Results of operations include the accounts of The Hanover Insurance Company (“Hanover Insurance”) and Citizens Insurance Company of America (“Citizens”), our principal U.S. domiciled property and casualty companies; Chaucer Holdings Limited (“Chaucer”), our United Kingdom (“U.K.”) domiciled specialist insurance underwriting group which operates through the Society and Corporation of Lloyd’s (“Lloyd’s”); and other insurance and non-insurance subsidiaries. Results of operations include our discontinued operations, consisting primarily of our former life insurance businesses and our accident and health business.
Given the inherent complexity of our loss reserve estimation process and the potential variability of the assumptions used, the actual emergence of losses will vary, perhaps substantially, from the estimate of losses included in our financial statements, particularly in those instances where settlements or other claim resolutions do not occur until well into the future. Our net loss reserves at December 31, 2016 were $4.7 billion. Therefore, a relatively small percentage change in the estimate of net loss reserves would have a material effect on our results of operations.
The following discussion presents disclosure related to possible variation in net reserve estimates due to changes in key assumptions. This information is provided for illustrative purposes only. Many other assumptions may also lead to material reserve adjustments. If any such variations do occur, then they would likely occur over a period of several years and therefore their impact on our results of operations would be recognized during the same periods. It is important to note, however, that there is the potential for future variations greater than the amounts described below and for any such variations to be recognized in a single quarterly or annual period. No consideration has been given to potential correlation or lack of correlation among key assumptions or among lines of business and coverage as described below. As a result and because there are so many other factors which affect our net reserve estimate, it would be inappropriate to take the amounts described below and simply add them together in an attempt to estimate volatility in total. While we believe these are reasonably likely scenarios, the reader should not consider the following sensitivity analysis as illustrative of a net reserve range.
Specialty Programs - reserves recorded (including allocated LAE) for the AIX Companies were $342.3 million as of December 31, 2016. Two key assumptions underlying the actuarial reserve analysis for specialty programs are the inflation rate underlying the estimated reserve for our commercial automobile liability, general liability and workers’ compensation coverages, as well as the tail factor selection for workers’ compensation. A five point change to the embedded inflation rate for the aforementioned coverages, and a one point change in the workers’ compensation tail factor on AIX program business would have changed total reserves by approximately $50 million at December 31, 2016.
Chaucer’s favorable development was primarily the result of lower than expected losses in the energy line of $39.9 million, primarily in the 2012 through 2014 accident years, in the marine and aviation line of $29.6 million, primarily in the 2010, 2012 and 2013 accident years and the property line of $18.5 million, primarily in the 2012 through 2014 accident years. Additionally, Chaucer experienced lower than expected losses within casualty and other lines, specifically the specialist and international liability lines, of $21.9 million primarily in the 2008, 2011 and 2013 accident years. Chaucer’s favorable development was also partially attributable to the favorable impact of foreign exchange rate movements on prior years’ loss reserves. See “Foreign Exchange” section above for further discussion.
In 2014, net favorable loss and LAE development was $99.1 million, primarily as a result of favorable development of $104.6 million for Chaucer, partially offset by net unfavorable development of $9.2 million for Commercial Lines. Chaucer’s favorable development was primarily the result of lower than expected losses in the marine and aviation line of $40.1 million, primarily in the 2011 through 2013 accident years. Additionally, Chaucer experienced lower than expected losses within the property line of $21.5 million, primarily in the 2010 through 2013 accident years, and in casualty and other lines, specifically the specialty liability line of $21.4 million, primarily in the 2010 and 2013 accident years. Chaucer’s favorable development was also partially attributable to the favorable impact of foreign exchange rate movements on prior years’ loss reserves. See “Foreign Exchange” section above for further discussion.
The following table sets forth gross unrealized losses for fixed maturities by maturity period and for equity securities at December 31, 2016 and 2015. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, or we may have the right to put or sell the obligations back to the issuers.
Holding all other assumptions constant (using the December 31, 2016 GBP to U.S. dollar conversion rate of 1.23), sensitivity to changes in our key assumptions related to our pension plans is as follows:
We have the following securities, letters of credit and cash and cash equivalents pledged to Lloyd’s to satisfy these capital requirements at December 31, 2016. At December 31, 2016, we are in compliance with the capital requirements and expect to be able to meet these capital requirements in the future.
Membership in the FHLBB provides us with access to additional liquidity based on our stock holdings and pledged collateral. At December 31, 2016, we had additional borrowing capacity of $57.6 million. There were no borrowings outstanding under this agreement at December 31, 2016; however, we have borrowed and may continue to borrow, from time to time, through this facility to provide short term liquidity.
Other investments also include interests in limited partnerships and overseas deposits of $121.3 million and $102.2 million, respectively, at December 31, 2016, and $79.9 million and $100.9 million, respectively, at December 31, 2015.
In 2015, the Company repurchased senior debentures maturing March 1, 2020, with a carrying value of $83.7 million at a cost of $106.0 million, resulting in a pre-tax loss of $22.3 million, and senior debentures maturing October 15, 2025, with a carrying value of $6.5 million at a cost of $8.3 million, resulting in a pre-tax loss of $1.8 million.
In prior years, the Company completed several transactions which resulted in the realization, for tax purposes only, of unrealized gains in its investment portfolio. As a result of these transactions, the Company was able to realize capital losses carried forward and to release the valuation allowance recorded against the deferred tax asset related to these losses. The releases of valuation allowances were recorded as a benefit in accumulated other comprehensive income. Previously unrealized benefits of $20.7 million, $13.3 million and $16.2 million attributable to non-operating income, are recognized as part of income from continuing operations during 2016, 2015 and 2014, respectively. The remaining amount of $57.5 million in accumulated other comprehensive income will be released into income from continuing operations in future years, as the investment securities subject to these transactions are sold or mature.
The Company recognizes interest and penalties related to unrecognized tax benefits in federal income tax expense. The Company had accrued interest of $0.2 million and $0.6 million as of December 31, 2016 and 2015, respectively. For the years ended December 31, 2016, 2015 and 2014 the Company recognized a release of interest of $0.4 million, and expense of $0.1 million and $0.5 million, respectively. The Company has not recognized any penalties associated with unrecognized tax benefits.
The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions, as well as foreign jurisdictions. The Company and its subsidiaries are subject to U.S. federal income tax examinations by tax authorities for years after 2012, U.S. state income tax examinations for years after 2012 and foreign examinations for years after 2012.
The following tables present, for each hierarchy level, the U.S. qualified defined benefit plan’s investment assets that are measured at fair value at December 31, 2016 and 2015. Refer to Note 5 - “Fair Value” for a description of the different levels in the Fair Value Hierarchy.
Real estate fund investments are also valued based upon the values of the net assets of the fund. Although the NAV is calculated daily, transactions also consider cash inflows and outflows of the fund. The price where units are transacted includes the NAV, which is adjusted for investment charges and other estimated acquisition costs such as legal fees, taxes, planning and architect fees, survey and agent fees, among others. The following table presents the Chaucer defined benefit plan’s investment assets at December 31, 2016 and 2015.
Contributions include $0.2 and $0.3 million of Chaucer employee contributions during 2016 and 2015, respectively. All other contributions for all plans were made by the Company.
Long-lived assets located outside the U.S. were not material for the years ended December 31, 2016 or 2015. The Company does not have revenue from transactions with a single agent or broker amounting to 10 percent or more of its consolidated revenue.