1Effective January 1, 2018, changes in unrealized gains and losses on our equity portfolio are recognized in income through "Net unrealized losses on equity securities" on our Consolidated Statements of Income, as a result of our adoption of the Financial Accounting Standards Board issued Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. See Note 3. "Adoption of Accounting Pronouncements" in Item 8. "Financial Statements and Supplementary Data." of this Form 10-K for additional information.
For further details regarding these segments, refer to Note 1. "Organization" and Note 11. "Segment Information" included in Item 8. “Financial Statements and Supplementary Data.” of this Form 10-K.
Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to us, and our payment of that loss. To recognize liabilities for unpaid loss and loss expense, insurers establish reserves as balance sheet liabilities representing an estimate of amounts needed to pay reported and unreported net loss and loss expense. We had accrued $3.9 billion of gross loss and loss expense reserves and $3.4 billion of net loss and loss expense reserves at December 31, 2018. At December 31, 2017, these gross and net reserves were $3.8 billion and $3.2 billion, respectively. The Insurance Subsidiaries' liability duration was approximately 3.6 years at December 31, 2018, down from 3.8 years at December 31, 2017.
During 2017, this line experienced favorable development of $48.3 million, attributable to lower than expected frequencies and severities, mainly in accident years 2016 and prior.
The importance of any single assumption depends on several considerations, such as the line of business and the accident year. If the actual experience emerges differently than the assumptions used in the process to establish reserves, changes in our reserve estimate are possible and may be material to the results of operations in future periods. Set forth below are sensitivity tests that highlight potential impacts to loss and loss expense reserves under different scenarios, for the major casualty lines of business. These tests consider each assumption and line of business individually, without any consideration of correlation between lines of business and accident years. Therefore, the results in the tables below do not constitute an actuarial range. While the figures represent possible impacts from variations in key assumptions as identified by management, there is no assurance that the future emergence of our loss and loss expense experience will be consistent with either our current or alternative sets of assumptions.
Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Normal historically-based actuarial approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future potential loss emergence. In addition, while certain alternative models can be applied, such models can produce significantly different results with small changes in assumptions. As a result, we do not calculate an asbestos and environmental loss range. Historically, our asbestos and environmental claims have been significantly lower in volume, with less volatility and uncertainty than many of our competitors in the Standard Commercial Lines industry. Prior to the introduction of the absolute pollution exclusion endorsement in the mid-1980's, we were primarily a Standard Personal Lines carrier and therefore do not have broad exposure to asbestos and environmental claims. Additionally, we are the primary insurance carrier on the majority of these exposures, which provides more certainty in our reserve position compared to others in the insurance marketplace.
Our pension and post-retirement benefit obligations and related costs are calculated using actuarial methods, within the framework of U.S. GAAP. Two key assumptions, the discount rate and the expected return on plan assets, are important
The combined ratio decreased in 2017 compared to 2016 by 2.3 points driven by: (i) a decrease in supplemental commission to our distribution partners of 0.4 points; (ii) a decrease in pension expense of 0.3 points; and (iii) a decrease in current year loss costs of approximately 0.4 points.
The property catastrophe treaty, which covers both our standard market and E&S business, was renewed effective January 2019. We also renewed the separate catastrophe treaty of $35 million in excess of $5 million that covers events outside of our original 22-state footprint, in support of our growing E&S property book and geographic expansion into Arizona, New Hampshire, Colorado, Utah, and New Mexico. Both treaties were renewed with substantially the same terms as the expiring treaty. Overall catastrophe ceded premium for 2019 increased modestly primarily due to increases in reinsurer participation. On a risk-adjusted basis, however, the expiring layers saw a reduction in rate.
2Losses are after a 21% Federal income tax benefit and include applicable reinstatement premiums.
Certain amounts in our prior years' Financial Statements and related notes have been reclassified to conform to the
extinguishment costs; (ii) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life
participation in the NFIP, which we had previously reported as part of "Other assets" on the Consolidated Balance Sheets.
and ending cash balances on the Statements of Cash Flows. In addition, we have included the required reconciliation in Note 4.
(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2018, 2017, and 2016:
(b) Information regarding our HTM fixed income securities as of December 31, 2018 and December 31, 2017 was as follows:
The majority of the 2016 net favorable development was attributable to accident years 2013 and prior, driven by the workers compensation and general liability lines of business. This net favorable development was partially offset by unfavorable development in accident years 2014 and 2015 attributable to our commercial auto and E&S casualty lines of business. The unfavorable development in our commercial auto line of business was driven primarily by bodily injury liability for accident years 2014 and 2015. The unfavorable development in accident year 2014 was driven by higher than expected severity, whereas accident year 2015 was driven by higher than expected frequency and severity.
The Parent's line of credit with Wells Fargo Bank, National Association, as administrative agent, and Branch Banking and Trust Company (BB&T) (referred to as our "Line of Credit"), was renewed effective December 1, 2015, with a borrowing capacity of $30 million, which can be increased to $50 million with the approval of both lending partners. Our Line of Credit expires on December 1, 2020, and has an interest rate, which varies and is based on, among other factors, the Parent’s debt ratings. There were no balances outstanding under our Line of Credit at December 31, 2018 or at any time during 2018.
(2) In the fourth quarter of 2015, SICA and Selective Insurance Company of New York ("SICNY") joined, and invested in, the FHLBNY, which provides them with access to additional liquidity. The aggregate investment for both subsidiaries was $2.7 million at December 31, 2018 and $2.6 million at December 31, 2017. Our investment provides us the ability to borrow approximately 20 times the total amount of the FHLBNY common stock purchased with additional collateral, at comparatively low borrowing rates. In 2016, SICA borrowed the following amounts from the FHLBNY: (i) $25 million in August 2016 at an interest rate of 1.56%, which is due on August 16, 2021; and (ii) $25 million from the FHLBNY at an interest rate of 1.61%, which is due on July 21, 2021.
In addition to the Pension Plan, SICA also sponsors the Supplemental Excess Retirement Plan (the "Excess Plan") and a life insurance benefit plan (the "Retirement Life Plan"). Both of these plans are closed to new entrants and participants in the Excess Plan ceased accruing benefits after March 31, 2016. The Retirement Life Plan does not accrue benefits and this plan applies only to retirees who terminated employment with SICA on or before March 31, 2009. These are both unfunded plans with benefit obligations as of December 31, 2018 and December 31, 2017 of $9.5 million and $10.1 million, respectively, for the Excess Plan and $5.8 million and $6.4 million, respectively, for the Retirement Life Plan. Expense recorded for the Excess Plan was $0.4 million in both 2018 and 2017, and $0.5 million in 2016. Expense recorded for the Retirement Life Plan was $0.3 million in each of 2018, 2017, and 2016.
The fair value of the CIU liability is remeasured at each reporting period through the settlement date of the awards, which is three years from the date of grant based on an amount expected to be paid. A Monte Carlo simulation is performed to approximate the projected fair value of the CIUs that, in accordance with the CIU agreements established under the Cash Plan, is adjusted to reflect our performance on specified indicators as compared to targeted peer companies.
William M. Rue, a Director of the Parent, is Chairman of, and owns more than 10% of the equity of, Chas. E. Rue & Son, Inc., t/a Rue Insurance, a general independent retail insurance agency ("Rue Insurance"). Rue Insurance is an appointed distribution partner of the Insurance Subsidiaries on terms and conditions similar to those of our other distribution partners, which includes the right to participate in the Agent Plan. Mr. Rue’s son is President, and an employee, of Rue Insurance, and owns more than 10% of the equity of Rue Insurance. Mr. Rue’s daughter is an employee of Rue Insurance. Our relationship with Rue Insurance has existed since 1928.
Our Pension Plan contained investments in BlackRock funds of $131.9 million at December 31, 2018 and $134.3 million at December 31, 2017. We recorded a net investment loss on these funds of $9.3 million in 2018, net investment income of $25.2 million in 2017, and net investment income of $8.5 million in 2016. In addition, our Deferred Compensation Plan and Retirement Savings Plan may offer our employees the option to invest in various BlackRock funds. All contracts and transactions with BlackRock were consummated in the ordinary course of business on an arm's-length basis.