The Company leases its principal executive offices in New York, New York, as well as approximately 230 field and claim offices totaling approximately 4.5 million square feet throughout the United States under leases or subleases with third parties. The Company also leases offices in Canada, the United Kingdom, the Republic of Ireland, Brazil, India and China that house operations (primarily for Business and International Insurance) in those locations. The Company owns six buildings in Hartford, Connecticut, consisting of approximately 1.8 million square feet of office space. The Company also owns buildings located in other areas of Connecticut; Walnut Creek, California; Norcross, Georgia; St. Paul, Minnesota; and Omaha, Nebraska. The Company owns a building in London, England, which houses a portion of Business and International Insurance's operations in the United Kingdom.
Claims and claim adjustment expenses in 2015 were $13.72 billion, $147 million or 1% lower than in 2014, primarily reflecting the impacts of (i) lower catastrophe losses and (ii) lower non-catastrophe weather-related losses, partially offset by (iii) loss cost trends. Catastrophe losses in 2015 included wildfires in California, hail and wind storms in several regions of the United States and winter storms in several regions of the United States. Catastrophe losses in 2014 included multiple wind and hail storms in several regions of the United States and a winter storm in the Mid-Atlantic, Midwestern and Southeastern regions of the United States.
primarily resulted from the pre-tax impact of a 2014 reduction in the estimated liability for state assessments to be paid by the Company related to workers' compensation premiums, partially offset by lower non-catastrophe weather-related losses. Partially offsetting this net pre-tax decrease in income was a related decrease in income tax expense. In addition, income tax expense in 2015 was reduced by $12 million as a result of the resolution of prior year tax matters.
2016, 2015 and 2014 are discussed in more detail in note 7 of notes to the consolidated financial statements.
Income tax expense in 2016 was $307 million, $35 million or 13% higher than in 2015, primarily reflecting the impact of the $55 million increase in income before income taxes in 2016. Income tax expense in 2015 was $272 million, $76 million or 22% lower than in 2014, primarily reflecting the $170 million decrease in income before income taxes and the $16 million reduction in income tax expense in 2015 resulting from the resolution of prior year tax matters.
Claims and claim adjustment expenses in 2016 were $5.31 billion, $1.09 billion or 26% higher than in 2015, primarily reflecting (i) higher volumes of insured exposures, (ii) net unfavorable prior year reserve development as compared to net favorable prior year reserve development in 2015, (iii) higher loss estimates in the Automobile product line for bodily injury liability coverages, (iv) the impact of loss cost trends and (v) higher catastrophe losses. Claims and claim adjustment expenses of $4.22 billion in 2015 were comparable to 2014, primarily reflecting (i) higher net favorable prior year reserve development and (ii) lower catastrophe losses, largely offset by (iii) the impact of loss cost trends and (iv) higher volumes of insured exposures. Factors contributing to prior year reserve development during the years ended December 31, 2016, 2015 and 2014 are discussed in more detail in note 7 of notes to the consolidated financial statements.
The carrying values of investments in fixed maturities classified as available for sale at December 31, 2016 and 2015 were as follows:
securities at December 31, 2016 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $521 million and a fair value of $503 million, resulting in a net pre-tax unrealized investment loss of $18 million. These securities in an unrealized loss position represented approximately 0.9% of the total amortized cost and 0.8% of the fair value of the fixed maturity portfolio at December 31, 2016 and accounted for 3.6% of the total gross pre-tax unrealized investment loss in the fixed maturity portfolio at December 31, 2016.
The Company actively monitors and evaluates changes in third-party models and, when necessary, calibrates the catastrophe risk model estimates delivered via its own proprietary modeling processes. The Company considers historical loss experience, recent events, underwriting practices, market share analyses, external scientific analysis and various other factors including non-modeled losses to refine its proprietary view of catastrophe risk. These proprietary models are continually updated as new information emerges.
In Business and International Insurance, the Company expects underlying underwriting margins and the underlying combined ratio during 2017 will be broadly consistent with those in 2016, reflecting the impact of loss trends in excess of earned pricing, largely offset by lower (and more normalized) levels of non-catastrophe weather-related losses.
In September 2015, the FASB issued updated guidance regarding business combinations that requires an acquirer to recognize post-close measurement adjustments for provisional amounts in the period the adjustment amounts are determined rather than retrospectively. The acquirer is also required to recognize, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the provisional amount, calculated as if the accounting had been completed at the acquisition date. The updated guidance is to be applied prospectively effective for reporting periods beginning after December 15, 2015. In connection with business combinations which have already been completed, the adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.
The updated guidance changes the threshold amount an entity can withhold for taxes when settling an equity award and still qualify for equity classification. A company can withhold up to the maximum statutory tax rates in the employees' applicable jurisdiction rather than withholding up to the employers' minimum statutory withholding requirement. The update also clarifies that all cash payments made to taxing authorities on behalf of employees for withheld shares are to be presented in financing activities on the statement of cash flows.
For structured fixed maturity securities (primarily residential and commercial mortgage-backed securities and asset-backed securities), the Company estimates the present value of the security by projecting future cash flows of the assets underlying the securitization, allocating the flows to the various tranches based on the structure of the securitization and determining the present value of the cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). The Company incorporates levels of delinquencies, defaults and severities as well as credit attributes of the remaining assets in the securitization, along with other economic data, to arrive at its best estimate of the parameters applied to the assets underlying the securitization. In order to project cash flows, the following assumptions are applied to the assets underlying the securitization: (1) voluntary prepayment rates, (2) default rates and (3) loss severity. The key assumptions made for the Prime, Alt-A and first-lien Sub-Prime mortgage-backed securities at December 31, 2016 were as follows:
The Company's consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related written and earned premiums) the Company has underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to
Gross claims and claim adjustment expense reserves at December 31, 2016 decreased by $343 million from December 31, 2015. This decrease primarily reflected the impacts of (i) payments related to operations in runoff, including the Company's $524 million payment related to the settlement of the PPG Industries, Inc. litigation and (ii) net favorable prior year reserve development, partially offset by the impacts of (iii) higher volumes of insured exposures and (iv) loss cost trends for the current accident year. Gross claims and claim adjustment expense reserves at December 31, 2015 decreased by $1.55 billion from December 31, 2014. This decrease primarily reflected the impacts of (i) payments related to operations in runoff, including a $579 million payment related to the settlement of the Asbestos Direct Action Litigation as described in more detail in note 16, (ii) net favorable prior
underlying shares of common stock are not issued until the vesting criteria is satisfied. In addition, the Company's board of directors can be issued deferred stock units from (i) an annual award; (ii) deferred compensation (in lieu of cash retainer); and (iii) dividend equivalents earned on outstanding deferred compensation.
Fair value estimates for equity and bond mutual funds held by the pension plans reflect prices received from an external pricing service that are based on observable market transactions. These estimates are included in Level 1.
(1)Total other-than-temporary impairments (OTTI) for the year ended December 31, 2016, and the amounts comprising total OTTI that were recognized in net realized investment gains (losses) and in other comprehensive income (OCI), were as follows: