggregate loss experience for our portfolio of larger policies is greater than that of our portfolio of smaller policies, and we continue to monitor the volatility in addition to general inflationary trends in loss costs.
Personal lines commission expense as a percent of earned premiums increased slightly in 2015 compared with 2014. The increase was primarily due to changes in estimates related to allocations of deferred acquisition costs by segment. Other underwriting expenses as a percent of earned premiums rose in 2015. The ratio increase was largely due to strategic investments that included enhancement of underwriting expertise, such as personal lines staff additions to support high net worth market expansion.
For 2013 through 2015, our personal auto line of business had a total loss and loss expense ratio higher than desired. As discussed in the overview section of Personal Lines Insurance Results, and below, we are taking actions to improve pricing and reduce loss costs that we expect to benefit future profitability trends. A similar approach was used to improve the total loss and loss expense ratio for our homeowner line of business to a satisfactory result in recent years.
The 2015 total loss and loss expense ratio rose 4.8 percentage points, in part due to the $31 million increase in net loss and loss expense reserves discussed above. The ratio for current accident year before catastrophe losses rose 2.1 points and included higher ratios on both a paid and net reserve change basis. The ratio for prior accident years before catastrophe losses rose 3.0 points, primarily for accident year 2013. The 2014 total loss and loss expense ratio increase was largely due to a 1.4 point increase for IBNR reserves that contributed to a total increase of 1.7 points in the ratio for the current accident year before catastrophe losses.
Other personal premiums grew in both 2015 and 2014. Premium trends for this line of business have generally been similar to the growth pattern of our personal auto and homeowner lines before the effects of reinsurance. Most of our other personal coverages are written in conjunction with homeowner or auto policies. In addition to umbrella liability coverage, our other personal lines policies provide property-oriented coverages such as dwelling fire and inland marine.
Premiums - Earned premiums and net written premiums continued to grow steadily during 2015. Growth was driven by higher renewal written premiums that included average renewal price increases near the low end of the mid-single-digit range. New business written premiums for 2015 again increased compared with the prior year, but at a slower rate than in 2014, reflecting careful underwriting in an increasingly competitive market.
Other written premiums are primarily premiums that are ceded to reinsurers and that lower our net written premiums. Ceded premium volume for 2015 was similar to 2014, as lower reinsurance premium rates essentially offset higher written premiums subject to reinsurance.
Loss and loss expenses include both net paid losses and reserve changes for unpaid losses, as well as the associated loss expenses. The majority of the total incurred losses and loss expenses shown above in the three-year highlights table are for the respective current accident years, with reserve development on prior accident years shown separately. Since less than 20 percent of our 2015 excess and surplus lines current accident year incurred losses and loss expenses represents net paid amounts, a large majority represents reserves for our estimate of unpaid losses and loss expenses. These reserves develop over time, and we update our estimates of previously reported reserves as we learn more about the development of the related claims. The table below illustrates that development. For example, the 69.9 percent accident year 2014 loss and loss expense ratio reported as of December 31, 2014, developed favorably by 9.4 percentage points to 60.5 percent due to claims settling for less than previously estimated, or due to updated reserve estimates for unpaid claims, as of December 31, 2015. Accident years 2014 and 2013 for this segment have both developed favorably, as indicated by the progression over time of the ratios in the table.
Catastrophe losses, as discussed in Consolidated Property Casualty Insurance Results, explain some of the movement in current accident year loss and loss expense ratios for accident year 2015 compared with 2014. Catastrophe losses added 0.5 percentage points in 2015, following 1.8 percentage points in 2014 and 0.7 percentage points in 2013, to the respective excess and surplus lines current accident year loss and loss expense ratios in the table above.
The 62.1 percent ratio for current accident year loss and loss expenses before catastrophe losses for 2015 decreased 6.0 percentage points compared with the 68.1 percent accident year 2014 ratio measured as of December 31, 2014. We recognized significant favorable reserve development on prior accident years during 2015 and also during 2014, with a ratio effect of approximately 20 percentage points for each year.
Excess and surplus lines reserve development on prior accident years continued to net to a favorable amount in 2015 as $35 million was recognized, compared with $29 million in 2014. Approximately two-thirds of the 2015 favorable development was for accident years 2014 and 2013 in aggregate, and was primarily due to lower than anticipated emergence on known claims.
We believe the loss and loss expense reserves for our excess and surplus lines business are adequate. We establish case reserves in a manner consistent with standard lines coverages, despite the more restrictive terms and conditions for excess and surplus lines policies. The amount of outstanding reserves for our excess and surplus lines operation can be seen in a table in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves. One indication of how long it takes for most of the outstanding reserves to be settled is to measure outstanding reserves by accident year at different points in time. For accident year 2010 and all accident years prior to that, at December 31, 2010, we reported reserves for estimated unpaid losses and loss expenses of $55 million, net of reinsurance. At December 31, 2015, our estimate for the remaining unpaid losses that occurred in those accident years was less than $3 million. The inherent uncertainty in estimating reserves is discussed in Liquidity and Capital Resources, Property Casualty Insurance Loss and Loss Expense Obligations and Reserves. Development trends are further analyzed in Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Revenues - Earned premiums rose 6 percent for the year 2015, as shown in the table below that includes details by major line of business. Our largest life insurance product line, term life insurance, rose 4 percent. Net in-force policy face amounts rose 5 percent to $52.735 billion at year-end 2015 from $50.356 billion at year-end 2014 and $48.063 billion at year-end 2013.
Over the past several years, we have worked to maintain a portfolio of simple, yet competitive, products primarily under the LifeHorizons banner. Our product development efforts emphasize death benefit protection and guarantees. Distribution expansion within our property casualty insurance agencies remains a high priority. Our 31 life field marketing representatives work in partnership with our 134 property casualty field marketing representatives. Approximately 69 percent of our term and other life insurance product premiums were generated through our property casualty insurance agency relationships.
The major macroeconomic factor that could cause disruption in the industry remains the level of interest rates. While the Federal Reserve increased short-term rates in December 2015, and has signaled that it intends to do so again in 2016, long-term rates remain stubbornly depressed. If long-term rates fail to rise in tandem with short-term rates, prices on life insurance products will be pressured to increase, which would adversely affect growth.
Interest income rose $11 million, or 3 percent, in 2015. The average fixed-maturity pretax yield declined by approximately 6 basis points but was offset by a larger fixed-maturity portfolio that rose 5 percent on an amortized cost basis. Interest income increased 1 percent in 2014 when that yield declined by approximately 14 basis points while the portfolio rose 3 percent on an amortized cost basis.
Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on results in any given period. However, such gains or losses usually have little, if any, effect on total shareholders’ equity because most equity and fixed-maturity investments are carried at fair value, with the unrealized gain or loss included as a component of other comprehensive income.
Net realized investment gains and losses totaling $70 million for the year ended December 31, 2015, included:
$52 million in OTTI charges to write down 20 holdings of equity and fixed-maturity securities.
With the Federal Reserve determined to take a measured approach to rate increases and global economic growth remaining under pressure, it appears likely that we will continue to experience bond yields below historic norms. This will likely extend pressure on investment income growth.
We continue to focus on portfolio strategies to balance near-term income generation and long-term book value growth. In 2016, we expect to continue to allocate a portion of cash available for investment to equity securities, taking into consideration corporate liquidity and income requirements, as well as insurance department regulations and rating agency comments. We discuss our portfolio strategies in Item 1, Our Segments, Investments Segment.
We believe that a weak or prolonged recovery from current economic conditions could heighten the risk of renewed pressure on securities markets, which could lead to additional OTTI charges. Our asset impairment committee continues to monitor the investment portfolio. The current asset impairment policy is described in Critical Accounting Estimates, Asset Impairment.
Total revenues in 2015 for our Other operations increased, compared with 2014, primarily due to earned premiums from our Cincinnati Re business. Other also includes noninvestment operations of the parent company and its commercial leasing and financial services subsidiary, CFC Investment Company. Total expenses for Other also increased in 2015, primarily due to losses and loss expenses and underwriting expenses from our Cincinnati Re operations.
The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with small changes in the amount of permanent book-tax differences.
We seek to maintain prudent levels of liquidity and financial strength for the protection of our policyholders, creditors and shareholders. We manage liquidity at two levels to meet the short- and long-term cash requirements of business obligations and growth needs. The first is the liquidity of the parent company. The second is the liquidity of our insurance subsidiary. Management of liquidity at both levels is essential because each has different funding needs and sources, and each is subject to certain regulatory guidelines and requirements.
At December 31, 2015, the parent company had $1.747 billion in cash and marketable securities, providing strong liquidity to fund cash outflows, as needed. The payment of dividends to shareholders is largely based upon receiving subsidiary dividends. Alternatively, we could sell investments or use our line of credit to support the dividend payment.
Dividends received from the subsidiary in 2015 were $47 million more than 2014, supported by strong property casualty insurance subsidiary net cash flow from operating activities. We expect 2016 parent company sources of cash flows to be similar to 2015. The majority of expenditures for the parent company have been consistent during the last three years, and we expect future expenditures to remain fairly stable. Share repurchases are discretionary, depending on cash availability and capital management decisions.
The parent company’s insurance subsidiary is largely the operations of the property casualty segments. The primary sources of cash inflows are collection of premiums, investment income, maturity of fixed-income securities and sale proceeds from investments. Property casualty insurance premiums generally are received before losses are paid under the policies purchased with those premiums. Cash outflows are primarily loss and loss expenses, commissions, salaries, taxes, operating expenses and investment purchases. Over the three-year period ended December 31, 2015, premium receipts and investment income have been more than sufficient to pay claims and operating expenses. Excess cash flows were partially used to pay dividends to the parent company. We are not aware of any known trends that would materially change historical cash flow results other than fluctuations in catastrophe claims and other large losses either individually or in aggregate.
The table below shows a summary of operating cash flow for property casualty insurance (direct method). Historically, annual variation in operating cash flow has been largely related to changes in amounts of catastrophe losses.
$28 million aggregate principal amount of 6.900% senior debentures due 2028.
At December 31, 2015, we had a $225 million line of credit with commercial banks, with $35 million borrowed. That line of credit had a $49 million balance at December 31, 2014. During 2015, we repaid $14 million as part of routine cash management. Access to this line of credit requires compliance with various covenants, including maintaining a minimum consolidated net worth and not exceeding a 30 percent debt-to-total capital ratio, as defined by the agreement. At December 31, 2015, we had in excess of $1.0 billion in net worth compared with our covenant net worth requirement. We are considerably within compliance with all covenants under the credit agreement, and believe we will remain in compliance. The credit agreement provides alternative interest charges based on the type of borrowing and our debt rating. The interest rate charged is adjusted LIBOR plus an applicable margin.
Capital resources consisting of shareholders’ equity and total debt represent our overall financial strength to support current obligations and growth in our insurance businesses. At December 31, 2015, we had total capital of $7.248 billion. Shareholders’ equity was $6.427 billion, a decrease of $146 million, or 2 percent, from the prior year. Our total debt was $821 million, down $14 million from a year ago. We seek to maintain a solid financial position and provide capital flexibility by keeping our ratio of debt to total capital moderate. We target a ratio below 20 percent. At year-end 2015, the ratio was 11.3 percent, matching year-end 2014.
Other operating expenses - Many of our operating expenses are not contractual obligations but reflect the ongoing expenses of our business. For example, we anticipate capitalizing development costs for approximately $5 million in spending for key technology initiatives in 2016, compared with actual capitalization totaling $6 million in 2015 and $5 million in 2014. These activities are conducted at our discretion, and we have no material contractual obligations for activities planned as part of these projects.
A long-term perspective governs our liquidity and capital resources decisions, with the goal of benefiting our policyholders, agents, shareholders and associates over time. Our 2015 insurance results were better than our longer-term combined ratio objective of averaging within the range of 95 percent to 100 percent over five-year periods, resulting in strong underwriting profits.
At December 31, 2015, we had $544 million in cash and cash equivalents. That strong liquidity and our consistent cash flows give us the flexibility to meet current obligations and commitments while building value by prudently investing where we see potential for both current income and long-term return. They also provide adequate financial cushion when short-term operating results do not meet our objectives.
In any year, we consider the most likely source of pressure on liquidity would be an unusually high level of catastrophe loss payments within a short period of time, such as what occurred in the second quarter of 2011. We responded with a reduced insurance subsidiary dividend to our parent company in 2011. There could be additional obligations for our insurance operations due to increasing severity or frequency of noncatastrophe claims. To address the risk of unusually large insurance loss obligations including catastrophe events, we maintain property casualty reinsurance contracts with highly rated reinsurers, as discussed under 2016 Reinsurance Ceded Programs. We also monitor the financial condition of our reinsurers because their insolvency could jeopardize a portion of our $542 million reinsurance recoverable asset at December 31, 2015.
Our estimate of future gross property casualty loss and loss expense payments of $4.660 billion is lower than loss and loss expense reserves of $4.718 billion reported on our balance sheet at December 31, 2015. The $58 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
We carried $84 million of net loss and loss expense reserves for asbestos and environmental claims and $45 million of reserves for mold claims at year-end 2015, compared with $81 million and $51 million, respectively, for such claims at year-end 2014. The asbestos and environmental claims amounts for each respective year constituted 1.9 percent and 2.0 percent of total net loss and loss expense reserves at these year-end dates.
We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s, when asbestos and pollution exclusions were not widely used by commercial lines insurers. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we endorsed to or included in most policies an asbestos and environmental exclusion.
The ranges reflect our assessment of the most likely unpaid loss and loss expenses at year-end 2015 and 2014. However, actual unpaid loss and loss expenses could nonetheless fall outside of the indicated ranges.
We reconcile the beginning and ending balances of our reserves for loss and loss expenses at December 31, 2015, 2014 and 2013, in Item 8, Note 4 of the Consolidated Financial Statements. The reconciliation of our year-end 2014 reserve balance to net incurred losses one year later recognized $184 million of favorable reserve development.
Section D, cumulative net reserve development, represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, reserves established at December 31, 2005, had developed favorably by $317 million over 10 years, net of reinsurance, which was reflected in income over the 10 years. The table shows favorable reserve development as a negative number. Favorable reserve development on prior accident years, which represents a negative expense, is favorable to income. The “One year later” line in the table shows the effects on income before income taxes in 2015, 2014 and 2013 of changes in estimates of the reserves for loss and loss expenses for all accident years. The effect was favorable to pretax income for those three years by $184 million, $98 million, and $147 million, respectively.
Overall favorable development for consolidated property casualty reserves of $184 million in 2015 illustrated the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. As noted in Critical Accounting Estimates, Key Assumptions Loss Reserving, our models predict that actual loss and loss expense emergence will differ from projections, and we do not attempt to monitor or identify such normal variations. The table in Property Casualty Loss and Loss Expense Obligations and Reserves shows reserves by segment and lines of business and the components of gross reserves among case, IBNR and loss expense reserves.
Favorable reserve development of $93 million for our workers’ compensation line accounted for approximately 60 percent of our commercial lines insurance segment net total in 2015, while favorable reserve development of $63 million for our commercial casualty line of business accounted for approximately 40 percent. Our commercial auto line of business experienced $31 million of unfavorable reserve development on prior accident years recorded during 2015, and that 2015 measure for our personal auto line of business was also unfavorable at $15 million. Drivers of significant reserve development for various lines of business are discussed below.
Commercial casualty favorable development for prior accident years - During 2015, we experienced favorable development on prior accident years in total for this line of business. However, results varied between component coverages and by accident year within coverage. For example, our products liability coverage within commercial casualty experienced favorable results for most prior accident years, but slightly adverse development on accident years 2009 and 2011. In total, development for products liability was favorable for all prior years combined. After exhibiting adverse development in 2014, prior years for commercial umbrella coverage developed slightly better than expected in 2015. Our actuaries reacted cautiously and lowered estimated ultimate losses slightly for commercial umbrella.
Workers’ compensation - We continue to see favorable reserve development, for all prior accident years in aggregate. During 2015, the trend for estimated payments to be made in future calendar years was down slightly from 2014. However, we continue to monitor this line closely, as a sudden increase in trend for future payments has a highly leveraged effect. During 2013, paid loss amounts were higher than we expected for several older accident years, and we increased our reserve estimates accordingly. Initiatives to improve profitability of our workers’ compensation line of business are discussed in Commercial Lines Insurance Results, Commercial Lines of Business Analysis.
Our estimates of gross life, annuity and disability obligations do not reflect net recoveries from reinsurance agreements. Ceded life reinsurance receivables were $250 million at year-end 2015. As discussed in
Gross life policy reserves were $2.583 billion at year-end 2015, compared with $2.497 billion at year-end 2014. The increase was primarily due to reserves for traditional life insurance contracts. We establish reserves for traditional life insurance policies based on expected expenses, mortality, morbidity, withdrawal rates and investment yields, including a provision for uncertainty. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. We use both our own experience and industry experience adjusted for historical trends in arriving at our assumptions for expected mortality, morbidity and withdrawal rates. We use our own experience and historical trends for setting our assumptions for expected expenses. We base our assumptions for expected investment income on our own experience adjusted for current economic conditions.
To help determine appropriate reinsurance coverage for hurricane, earthquake and tornado/hail exposures, we use the RMS and AIR models to estimate the probable maximum loss from a single event or multiple events occurring in a one-year period. The models are proprietary in nature, and the vendors that provide them periodically update the models, sometimes resulting in significant changes to their estimate of probable maximum loss. As of the end of 2015, both models indicated that a hurricane event represents our largest amount of exposure to losses. The table below summarizes estimated probabilities and the corresponding probable maximum loss from a single hurricane event occurring in a one-year period, and indicates the effect of such losses on consolidated shareholders’ equity at December 31, 2015. Net losses are net of reinsurance and income taxes, and assume our 2016 reinsurance programs apply.
Currently participating on our standard market property and casualty per-risk and per-occurrence reinsurance ceded programs are Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation, all of which had A.M. Best insurer financial strength ratings of A (Excellent) or better as of December 31, 2015. Our property catastrophe program is subscribed through a broker by reinsurers from the United States, Bermuda, London and the European markets. The largest participant in our property catastrophe program, representing approximately 48 percent of total participation, is the Lloyds of London placement that features numerous syndicates, with Liberty Syndicates and the XL Catlin Syndicate taking the largest participations. Other primary participants in our property catastrophe program include R.J. Kiln & Company Limited, Amlin Re and Markel Ltd.
The following table shows our five largest property casualty reinsurance receivable amounts by reinsurer at year-end 2015 and 2014. USAIG is a joint underwriting association of individual insurance companies that collectively functions as a worldwide aviation insurance market. We terminated our participation in the association after policy year 2002. The A.M. Best insurer financial strength ratings as of the end of the two most recent years are also shown for each those reinsurers that are rated by Best.
Property per risk treaty - The primary purpose of the property treaty is to provide capacity up to $25 million, adequate for the majority of the risks we write. It also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100 percent. The 2016 ceded premium estimate was $18 million, compared with a $19 million estimate for 2015.
Casualty per occurrence treaty - The casualty treaty provides capacity up to $25 million. Similar to the property treaty, it provides sufficient capacity to cover the vast majority of casualty accounts we insure and also includes protection for extra-contractual liability coverage losses. We retain the first $10 million of each loss. Losses between $10 million and $25 million are reinsured at 100 percent. The 2016 ceded premium estimate was $12 million, compared with a $13 million estimate for 2015.
Casualty excess treaty - We purchase a casualty reinsurance treaty that provides an additional $45 million in protection for certain casualty losses. This treaty, along with the casualty per occurrence treaty, provides a total of $70 million of protection for workers’ compensation, extra-contractual liability coverage and clash coverage losses, which would apply when a single occurrence involves multiple policyholders of The Cincinnati Insurance Companies or multiple coverages for one insured. The 2016 ceded premium estimate was approximately $3 million, essentially unchanged from the 2015 estimate.
Property catastrophe treaty - To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, we purchased property catastrophe reinsurance with a limit up to $600 million. Losses from the same occurrence can now be aggregated into one limit over a 120-hour period and applied to the treaty towards recovery. The treaty contains one reinstatement provision. The 2016 ceded premium estimate was $41 million, compared with a $42 million estimate for 2015. We retain the first $100 million of any loss, and a share of losses up to $600 million, as indicated below:
Beginning in 2013 we added an alternative reinsurance structure to protect against certain catastrophic events, and a similar structure is in place for 2014 through 2016. For certain exposures in the United States, we arranged for the purchase of collateralized reinsurance funded through the issuance of collateralized risk-linked securities, known as catastrophe bonds. The catastrophe bond arrangements generally provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the property catastrophe treaty. Effective January 2014, we have a catastrophe bond arrangement providing up to $100 million in reinsurance protection. It expires in January 2017 and provides coverage for severe convective storm losses in certain key core regions as well as supplemental coverage in the event of an earthquake occurring along the New Madrid fault line and faults occurring in the states of Utah, Washington and Oregon.
Individual risks with insured values in excess of $50 million, as identified in the policy, are handled through a different reinsurance mechanism. We typically reinsure property coverage for individual risks with insured values between $50 million and $65 million under an automatic facultative agreement. For risks with property values exceeding $65 million, we negotiate the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is
Terrorism coverage at various levels has been secured in most of our reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, the property per risk treaty and the casualty per occurrence treaty, which provide coverage for commercial and personal risks. Our property catastrophe treaty provides terrorism coverage for personal risks, and coverage for commercial risks with total insured values of $15 million or less. For insured values between $15 million and $50 million, there also may be coverage in the property working treaty.
The following table shows our five largest life reinsurance receivable amounts by reinsurer at year-end 2015 and 2014. The A.M. Best insurer financial strength ratings are also shown.
We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2015, in accordance with accounting principles generally accepted in the United States of America (GAAP).
Deloitte & Touche LLP, our independent registered public accounting firm, audited the consolidated financial statements of Cincinnati Financial Corporation and subsidiaries for the year ended December 31, 2015. Deloitte & Touche LLP met with our audit committee to discuss the results of its examination. They have the opportunity to discuss the adequacy of internal controls and the quality of financial reporting without management present.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Cincinnati Financial Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Cincinnati Insurance Company leads our standard market property casualty insurance group that also includes two subsidiaries: The Cincinnati Casualty Company and The Cincinnati Indemnity Company. This group markets a broad range of standard market commercial and personal policies. The group focuses on delivery of quality customer service to our select group of 1,526 independent insurance agencies with 1,956 reporting locations across 39 states. In 2015 the Cincinnati Insurance Company began our reinsurance assumed operations, Cincinnati Re. Other subsidiaries of The Cincinnati Insurance Company include The Cincinnati Life Insurance Company, which markets life and disability income insurance and fixed annuities, and The Cincinnati Specialty Underwriters Insurance Company, which offers excess and surplus lines property casualty insurance products.
When determining OTTI charges for our equity portfolio, our invested asset impairment policy considers qualitative and quantitative factors, including facts and circumstances specific to individual securities, asset classes, the financial condition of the issuer, changes in dividend payment, the length of time fair value had been less than cost,
Included within our other invested assets are $31 million of life policy loans and $36 million of private equity investments. Life policy loans are carried at the receivable value. The private equity investments provide their financial statements to us and generally report investments on their balance sheets at fair value. We use the equity method of accounting for private equity investments.
We establish reserves to cover the expected cost of claims, losses and expenses related to investigating, processing and resolving claims. Although the appropriate amount of reserves is inherently uncertain, we base our decisions on past experience and current facts. Reserves are based on claims reported prior to the end of the year and estimates of unreported claims. We take into account the fact that we may recover some of our costs through salvage and subrogation. We regularly review and update reserves using the most current information available. Any resulting adjustments are reflected in current calendar year insurance losses and policyholder benefits.
We offer several types of life insurance and disability income insurance, and we account for each according to the duration of the contract. Short-duration life and health contracts are written to cover claims that arise during a short, fixed term of coverage. We generally have the right to change the amount of premium charged or cancel the coverage at the end of each contract term. Group life insurance is an example. We record premiums for short-duration life and health contracts similarly to property casualty contracts.
We capitalize acquisition costs for traditional long-duration contracts. We charge these capitalized costs associated with successfully acquiring traditional long-duration contract insurance policies over the premium-paying period of the policies. We use the same assumptions used in establishing the liability for the contract. All acquisition costs are in accordance with ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate our deferred acquisition costs for recoverability.
We maintain a liability equal to the policyholder account value. There is no provision for adverse deviation. Some of our universal life policies contain no-lapse guarantee provisions. For these policies, we establish a reserve in addition to the account balance, based on expected no-lapse guarantee benefits and expected policy assessments.
We carry the assets of separate account BOLIs at fair value. The liabilities on separate account BOLIs primarily are the contract holders’ claims to the related assets and are carried at an amount equal to the contract holders’ account value. At December 31, 2015, the current fair value of the BOLI invested assets and cash exceeded the current fair value of the contract holders’ account value by approximately $21 million. If the BOLI projected fair value were to fall below the value we guaranteed, a liability would be established with a corresponding charge to the company’s earnings.
Ceded premiums are deferred and recorded as earned premiums on a pro rata basis over the terms of the contracts. We estimate loss amounts recoverable from our reinsurers based on the reinsurance policy terms. Historically, our claims with reinsurers have been paid. We do not have an allowance for uncollectible reinsurance.
We sponsor a defined benefit pension plan that was modified during 2008. We closed entry into the pension plan, and only participants 40 years of age or older could elect to remain in the plan. Our pension expense is based on certain actuarial assumptions and also is composed of several components that are determined using the projected
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest. ASU 2015-03 reduces the complexity of disclosing debt issuance costs and debt discount and premium on the balance sheet by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 allows entities to defer and present debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Insurance contracts do not fall within the scope of this ASU. The effective date of ASU 2014-09 is for annual reporting periods beginning after December 15, 2017 with early adoption permitted. The ASU has not yet been adopted; however, there is not expected to be a material impact on our company’s consolidated financial position, cash flows or results of operations.
ASU 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis
In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance: Disclosures About Short-Duration Contracts. ASU 2015-09 requires entities to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses to increase the transparency of significant estimates. ASU 2015-09 also requires entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 also requires entities to disclose a rollforward of the liability of unpaid claims and claim adjustment expense for annual and interim reporting periods. The effective date of ASU 2015-09 is for annual reporting periods beginning after December 15, 2015, and interim reporting periods within annual periods beginning after December 15, 2016. The ASU has not yet been adopted and will not have a material impact on our company’s consolidated financial position, cash flows or results of operations, but the ASU will require additional disclosures to our annual and interim financial statements.
At December 31, 2015, fixed-maturity investments with amortized cost of $74 million and fair value of $77 million were on deposit with various states in compliance with regulatory requirements. At December 31, 2014, fixed-maturity investments with amortized cost of $75 million and fair value of $78 million were on deposit with various states in compliance with regulatory requirements.
For the years ended December 31, 2015, 2014 and 2013, there were no credit losses on fixed-maturity securities for which a portion of OTTI has been recognized in other comprehensive income.
The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used. Our valuation techniques have not changed from those used at December 31, 2014, and ultimately management determines fair value. Financial instruments reported at fair value in our consolidated financial statements are categorized based upon the following characteristics or inputs to the valuation techniques:
Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the following tables by security type with a summary of changes in fair value for the years ended December 31, 2015 and 2014. Total Level 3 assets continue to be less than 1 percent of financial assets measured at fair value in the consolidated balance sheets. Assets presented in the table below were valued based primarily on broker/dealer quotes for which there is a lack of transparency as to inputs used to develop the valuations. Transfers into Level 3 included situations where a fair value quote was not provided by the company's nationally recognized pricing vendor and as a result the price was stale or had been replaced with a broker quote where the inputs had not been corroborated to be market observable resulting in the security being classified as Level 3. Transfers out of Level 3 included situations where a broker quote was used in the prior period and a fair value quote
became available from the company's pricing vendor in the current period. A quote utilizing the new pricing source was not available as of the prior period, and any gains or losses related to the change in valuation source for individual securities were not significant. The quantitative detail of these unobservable inputs is neither provided nor reasonably available to us.
Fair value of the long-term debt was determined under the fair value measurements and disclosure accounting rules based on market pricing of similar debt instruments that are actively trading. We determine fair value for our debt the same way that we value corporate fixed maturities in our investment portfolio. Fair value can vary with macroeconomic conditions. Regardless of the fluctuations in fair value, the outstanding principal amount of our long-term debt is $793 million at both December 31, 2015 and 2014. None of the long-term debt is encumbered by rating triggers.
Outstanding principal and interest for these life policy loans totaled $31 million at December 31, 2015 and 2014. To determine the fair value, we make the following significant assumptions: (1) the discount rates used to calculate the present value of expected payments are the risk-free spot rates, as nonperformance risk is minimal; and (2) the loan repayment rate by which policyholders pay off their loan balances is in line with past experience.
Recorded reserves for the deferred annuities were $860 million and $863 million at December 31, 2015 and 2014, respectively. Recorded reserves for the structured settlements were $174 million and $182 million at December 31, 2015 and 2014, respectively.
inter-departmental committee that includes actuarial management that is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. The reserve for loss and loss expenses in the consolidated balance sheets also includes
$58 million, $47 million and $70 million for certain accident, life and health loss reserves at December 31, 2015, 2014 and 2013, respectively.
During 2015, we experienced $184 million of favorable development on prior accident years including $154 million of favorable development in commercial lines, $5 million of adverse development in personal lines and $35 million of favorable development in excess and surplus lines. Favorable development in 2015 was $86 million more than in 2014, due primarily to reduced uncertainty of prior accident year loss and loss adjustment net expense. This illustrates the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable development of $93 million for the workers' compensation line, largely due to more favorable 2015 workers' compensation trends for estimated payments to be made in future calendar years that were down slightly from 2014. We recognized favorable development of $63 million for the commercial casualty line. Development for products liability was favorable for most prior accident years and development of prior years for commercial umbrella coverage improved slightly better than expected. Therefore, estimated ultimate losses were lowered. Our commercial auto line experienced $31 million of adverse development due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled. We believe we were slow to recognize some of the higher loss cost effects.
We carried $84 million of net loss and loss expense reserves for asbestos and environmental claims and
Expenses associated with successfully acquiring insurance policies - primarily commissions, premium taxes and underwriting costs - are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability.
$49 million was drawn on the line of credit. The interest rate charged on our borrowings on this credit agreement ranged from 1.07 percent to 1.19 percent during 2015 and ranged from 1.15 percent to 1.30 percent during 2014.
Capital lease obligations, excluding an insignificant amount of interest, totaled $35 million and $36 million in 2015 and 2014, respectively. Below are the expected capital lease obligations that we expect to pay over the next six years:
Declared cash dividends per share were $2.30, $1.76 and $1.655 for the years ended December 31, 2015, 2014 and 2013, respectively.
Our insurance subsidiary declared dividends to the parent company of $447 million in 2015, $400 million in 2014 and $375 million in 2013. State regulatory requirements restrict the dividends insurance subsidiaries can pay. Dividends must be paid within 30 days of declaration. Generally, the most our insurance subsidiary can pay without prior regulatory approval is the greater of 10 percent of statutory capital and surplus or 100 percent of statutory net income for the prior calendar year. Dividends exceeding these limitations may be paid only with approval of the insurance department of the domiciliary state. During 2016, the total that our insurance subsidiary, which is the parent of all other insurance subsidiaries, may declare in dividends is approximately $534 million.
Our consolidated statements of income include life insurance contract holders’ benefits incurred on ceded business:
The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. As of December 31, 2015, 2014 and 2013, we had no operating or capital loss carry forwards.
As a result of positions either taken in our 2012 through 2014 federal tax returns filed with the IRS or expected to be taken in the 2015 filing, we believe it is more likely than not that our tax liability will be sustained upon examination by the IRS. We therefore carry no amount for unrecognized tax benefits for the years ended 2012 through 2015.
We also sponsor a defined contribution plan (401(k) plan). Matching company contributions totaled $12 million,
year-end 2015 and $13 million at year-end 2014, which is included in the projected benefit obligation. The company also makes available to a select group of associates the CFC Top Hat Savings Plan, a nonqualified deferred compensation plan, which had a fair value of $21 million and $18 million at December 31, 2015 and 2014, respectively.
Benefit obligation activity using an actuarial measurement date for our qualified pension plan and SERP at December 31 follows:
Investments in securities are valued based on the fair value hierarchy outlined in Note 3, Fair Value Measurements. The pension plan did not have any liabilities carried at fair value during the years ended December 31, 2015 and 2014. There have been no transfers between Level 1 and Level 2 for the years ended December 31, 2015 and 2014. The following table shows the fair value hierarchy for those assets measured at fair value on a recurring basis at December 31, 2015 and 2014. Excluded from the table below is cash on hand of $21 million and $11 million at December 31, 2015 and 2014, respectively.
Four equity compensation plans currently permit us to grant various types of equity awards. We currently grant incentive stock options, nonqualified stock options, service-based restricted stock units and performance-based restricted stock units to associates, including some with market-based performance objectives under our shareholder-approved plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full-time associate for each full calendar year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant stock to our outside directors as a component of their annual compensation. We used treasury shares for share-based compensation award issues or exercises during 2014 and 2015.
December 31, 2015, 2014 and 2013, respectively. The related income tax benefit recognized was $6 million
Stock options are granted to associates at an exercise price equal to the fair value as determined by the average high and low sales price reported on the Nasdaq Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts, we estimate the fair value of each option granted on the date of grant using a binomial option-pricing model. We make the following assumptions to develop the binomial option-pricing model as follows:
The following weighted average assumptions were used in determining fair value for option grants issued during 2015 and 2014:
We have performance-based awards that vest on the first day of March after a three-calendar-year performance period. These awards vest according to the level of three-year total shareholder return achieved compared with a peer group over a three-year performance period with payouts ranging from 0 - 200 percent for awards granted in 2013, 2014 and 2015. Three-year total shareholder return is calculated by using annualized total return of a stock to an investor due to capital gain appreciation plus reinvestment of all dividends. We issued 103,586 shares of performance-based restricted stock units during 2015 at the target-level performance hurdle for the three-year performance period ended December 31, 2014, as we achieved a three-year total shareholder return that exceeded six of 10 peers in our 2012 peer group. For the three-year performance period ended December 31, 2015, our total shareholder return exceeded four of 10 peers in our 2013 peer group. We expect payout of these shares at the
threshold level to occur in March of 2016. Performance-based awards vested during the year had an intrinsic value of $6 million, $3 million and $3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Expected volatility is based on each company's historical volatility using daily stock price observations. Volatility ranged from 13.78 percent to 34.69 percent for 2015 grants and 18.69 percent to 41.21 percent for 2014 grants. We have used a historical volatility term of 2.88 years for both the 2015 and 2014 grants.
Dividend yield has been modeled assuming dividends are reinvested in the issuing entity on a continuous basis and the holder of the award is not entitled to receive dividends paid during the performance period. Dividend yields of 3.52 percent for 2015 grants and 3.74 percent for 2014 grants were used.
Risk-free rates are equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the performance measurement period. Risk-free rates used were 0.99 percent for 2015 and 0.66 percent for 2014 grants.
Fee revenues for the commercial and personal insurance segments primarily represent installment fees. Fee revenues for the life insurance segment represent separate account investment management fees.
Our investments’ revenues consist of pretax net investment income and realized investment gains and losses.
This table includes unaudited quarterly financial information for the years ended December 31, 2015 and 2014:
Note: The sum of the quarterly reported per share amounts may not equal the full year as each is computed independently. Revenues including realized investment gains and losses, which are integral to our financial results over the long term, may cause this value to fluctuate substantially because we have substantial discretion in the timing of investment sales. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses.