The personal insurance segment’s SAP catastrophe loss ratio for the year ended December 31, 2015 was 5.9%, compared to pro forma SAP catastrophe loss ratios of 5.2% and 5.7% in 2014 and 2013, respectively (Table 2 and Reconciliation Tables 7 - 8). Catastrophe events in Colorado and Texas during 2014 contributed to the higher personal auto ratio when compared to 2013 (Table 2). Partially offsetting the personal auto ratio increase for the year ended December 31, 2014 were improvements in both the as reported homeowners and other personal ratios of 2.8 points and 4.1 points, respectively, when compared to 2013 (Table 2). The improvements were attributable to a combination of successful remediation efforts in our homeowners line of business, where exposure was reduced in previously identified unprofitable states, and fewer and less severe catastrophe events during 2014 as compared to 2013.
The programs unit 2015 SAP non-catastrophe loss and ALAE ratio improved 112.7 points when compared to 2014 (Table 6) as a result of RED reserve strengthening in 2014 which added 127.1 points to the 2014 ratio. Excluding RED reserve strengthening, the ratio increased 14.3 points when compared to pro forma 2014, primarily due to higher current accident year losses due to increased severity in three programs with commercial auto exposures. In addition, prior accident year losses developed adversely for certain programs, including those in runoff.
Losses and loss expenses for a calendar year represent the combined estimated ultimate liability for claims occurring in the current calendar year along with any change in the estimated ultimate liability for claims occurring in prior years. The following table sets forth the provision for losses and loss expenses for those claims occurring in the current and prior years, along with the GAAP loss and LAE ratio for the years ended December 31, 2015, 2014 and 2013:
Our GAAP expense ratio was 33.6% in 2015 compared to 33.7% and 33.6% in 2014 and 2013, respectively.
Our internally managed equity portfolio invests in U.S. large-cap, companies across many different industries selected based upon their potential for appreciation. This diversification across companies and industries reduces volatility in the value of the large-cap equity portfolio. Our investment policy guidelines limit the purchase of a specific stock to no more than 5.0% of the market value of the stock at the time of purchase, and no single equity holding should exceed 5.0% of the total equity portfolio. In addition, we also invest in U.S. large-cap, dividend-paying exchange traded funds which adds to the diversification of the portfolio by allowing us to invest in a large number of companies via one security.
At December 31, 2015, our investments in fixed maturities, equity securities and certain other invested assets were held as available-for-sale and carried at fair value. The unrealized holding gains or losses, net of applicable deferred taxes, are included as a separate component of stockholders’ equity as accumulated other comprehensive income (loss) and as such are not included in the determination of net income.
On December 31, 2011, the State Auto Group entered into the HO QS Arrangement, which was a three-year quota share reinsurance agreement covering our homeowners line of business. Under the HO QS Arrangement, the State Auto Group ceded to reinsurers 75% of its homeowners business under policies in force at the effective date and new and renewal policies thereafter issued during the term of the agreement. The HO QS Arrangement expired December 31, 2014.
At December 31, 2015, 2014 and 2013, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.
To calculate the State Auto Group’s December 31, 2015 benefit obligation for each of the benefit plans, we used a discount rate of 4.20% based on an evaluation of the expected future benefit cash flows of our benefit plans used in conjunction with the Citigroup Pension Discount Curve at the measurement date. A lower discount rate results in, all else being equal, a higher present value of the benefit obligation. To calculate our benefit obligation at December 31, 2015 and net periodic benefit cost for the year ended December 31, 2016, a discount rate of 4.20% and an expected long-term rate of return on plan assets of 7.00% were used. We selected an expected long-term rate of return on our plan assets by considering the mix of investments and stability of investment portfolio along with actual investment experience during the lifetime of the plans. Our assumptions regarding the discount rate and expected return on plan assets could have a significant effect on the amounts related to our benefit obligations and net periodic benefit cost depending on the degree of change between reporting periods.
See Note 9, “Pension and Postretirement Benefit Plans,” to our consolidated financial statements included in Item 8 of this Form 10-K for further disclosures regarding our benefit plans.
In our opinion, State Auto Financial Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015 based on the COSO criteria.
accounting practices. The Company’s insurance subsidiaries do not apply any statutory accounting practices that would be considered a prescribed statutory accounting practice that differs from NAIC statutory accounting practices.
The following table sets forth the realized and unrealized holding gains (losses) on the Company’s investment portfolio for the years ended December 31, 2015, 2014 and 2013:
For assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), the following tables set forth a reconciliation of the beginning and ending balances for 2015 and 2014, separately for each major category of assets:
State Auto Financial and its subsidiaries file a consolidated U.S. federal income tax return. State Auto Financial and its subsidiaries also file in various state jurisdictions. The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2012. The Company has no current U.S. federal or state and local income tax examinations on-going at this time.