The underwriting expense ratio of 31.9% in 2013 was lower than the underwriting expense ratio of 32.2% in 2012, primarily reflecting the impact of growth in earned premiums in 2013.
First Party. Net written premiums of $1.58 billion in 2014 increased by 2% over 2013, primarily due to lower reinsurance costs. Business retention rates in 2014 remained strong but were slightly lower than in 2013. Renewal premium changes in 2014 remained positive but were lower than in 2013, primarily due to lower renewal rate changes. New business premiums in 2014 decreased from 2013. Net written premiums of $1.55 billion in 2013 increased by 8% over 2012. Business retention rates in 2013 remained strong and were level with 2012. Renewal premium changes in 2013 remained positive but were lower than in 2012, primarily due to lower renewal rate increases. New business premiums in 2013 increased over 2012.
Operating income in 2014 was $727 million, $154 million or 27% higher than operating income of $573 million in 2013, primarily reflecting the pretax impacts of (i) higher net favorable prior year reserve development and (ii) higher underlying underwriting margins, partially offset by (iii) lower net investment income. Net favorable prior year reserve development in 2014 and 2013 was $450 million and $232 million, respectively. Catastrophe losses in 2014 and 2013 were $6 million and $8 million, respectively. The improvement in underlying underwriting margins primarily reflected the pretax impact of lower reinsurance costs. Partially offsetting this net pretax increase in operating income was an increase in income tax expense. The higher effective tax rate in 2014 than in 2013 resulted from the impact of interest on municipal bonds, which is effectively taxed at a rate that is lower than the corporate tax rate of 35%, comprising a lower percentage of pretax income in 2014 than in 2013, as well as the impact of a $15 million reduction in income tax expense in 2013 due to the resolution of prior year tax matters.
The underwriting expense ratio of 29.1% in 2014 was 0.7 points lower than the underwriting expense ratio of 29.8% in 2013. The decrease in 2014 primarily reflected (i) lower homeowners' commission rates and (ii) the benefit of the Company's expense reduction initiatives, partially offset by (iii) higher underwriting expenses resulting from higher new business levels and (iv) a decrease in earned premiums.
The operating loss for Interest Expense and Other in 2014 was $9 million higher than in 2013. The operating loss for Interest Expense and Other in 2013 was $13 million lower than in 2012. After-tax interest expense in 2014, 2013 and 2012 was $240 million, $235 million and $246 million, respectively. The increase in interest expense in 2014 compared with 2013 primarily reflected slightly higher average levels of debt outstanding. The decrease in interest expense in 2013 compared with 2012 primarily reflected lower average levels of debt outstanding.
The carrying values of investments in fixed maturities classified as available for sale at December 31, 2014 and 2013 were as follows:
Included in reinsurance recoverables are amounts related to structured settlements, which are annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers' compensation claims comprise a significant portion. In cases where the Company did not receive a release from the claimant, the amount due from the life insurance company related to the structured settlement is included in the Company's consolidated balance sheet as a reinsurance recoverable and the related claim cost is included in the liability for claims and claim
The Agency Automobile line of business has been negatively impacted by various factors, including the use of price comparison technology by agents and brokers as discussed above. The Company's actions in response to these factors have included, among other things, the reduction of certain claim adjustment and other insurance expenses, with the majority of the impact in the Agency Automobile line of business. At December 31, 2014, these actions to reduce costs have resulted in an expected annual decrease of $140 million in pre-tax expenses in 2015 when compared with expense levels prior to their implementation. Additionally, in the fourth quarter of 2013, the Company launched its newest private passenger automobile product, Quantum Auto 2.0. This product, in addition to incorporating the cost savings described above, has a lower base commission rate than the Company's existing Quantum Auto 1.0 product. These changes in cost structure enabled the Company to price Quantum Auto 2.0 more competitively while maintaining expected returns at appropriate levels. By December 31, 2014, the Company offered Quantum Auto 2.0 in approximately 90% of the states where it plans to offer the product, and the Company currently expects that, by the end of 2015, it will offer the product in all of those states. The Company intends that, in approved states, all new accounts will be written using Quantum Auto 2.0. In addition, Quantum Auto 2.0 is available to agents at their discretion for existing accounts.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Travelers Companies, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 12, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter.
The Company is organized into three reportable business segments: Business and International Insurance; Bond & Specialty Insurance; and Personal Insurance. On June 10, 2014, the Company announced a realignment of its management team, effective July 1, 2014, that gave rise to a realignment of two of its three reportable business segments, as follows:
Included in fixed maturities are below investment grade securities totaling $1.91 billion and $1.93 billion at December 31, 2014 and 2013, respectively. The Company defines its below investment grade securities as those securities rated below investment grade by external rating agencies, or the equivalent by the Company when a public rating does not exist. Such securities include below investment grade bonds that are publicly traded and certain other privately issued bonds that are classified as below investment grade loans.
The pricing service utilized by the Company has indicated that it will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as the pricing service but would have to make assumptions for any market-based inputs that were unavailable due to market conditions.
The Company sponsors a qualified non-contributory defined benefit pension plan, which covers substantially all U.S. domestic employees and provides benefits under a cash balance formula, except that employees satisfying certain age and service requirements remain covered by a prior final average pay formula. In addition, the Company sponsors a nonqualified defined benefit pension plan which covers certain highly-compensated employees, pension plans for employees of its foreign subsidiaries,
The following table presents the changes in the Level 3 fair value category for the years ended December 31, 2014 and 2013.
18. CONSOLIDATING FINANCIAL STATEMENTS OF THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES