The Company's threshold for disclosing catastrophes is determined at the reportable segment level. If a threshold for one segment or a combination thereof is pierced and the other segments have losses from the same event, losses from the event are identified as catastrophe losses in the segment results and for the consolidated results of the Company. The threshold for 2015 ranged from approximately $17 million to $30 million of losses before reinsurance and taxes.
The loss and loss adjustment expense ratio of 22.8% in 2014 was 11.9 points lower than the loss and loss adjustment expense ratio of 34.7% in 2013. Net favorable prior year reserve development in 2014 and 2013 provided 21.7 points and 11.7 points of benefit, respectively, to the loss and loss adjustment expense ratio. Catastrophe losses in 2014 and 2013 accounted for 0.3 points and 0.4 points, respectively, of the loss and loss adjustment expense ratio. The underlying loss and loss adjustment expense ratio in 2014 was 1.8 points lower than the 2013 ratio on the same basis, primarily reflecting the impact of increases in earned premiums largely due to lower reinsurance costs.
The loss and loss adjustment expense ratio of 58.1% in 2015 was 1.5 points lower than the 2014 ratio of 59.6%. Catastrophe losses accounted for 3.6 points and 4.7 points of the 2015 and 2014 loss and loss adjustment expense ratio, respectively. Net favorable prior year reserve development in 2015 and 2014 provided 3.8 points and 2.4 points of benefit to the loss and loss adjustment expense ratio, respectively. The 2015 underlying loss and loss adjustment expense ratio was 1.0 point higher than the 2014 ratio on the same basis, primarily reflecting the impact of a higher mix of new business versus renewal business, as well as a higher mix of automobile business versus homeowners and other business.
In the direct to consumer business, net written premiums in 2015 were $236 million, $49 million or 26% higher than in 2014. In 2015, automobile net written premiums increased by $36 million or 28% over 2014, and homeowners and other net written premiums increased by $13 million or 23% over 2014. Net written premiums in 2014 were $187 million, $25 million or 15% higher than in 2013. In 2014, automobile net written premiums increased by $18 million or 16% over 2013, and homeowners and other net written premiums increased by $7 million or 14% over 2013. The direct to consumer business had 242,000 and 193,000 active policies at December 31, 2015 and 2014, respectively.
On January 29, 2009, the Company and PPG Industries, Inc ("PPG"), along with approximately 30 other insurers of PPG, agreed in principle to an agreement to settle asbestos-related coverage litigation under insurance policies issued to PPG. The tentative settlement agreement has been incorporated into the Modified Third Amended Plan of Reorganization ("Amended Plan") proposed as part of the Pittsburgh Corning Corp. ("PCC," which is 50% owned by PPG) bankruptcy proceeding. Pursuant to the proposed Amended Plan, which was filed on January 30, 2009, PCC, along with enumerated other companies (including PPG as well as the Company as a participating insurer), are to receive protections afforded by Section 524(g) of the Bankruptcy Code from certain asbestos-related bodily injury claims. Under the agreement in principle, the Company has the option to make a series of payments over 20 years totaling approximately $620 million to the Trust to be created under the Amended Plan, or it may elect to make a one-time discounted payment, which, as of June 30, 2016, would total approximately $525 million. On January 7, 2016, the final objections to the Amended Plan were
The following table displays the funding sources for the $9.96 billion of municipal bonds identified as revenue bonds in the foregoing table at December 31, 2015.
At December 31, 2015 and 2014, the Company's fixed maturity investment portfolio included CMOs backed by alternative documentation mortgages and asset-backed securities collateralized by sub-prime mortgages with a collective fair value of $185 million and $252 million, respectively (comprising less than 1% of the Company's total fixed maturity investments at both dates). The Company defines sub-prime mortgage-backed securities as investments in which the underlying loans primarily exhibit one or more of the following characteristics: low FICO scores, above-prime interest rates, high loan-to-value ratios or high debt-to-income ratios. Alternative documentation securitizations are those in which the underlying loans primarily meet the government-sponsored entities' requirements for credit score but do not meet the government-sponsored entities' guidelines for documentation, property type, debt and loan-to-value ratios. The average credit rating on these securities and obligations held by the Company was"Ba2" at both December 31, 2015 and 2014. The Company does not believe this portfolio exposes it to a material adverse impact on its results of operations, financial position or liquidity, due to the portfolio's relatively small size.
The Company utilizes a Lloyd's trust deposit, whereby owned securities with a fair value of approximately $140 million and $151 million held by a wholly-owned subsidiary at December 31, 2015 and 2014, respectively, were pledged into a Lloyd's trust account to provide a portion of the capital needed to support the Company's obligations at Lloyd's.
• Increasingly unpredictable and severe weather conditions could result in increased frequency and severity of claims under policies issued by the Company. See "Risk Factors-Catastrophe losses could materially and adversely affect our results of operations, our financial position and/or
Catastrophe and other weather-related losses are inherently unpredictable from period to period. The Company experienced significant catastrophe and other weather-related losses in a number of periods during the past decade, which adversely impacted its results of operations. The Company's results of operations could be adversely impacted if significant catastrophe and other weather-related losses were to occur.
It is possible that the steps taken by the federal government in recent years, particularly by the Federal Reserve, to stabilize financial markets and improve economic conditions could lead to higher inflation than the Company had anticipated, which could in turn lead to an increase in the Company's loss costs and the need to strengthen claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that are considered "long tail", such as general liability, as they require a relatively long period of time to finalize and settle claims for a given accident year. For a further discussion, see "Part I-Item 1A - Risk Factors-If actual claims exceed our claims and claim
In Bond & Specialty Insurance, the Company expects underlying underwriting margins in 2016 will be broadly consistent with those in 2015.
Included in other liabilities in the consolidated balance sheet is the Company's estimate of its liability for guaranty fund and other insurance-related assessments. The liability for expected state guaranty fund and other premium-based assessments is recognized as the Company writes or becomes obligated to write or renew the premiums on which the assessments are expected to be based. The liability for loss-based assessments is recognized as the related losses are incurred. At December 31, 2015 and 2014, the Company had a liability of $241 million and $245 million, respectively, for guaranty fund and other insurance-related assessments and related recoverables of $18 million and $15 million, respectively. The liability for such assessments and the related recoverables are not discounted for the time value of money. The loss-based assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers' compensation claimants and the recoveries are expected to occur over the same period of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance contracts, primarily workers' compensation, are participating whereby dividends are paid to policyholders in accordance with contract provisions. Net written premiums for participating dividend policies were approximately 2%, 1% and 1% of total net written premiums for the years ended December 31, 2015, 2014 and 2013, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. The liability accrued for policyholder dividends totaled $57 million and $54 million at December 31, 2015 and 2014, respectively.
Compensation cost is measured based on the grant-date fair value of an award, utilizing the assumptions discussed in note 13. Compensation cost is recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period). In connection with certain share-based awards, participants are entitled to receive dividends during the vesting period, either in cash or dividend equivalent shares, commensurate with the dividends paid to common shareholders. Dividends and dividend equivalent shares on awards that are expected to vest are recorded in retained earnings. Dividends paid on awards that are not expected to vest as part of the Company's forfeiture estimate are recorded as compensation expense.
At December 31, 2015 and 2014, the Company held commercial mortgage-backed securities (CMBS, including FHA project loans) of $865 million and $715 million, respectively, which are included in "All other corporate bonds" in the tables above. At December 31, 2015 and 2014, approximately $303 million and $202 million of these securities, respectively, or the loans backing such securities, contained guarantees by the U.S. government or a government-sponsored enterprise. The average credit rating of the $562 million and $513 million of non-guaranteed securities at December 31, 2015 and 2014, respectively, was "Aaa" at both dates. The CMBS portfolio is supported by loans that are diversified across economic sectors and geographical areas. The average credit rating of the CMBS portfolio was "Aaa" at both December 31, 2015 and 2014.
The following tables summarize, for all investments in an unrealized loss position at December 31, 2015 and 2014, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in the tables are estimates that are prepared using the process described in note 4. The Company also relies upon estimates of several factors in its review and evaluation of individual investments, using the process described in note 1, in determining whether such investments are other-than-temporarily impaired.
These unrealized losses at December 31, 2015 represented less than 1% of the combined fixed maturity and equity security portfolios on a pretax basis and less than 1% of shareholders' equity on an after-tax basis.
In the Home Office and Field Office category, which accounts for the vast majority of policyholders with active asbestos-related claims, both the number of policyholders tendering asbestos claims for the first time and the number of policyholders with open asbestos claims declined when compared with 2014. Gross asbestos payments in this category were essentially unchanged when compared with 2014, while net asbestos-related payments increased in 2015 due to significant reinsurance billings relating to one policyholder in 2014. Payments on behalf of policyholders in these categories continue to be influenced by the high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily mesothelioma, continue to target defendants who were not traditionally primary targets of asbestos litigation.
The number of authorized shares of the Company is 1.755 billion, consisting of five million of preferred stock, 1.745 billion shares of voting common stock and five million undesignated shares. The Company's Articles of Incorporation authorize the board of directors to establish, from the undesignated shares, one or more classes and series of shares, and to further designate the type of shares and terms thereof.
On February 2, 2016, the Company, under the 2014 Stock Incentive Plan, granted 2,808,558 stock option awards with an exercise price of $106.03 per share. The fair value attributable to the stock option awards on the date of grant was $13.26 per share.