Chaucer’s net premiums written increased by 4.0% in 2017, as compared to 2016. Excluding the impact of a first quarter 2016 reinsurance to close (“RITC”) transaction, which increased 2016 premiums and loss and LAE reserves by $17.7 million, net premiums written increased 6.4% due to new business growth initiatives, partially offset by a planned increase in ceded reinsurance premiums. Underwriting results declined in 2017, as compared to 2016, primarily due to higher catastrophe losses. The high level of catastrophe activity in 2017 is primarily due to hurricanes Harvey, Irma and Maria and two Mexico earthquakes that occurred in the third quarter and the California wildfires that occurred in the fourth quarter.
The following is our discussion and analysis of the results of operations by business segment. The operating results are presented before interest expense, taxes and other items which management believes are not indicative of our core operations, including realized gains and losses and the results of discontinued operations.
Net premiums written increased by $82.0 million for the year ended December 31, 2016, compared to the year ended December 31, 2015. This increase was primarily the result of growth in our domestic lines, partially offset by a planned increase in ceded reinsurance premiums in the Chaucer business.
Personal Lines underwriting profit for the year ended December 31, 2017 was $84.1 million, compared to $103.8 million for the year ended December 31, 2016, a decline of $19.7 million. Catastrophe losses for the year ended December 31, 2017 were $80.9 million, compared to $47.0 million for the year ended December 31, 2016, an increase of $33.9 million. This increase is primarily due to a large Midwest wind event that occurred in the first quarter. Unfavorable development on prior years’ loss reserves for the year ended December 31, 2017 was $9.4 million, compared to $4.3 million for the year ended December 31, 2016, an increase of $5.1 million.
Monoline and Multiple Peril General Liability - loss reserves recorded for monoline and multiple peril general liability on U.S. voluntary business were $740.5 million as of December 31, 2017. A key assumption for monoline and multiple peril general liability is the implied adequacy of the underlying case reserves. A ten point change in case adequacy (e.g., 10% deficiency changed to 0% or 20% deficiency) would have changed total reserves by approximately $82 million, either positive or negative, at December 31, 2017.
The net unfavorable Commercial Lines development primarily resulted from higher than expected losses in other commercial lines of $53.7 million. This was primarily driven by AIX programs and business classes which have since been terminated and general liability lines in accident years 2009 through 2012, partially offset by lower than expected losses in the commercial umbrella line in accident years 2012 through 2014 and in the healthcare line in accident years 2010 through 2014. We also experienced higher than expected losses within the commercial automobile line of $23.4 million, primarily related to liability coverage in accident years 2011 through 2013, and in the commercial multiple peril line, primarily in accident years 2008, 2009 and 2011. Partially offsetting the unfavorable development was lower than expected losses of $46.9 million within the workers’ compensation line, primarily related to accident years 2005 through 2014, and, to a lesser extent, our commercial umbrella line, primarily related to our 2012 through 2014 accident years.
Total cash and investments increased $686.0 million, or 7.9%, for the year ended December 31, 2017, primarily due to operational cashflows and market value appreciation, partially offset by the funding of financing activities, including dividend payments to shareholders.
Based on ratings by the National Association of Insurance Commissioners (“NAIC”), approximately 95% and 94% of the fixed maturity portfolio consisted of investment grade securities at December 31, 2017 and December 31, 2016, respectively. The quality of our fixed maturity portfolio remains strong based on ratings, capital structure position, support through guarantees, underlying security, issuer diversification and yield curve position.
See “Reinsurance Recoverables” in Part I - Item 1 of this Form 10-K for information on our reinsurance recoverable balances.
We currently have a U.S. qualified defined benefit plan, a defined benefit pension plan for our international subsidiary, Chaucer, and several smaller non-qualified benefit plans. In order to measure the liabilities and expense associated with these plans, we must make various estimates and key assumptions, including discount rates used to value liabilities, assumed rates of return on plan assets, employee turnover rates and anticipated mortality rates. Additionally, our Chaucer pension plan must also take into consideration inflation rates. These estimates and assumptions are reviewed at least annually and are based on our historical experience, as well as current facts and circumstances. In addition, we use outside actuaries to assist in measuring the expenses and liabilities associated with our defined benefit pension plans.
Net actuarial gains of $16.8 million and losses of $40.5 million were reflected as changes to accumulated other comprehensive income in 2017 and 2016, respectively. Net actuarial gains in 2017 resulted primarily from benefits from investment gains experienced during the year, partially offset by decreases in the discount rate. Net actuarial losses in 2016 resulted primarily from decreases in the discount rate as compared to the prior year that were partially offset by benefits from investments gains experienced during the year. The change in these actuarial gains and losses is amortized into earnings in future periods. In 2017 and 2016, amortization of actuarial losses from prior years was $14.1 million and $10.1 million, respectively.
On October 27, 2017, we entered into a Standby Letter of Credit Facility Agreement (the “Facility Agreement”) not to exceed £220.0 million (or $297.1 million) outstanding at any one time, with the option to increase the amount available for issuances of letters of credit to £300.0 million (or $405.1 million) in the aggregate on one occasion only during the term of the Facility Agreement (subject to the consent of all lenders and assuming no default and satisfaction of other specified conditions). The Facility Agreement amends and restates a Standby Letter of Credit Facility Agreement entered into on October 15, 2015 (the “Prior Facility Agreement”). This prior agreement provided for amounts available for issuances of letters of credit not to exceed £170.0 million (or $229.6 million) outstanding at any one time, with a similar option to increase the amount available for issuances of letters of credit to £235.0 million
In October 2016, the FASB issued ASC Update No. 2016-16, (Topic 740) Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. Under current GAAP, the tax effects of intra-entity transfers of assets (intercompany sales) are deferred until the assets are sold to an outside party or otherwise recovered through use. This ASC update eliminates this deferral of taxes for assets other than inventory and requires the recognition of taxes when the transfer occurs. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. Early adoption is permitted, but this election must be made in the first interim period of the adoption year. The adoption of ASC Update No. 2016-16 is not expected to have any net impact on the Company’s financial position or results of operations.
The Act also created a territorial tax system, which will generally allow companies to repatriate future non-U.S. sourced earnings without incurring additional U.S. taxes, by providing a 100% exemption on dividends received from certain non-U.S. subsidiaries. Although most of the Company’s non-U.S. income had been previously subject to U.S. taxes, a portion of its non-U.S. income had been indefinitely reinvested overseas and was not subject to U.S. tax until repatriated. These non-U.S. earnings are now subject to a one-time mandatory toll charge totaling $12.7 million, which also is recorded as a component of income tax expense in continuing operations for the year ended December 31, 2017.
In addition to the Company’s pension plans, the Company also has postretirement medical benefits that it provides to former agents and retirees and their dependents, and through December 31, 2017, to a limited number of full-time employees. The plans, which are funded by the Company through either a Health Reimbursement Arrangement (“HRA”) or directly, provide access to benefits including hospital and major medical, with certain limits, and have varying co-payments and deductibles, depending on the plan. Generally, employees who were actively employed on December 31, 1995 became eligible with at least 15 years of service after the age of 40. Effective January 1, 1996, the Company revised these benefits so as to establish limits on future benefit payments to
The excess tax expense realized from options exercised for the years ended December 31, 2017, 2016 and 2015 was $4.0 million, $5.6 million, and $9.7 million, respectively. The aggregate intrinsic value at December 31, 2017 for shares outstanding and shares exercisable was $35.3 million and $19.7 million, respectively. At December 31, 2017, the weighted average remaining contractual life for shares outstanding and shares exercisable was 7.7 years and 6.5 years, respectively. Additional information about employee options outstanding and exercisable at December 31, 2017 is included in the following table:
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. For all options granted through December 31, 2017, the exercise price equaled the market price on the grant date. Compensation cost related to options is based upon the grant date fair value and expensed on a straight-line basis over the service period for each separately vesting portion of the option as if the option was, in substance, multiple awards.
The weighted average grant date fair value of options granted during the years ended December 31, 2017, 2016 and 2015 was $13.05, $10.83 and $9.72, respectively.
In the second quarter of 2016, the Company issued $375 million aggregate principal amount of 4.5% senior unsecured debentures. The net proceeds were used, together with cash on hand, to redeem outstanding senior notes, resulting in a pre-tax loss of $86.1 million. The after-tax effect of this loss was to decrease diluted earnings per share from income from continuing operations in the quarter by $1.29. See also Note 6 - “Debt and Credit Arrangements” for further information.