Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of the Company’s financial condition and results of operations.

FINANCIAL HIGHLIGHTS

2018 Consolidated Results of Operations


•	Net income of $2.52 billion, or $9.37 per share basic and $9.28 per share diluted


•	Net earned premiums of $27.06 billion


•	Catastrophe losses of $1.72 billion ($1.36 billion after-tax)


•	Net favorable prior year reserve development of $517 million ($409 million after-tax)


•	Combined ratio of 96.9%


•	Net investment income of $2.47 billion ($2.10 billion after-tax)

Operating cash flows of $4.38 billion

2018 Consolidated Financial Condition


•	Total investments of $72.28 billion; fixed maturities and short-term securities comprise 93% of total investments


•	Total assets of $104.23 billion


•	Total debt of $6.56 billion, resulting in a debt-to-total capital ratio of 22.3% (22.2% excluding net unrealized investment losses, net of tax, included in shareholders' equity)


•	Repurchased 10.0 million common shares for total cost of $1.32 billion and paid $814 million of dividends to shareholders


•	Shareholders’ equity of $22.89 billion


•	Net unrealized investment losses of $137 million ($113 million after-tax)


•	Book value per common share of $86.84


•	Holding company liquidity of $1.42 billion

CONSOLIDATED OVERVIEW

Consolidated Results of Operations



(for the year ended December 31, in millions except per share amounts)	2018			2017			2016
Revenues
Premiums	$	27,059		$	25,683		$	24,534
Net investment income	2,474			2,397			2,302
Fee income	432			447			458
Net realized investment gains	114			216			68
Other revenues	203			159			263
Total revenues	30,282			28,902			27,625
Claims and expenses
Claims and claim adjustment expenses	18,291			17,467			15,070
Amortization of deferred acquisition costs	4,381			4,166			3,985
General and administrative expenses	4,297			4,170			4,154
Interest expense	352			369			363
Total claims and expenses	27,321			26,172			23,572
Income before income taxes	2,961			2,730			4,053
Income tax expense	438			674			1,039
Net income	$	2,523		$	2,056		$	3,014
Net income per share
Basic	$	9.37		$	7.39		$	10.39
Diluted	$	9.28		$	7.33		$	10.28
Combined ratio
Loss and loss adjustment expense ratio	66.8		%	67.2		%	60.5		%
Underwriting expense ratio	30.1			30.7			31.5
Combined ratio	96.9		%	97.9		%	92.0		%

The following discussions of the Company’s net income and segment income are presented on an after-tax basis. Discussions of the components of net income and segment income are presented on a pre-tax basis, unless otherwise noted. Discussions of earnings per common share are presented on a diluted basis.

Overview

Diluted net income per share of $9.28 in 2018 increased by 27% over diluted net income per share of $7.33 in 2017. Net income of $2.52 billion in 2018 increased by 23% over net income of $2.06 billion in 2017. The higher rate of increase in diluted net income per share reflected the impact of share repurchases in recent periods. The increase in income before income taxes primarily reflected the pre-tax impacts of (i) lower catastrophe losses, (ii) higher underwriting margins excluding catastrophe losses and prior year reserve development ("underlying underwriting margins") and (iii) higher net investment income, partially offset by (iv) lower net realized investment gains and (v) lower net favorable prior year reserve development. Catastrophe losses in 2018 and 2017 were $1.72 billion and $1.95 billion, respectively. Net favorable prior year reserve development in 2018 and 2017 was $517 million and $592 million, respectively. The higher underlying underwriting margins primarily resulted from the impacts of (i) earned pricing that exceeded loss cost trends in Personal Insurance, (ii) a lower level of international surety losses in Bond & Specialty Insurance and (iii) higher business volumes, partially offset by (iv) higher loss estimates in the commercial automobile product line for bodily injury liability coverages in Business Insurance and (v) higher non-catastrophe weather-related losses and non-weather related losses in Personal Insurance. Income tax expense in 2018 was lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the Tax Cuts and Jobs Act of 2017 (TCJA) and (ii) a net charge of $129 million in 2017 to reflect the change in tax laws and tax rates enacted in the U.S. on December 22, 2017 as part of the TCJA resulting primarily from revaluing the Company's deferred tax assets and liabilities and the tax imposed on accumulated foreign earnings, partially offset by (iii) the increase in income before income taxes and (iv) the $39 million reduction in income tax expense in 2017 as a result of the resolution of prior year tax matters.

Diluted net income per share of $7.33 in 2017 decreased by 29% from diluted net income per share of $10.28 in 2016. Net income of $2.06 billion in 2017 decreased by 32% from net income of $3.01 billion in 2016. The lower rate of decrease in diluted net income per share reflected the impact of share repurchases in recent periods. The decrease in income before income taxes primarily reflected the pre-tax impacts of (i) significantly higher catastrophe losses, (ii) lower net favorable prior year reserve development, (iii) lower underlying underwriting margins and (iv) lower other income in 2017 due to a favorable settlement of a reinsurance dispute in 2016, partially offset by (v) higher net realized investment gains and (vi) higher net investment income. Catastrophe losses in 2017 and 2016 were $1.95 billion and $877 million, respectively. Net favorable prior year reserve development in 2017 and 2016 was $592 million and $771 million, respectively. The lower underlying underwriting margins primarily resulted from the impacts of (i) loss cost trends that modestly exceeded earned pricing in Business Insurance, (ii) higher non-catastrophe fire-related losses in Business Insurance and (iii) higher non-catastrophe weather-related losses in Personal Insurance, partially offset by (iv) increased business volumes. Income tax expense in 2017 was lower than in 2016, primarily reflecting the impacts of (i) the decrease in income before income taxes, partially offset by (ii) the net charge of $129 million in 2017 related to the impact of the TCJA described above. In addition, income tax expense in 2017 was reduced by $39 million as a result of the resolution of prior year tax matters.

The Company has insurance operations in Canada, the United Kingdom, the Republic of Ireland and throughout other parts of the world as a corporate member of Lloyd’s, as well as in Brazil and Colombia, primarily through joint ventures. Because these operations are conducted in local currencies other than the U.S. dollar, the Company is subject to changes in foreign currency exchange rates. For the years ended December 31, 2018, 2017 and 2016, changes in foreign currency exchange rates impacted reported line items in the statement of income by insignificant amounts. The impact of these changes was not material to the Company’s net income or segment income for the periods reported.

Revenues

Earned Premiums

Earned premiums in 2018 were $27.06 billion, $1.38 billion or 5% higher than in 2017. In Business Insurance, earned premiums in 2018 increased by 4% over 2017. In Bond & Specialty Insurance, earned premiums in 2018 increased by 5% over 2017. In Personal Insurance, earned premiums in 2018 increased by 7% over 2017. Earned premiums in 2017 were $25.68 billion, $1.15 billion or 5% higher than in 2016. In Business Insurance, earned premiums in 2017 increased by 2% over 2016. In Bond & Specialty Insurance, earned premiums in 2017 increased by 2% over 2016. In Personal Insurance, earned premiums in 2017 increased by 10% over 2016. Factors contributing to the increases in earned premiums in each segment in 2018 and 2017 compared with the respective prior year are discussed in more detail in the segment discussions that follow.

Net Investment Income

The following table sets forth information regarding the Company’s investments.



(for the year ended December 31, in millions)	2018			2017			2016
Average investments (1)	$	73,031		$	71,867		$	70,246
Pre-tax net investment income	2,474			2,397			2,302
After-tax net investment income	2,102			1,872			1,846
Average pre-tax yield (2)	3.4		%	3.3		%	3.3		%
Average after-tax yield (2)	2.9		%	2.6		%	2.6		%


(1)	Excludes net unrealized investment gains and losses and reflects cash, receivables for investment sales, payables on investment purchases and accrued investment income.


(2)	Excludes net realized and net unrealized investment gains and losses.

Net investment income in 2018 was $2.47 billion, $77 million or 3% higher than in 2017. Net investment income from fixed maturity investments in 2018 was $1.98 billion, $85 million higher than in 2017, primarily resulting from a higher average level of fixed maturity investments and higher long-term reinvestment rates available in the market. Net investment income from short-term securities in 2018 was $92 million, $30 million higher than in 2017, primarily resulting from higher short-term interest rates. Net investment income generated by the Company's remaining investment portfolios in 2018 was $441 million, $37 million lower

than in 2017, primarily reflecting lower returns from private equity limited partnerships and lower dividend income due to a lower level of investments in equity securities, partially offset by higher returns from real estate partnerships.

Net investment income in 2017 was $2.40 billion, $95 million or 4% higher than in 2016. Net investment income from fixed maturity investments in 2017 was $1.89 billion, $86 million lower than in 2016, primarily resulting from lower long-term reinvestment rates available in the market, partially offset by the impact of a slightly higher level of fixed maturity investments. Net investment income from short-term securities in 2017 was $62 million, $33 million higher than in 2016, primarily due to higher short-term interest rates and a higher average level of short-term investments. Net investment income generated by the Company's remaining investment portfolios in 2017 was $478 million, $148 million higher than in 2016, primarily due to higher returns from private equity limited partnerships.

Fee Income

The National Accounts market in Business Insurance is the primary source of the Company’s fee-based business. Fee income is described in more detail in the Business Insurance discussion that follows.

Net Realized Investment Gains

The following table sets forth information regarding the Company’s net pre-tax realized investment gains.



(for the year ended December 31, in millions)	2018			2017			2016

Other-than-temporary impairment losses	$	(1	)	$	(14	)	$	(29	)
Net realized investment losses on equity securities still held	(29		)	—			—
Other net realized investment gains, including from sales	144			230			97
Total	$	114		$	216		$	68

Other Net Realized Investment Gains

Other net realized investment gains in 2018 included $92 million of net realized investment gains related to other investments, primarily resulting from the sale of a private equity limited partnership, $33 million of net realized gains related to fixed maturity investments, $23 million of net realized investment gains from real estate sales and $4 million of net realized investment losses related to equity securities sold.

Other net realized investment gains in 2017 included $236 million of net realized investment gains related to equity securities, $10 million of net realized investment gains from real estate sales, $4 million of net realized gains related to fixed maturity investments and $20 million of net realized investment losses related to other investments.

Other net realized investment gains in 2016 included $59 million of net realized gains related to fixed maturity investments, $14 million of net realized investment gains related to equity securities, $7 million of net realized investment gains from real estate sales and $17 million of net realized investment gains related to other investments.

Other Revenues

Other revenues in all years presented included installment premium charges. Other revenues in 2018 and 2017 also included revenues from Simply Business, which was acquired in August 2017. Other revenues in 2017 and 2016 also included gains related to the settlement of reinsurance disputes (discussed in more detail in note 16 of notes to the consolidated financial statements). Other revenues in 2016 also included proceeds from the favorable settlement of a claims-related legal matter.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2018 were $18.29 billion, $824 million or 5% higher than in 2017, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends, (iii) higher loss estimates in the commercial automobile product line for bodily injury liability coverages in Business Insurance, (iv) lower net favorable prior year reserve development and (v) higher non-catastrophe weather-related losses and non-weather related losses in Personal Insurance, partially offset by (vi) lower catastrophe losses and (vii) a lower level of international surety losses in Bond & Specialty Insurance. Catastrophes in 2018

primarily resulted from wildfires in California, Hurricanes Florence and Michael, wind and hail storms in several regions of the United States and winter storms in the eastern United States.

Claims and claim adjustment expenses in 2017 were $17.47 billion, $2.40 billion or 16% higher than in 2016, primarily reflecting the impacts of (i) significantly higher catastrophe losses, (ii) higher business volumes, (iii) loss cost trends, (iv) lower net favorable prior year reserve development, (v) higher non-catastrophe fire-related losses in Business Insurance and (vi) higher non-catastrophe weather-related losses in Personal Insurance. Catastrophe losses in 2017 primarily resulted from wildfires in California, Hurricanes Harvey, Irma and Maria, and several winter, wind and hail storms throughout the United States. Catastrophe losses in 2016 primarily resulted from Hurricane Matthew, wind and hail storms in several regions of the United States, flooding in the Southeast region of the United States, wildfires in Canada and Tennessee, and winter storms in the eastern United States.

Factors contributing to net favorable prior year reserve development during the years ended December 31, 2018, 2017 and 2016 are discussed in more detail in note 7 of notes to the consolidated financial statements.

Significant Catastrophe Losses

The Company defines a “catastrophe” as an event that:


•	is designated a catastrophe by internationally recognized organizations that track and report on insured losses resulting from catastrophic events, such as Property Claim Services (PCS) for events in the United States and Canada; and


•	the Company’s estimates of its ultimate losses before reinsurance and taxes exceed a pre-established dollar threshold.

The Company’s threshold for disclosing catastrophes is primarily determined at the reportable segment level. If a threshold for one segment or a combination thereof is exceeded 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. Additionally, an aggregate threshold is applied for International business across all reportable segments. The threshold for 2018 ranged from approximately $18 million to $30 million of losses before reinsurance and taxes.

The following table presents the amount of losses recorded by the Company for significant catastrophes that occurred in 2018, 2017 and 2016, the amount of net unfavorable (favorable) prior year reserve development recognized in 2018 and 2017 for catastrophes that occurred in 2017 and 2016, and the estimate of ultimate losses for those catastrophes at December 31, 2018, 2017 and 2016. For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes.



	Losses Incurred / Unfavorable (Favorable) Prior Year Reserve Development for the Year Ended December 31,								Estimated Ultimate Losses at December 31,
(in millions, pre-tax and net of reinsurance)	2018			2017			2016		2018		2017		2016
2016
PCS Serial Number:
21 — Severe wind and hail storms	$	(2	)	$	(2	)	$	150	$	146	$	148	$	150
25 — Severe wind and hail storms	(7		)	10			168		171		178		168
2017
PCS Serial Number:
22 — Severe wind and hail storms	(2		)	111			n/a		109		111		n/a
32 — Severe wind and hail storms	19			210			n/a		229		210		n/a
43 — Hurricane Harvey	(24		)	254			n/a		230		254		n/a
44 — Hurricane Irma	(28		)	187			n/a		159		187		n/a
48 — California wildfire—Tubbs fire	1			507			n/a		508		507		n/a
2018
PCS Serial Number:
15 — Winter storm	144			n/a			n/a		144		n/a		n/a
17 — Severe wind and hail storms	111			n/a			n/a		111		n/a		n/a
33 — Severe wind and hail storms	117			n/a			n/a		117		n/a		n/a
52 — Hurricane Florence	106			n/a			n/a		106		n/a		n/a
57 — Hurricane Michael	158			n/a			n/a		158		n/a		n/a
59 — California wildfire - Camp fire	334			n/a			n/a		334		n/a		n/a
60 — California wildfire - Woosley fire	119			n/a			n/a		119		n/a		n/a

n/a: not applicable.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in 2018 was $4.38 billion, $215 million or 5% higher than in 2017. Amortization of deferred acquisition costs in 2017 was $4.17 billion, $181 million or 5% higher than in 2016. Amortization of deferred acquisition costs is discussed in more detail in the segment discussions that follow.

General and Administrative Expenses

General and administrative expenses in 2018 were $4.30 billion, $127 million or 3% higher than in 2017, primarily reflecting the impacts of (i) the acquisition of Simply Business in August 2017 and (ii) variable costs associated with higher business volumes. General and administrative expenses in 2017 were $4.17 billion, comparable with 2016. General and administrative expenses are discussed in more detail in the segment discussions that follow.

Interest Expense

Interest expense in 2018, 2017 and 2016 was $352 million, $369 million and $363 million, respectively.

Income Tax Expense

Income tax expense in 2018 was $438 million, $236 million or 35% lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the TCJA and (ii) the net charge of $129 million in 2017 as part of the TCJA described above, partially offset by (iii) the $231 million increase in income before income taxes in 2018 and (iv) the $39 million reduction in income tax expense in 2017 as a result of the resolution of prior year tax matters. Income tax expense in 2017 was $674 million, $365 million or 35% lower than in 2016, primarily reflecting the impacts of (i) the $1.32 billion decrease in income before income taxes in 2017 and (ii) the $39 million reduction in income tax expense resulting from the resolution of prior year tax matters, partially offset by (iii) the net charge of $129 million as part of the TCJA described above.

The Company’s effective tax rate was 15%, 25% and 26% in 2018, 2017 and 2016, respectively. The effective tax rates in all years were lower than the respective statutory rate of 21% in 2018 and 35% in both 2017 and 2016, primarily due to the impact of tax-exempt investment income on the calculation of the Company’s income tax provision. The effective tax rate in 2018 also included the impact of the reduction in income tax expense resulting from the Company's $200 million voluntary contribution to its qualified domestic pension plan in 2018, which provided a 35% tax benefit rather than a 21% tax benefit. In addition, the effective tax rate in 2017 reflected the net charge related to TCJA and the impact of the resolution of prior year tax matters, both discussed above.

Combined Ratio

The combined ratio of 96.9% in 2018 was 1.0 points lower than the combined ratio of 97.9% in 2017. The loss and loss adjustment expense ratio of 66.8% in 2018 was 0.4 points lower than the loss and loss adjustment expense ratio of 67.2% in 2017. The underwriting expense ratio of 30.1% in 2018 was 0.6 points lower than the underwriting expense ratio of 30.7% in 2017.

Catastrophe losses in 2018 and 2017 accounted for 6.3 points and 7.6 points, respectively, of the combined ratio. Net favorable prior year reserve development in 2018 and 2017 provided 1.9 points and 2.3 points of benefit, respectively, to the combined ratio. The combined ratio excluding prior year reserve development and catastrophe losses ("underlying combined ratio") in 2018 was 0.1 points lower than the 2017 ratio on the same basis.

The combined ratio of 97.9% in 2017 was 5.9 points higher than the combined ratio of 92.0% in 2016. The loss and loss adjustment expense ratio of 67.2% in 2017 was 6.7 points higher than the loss and loss adjustment expense ratio of 60.5% in 2016. The underwriting expense ratio of 30.7% in 2017 was 0.8 points lower than the underwriting expense ratio of 31.5% in 2016.

Catastrophe losses in 2017 and 2016 accounted for 7.6 points and 3.6 points, respectively, of the combined ratio. Net favorable prior year reserve development in 2017 and 2016 provided 2.3 points and 3.2 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2017 was 1.0 points higher than the 2016 ratio on the same basis, primarily reflecting (i) loss cost trends that modestly exceeded earned pricing in Business Insurance, (ii) higher non-catastrophe fire-related losses in Business Insurance and (iii) higher non-catastrophe weather-related losses in Personal Insurance.

Written Premiums

Consolidated gross and net written premiums were as follows:



	Gross Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Business Insurance	$	16,255	$	15,473	$	15,232
Bond & Specialty Insurance	2,665		2,480		2,372
Personal Insurance	10,332		9,695		8,891
Total	$	29,252	$	27,648	$	26,495



	Net Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Business Insurance	$	14,956	$	14,270	$	13,900
Bond & Specialty Insurance	2,528		2,359		2,271
Personal Insurance	10,224		9,590		8,787
Total	$	27,708	$	26,219	$	24,958

Gross and net written premiums in 2018 both increased by 6% over 2017. Gross and net written premiums in 2017 increased by 4% and 5%, respectively, over 2016. Factors contributing to the changes in gross and net written premiums in each segment in 2018 and 2017 as compared with the respective prior year are discussed in more detail in the segment discussions that follow.

RESULTS OF OPERATIONS BY SEGMENT

Business Insurance

Results of Business Insurance were as follows:



(for the year ended December 31, in millions)	2018			2017			2016
Revenues
Earned premiums	$	14,722		$	14,146		$	13,855
Net investment income	1,833			1,786			1,701
Fee income	412			430			442
Other revenues	112			69			168
Total revenues	17,079			16,431			16,166

Total claims and expenses	15,182			14,370			13,528

Segment income before income taxes	1,897			2,061			2,638
Income tax expense	259			448			656
Segment income	$	1,638		$	1,613		$	1,982

Loss and loss adjustment expense ratio	67.8		%	65.9		%	61.7		%
Underwriting expense ratio	31.3			31.9			32.4
Combined ratio	99.1		%	97.8		%	94.1		%

Overview

Segment income in 2018 was $1.64 billion, $25 million or 2% higher than segment income of $1.61 billion in 2017. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower net favorable prior year reserve development and (ii) lower underlying underwriting margins, partially offset by (iii) lower catastrophe losses and (iv) higher net investment income. Catastrophe losses in 2018 and 2017 were $639 million and $858 million, respectively. Net favorable prior year reserve development in 2018 and 2017 was $142 million and $439 million, respectively. The lower underlying underwriting margins primarily reflected higher loss estimates in the domestic commercial automobile product line for bodily injury liability coverages. Income tax expense in 2018 was lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the TCJA and (ii) the decrease in segment income before income taxes, partially offset by (iii) the $15 million reduction in income taxes as a result of the resolution of prior year tax matters in 2017.

Segment income in 2017 was $1.61 billion, $369 million or 19% lower than segment income of $1.98 billion in 2016. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) significantly higher catastrophe losses, (ii) lower other income due to a favorable settlement of a reinsurance dispute in 2016 and (iii) lower underlying underwriting margins, partially offset by (iv) higher net investment income. Catastrophe losses in 2017 and 2016 were $858 million and $463 million, respectively. Net favorable prior year reserve development in 2017 and 2016 was $439 million and $424 million, respectively. The lower underlying underwriting margins primarily resulted from the impacts of (i) loss cost trends that modestly exceeded earned pricing and (ii) higher non-catastrophe fire-related losses. Income tax expense in 2017 was lower than in 2016, primarily reflecting the impacts of (i) the decrease in segment income before income taxes and (ii) the $15 million reduction in income taxes as a result of the resolution of prior year tax matters in 2017.

Revenues

Earned Premiums

Earned premiums of $14.72 billion in 2018 were $576 million or 4% higher than in 2017. Earned premiums of $14.15 billion in 2017 were $291 million or 2% higher than in 2016. The increase in earned premiums in both 2018 and 2017 reflected increases in net written premiums over the preceding twelve months.

Net Investment Income

Net investment income in 2018 was $1.83 billion, $47 million or 3% higher than in 2017. Net investment income in 2017 was $1.79 billion, $85 million or 5% higher than in 2016. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion for a description of the factors contributing to the increases in the Company’s consolidated net investment income in 2018 and 2017 compared with the respective prior years. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company’s net investment income allocation methodology.

Fee Income

National Accounts is the primary source of fee income due to revenue from its large deductible policies and service businesses, which include risk management, claims administration, loss control and risk management information services provided to large companies that choose to self-insure a portion of their insurance risks, as well as claims and policy management services to workers’ compensation residual market pools. Fee income in 2018 was $412 million, $18 million or 4% lower than in 2017, primarily reflecting lower claim volume in the large deductible business and lower serviced premium volume in the workers' compensation residual market pools. Fee income in 2017 was $430 million, $12 million or 3% lower than in 2016, primarily reflecting lower serviced premium volume in the workers’ compensation residual market pools.

Other Revenues

Other revenues in all years presented included installment premium charges and other policyholder service charges. Other revenues in 2018 and 2017 included revenues from Simply Business, which was acquired in August 2017. Other revenues in 2017 and 2016 also included gains related to the settlement of reinsurance disputes. Additionally, other revenues in 2016 included proceeds from the favorable settlement of a claims-related legal matter.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2018 were $10.17 billion, $650 million or 7% higher than in 2017, primarily reflecting the impacts of (i) higher business volumes, (ii) lower net favorable prior year reserve development, (iii) loss cost trends and (iv) higher loss estimates in the domestic commercial automobile product line for bodily injury liability coverages, partially offset by (v) lower catastrophe losses. Claims and claim adjustment expenses in 2017 were $9.52 billion, $768 million or 9% higher than in 2016, primarily reflecting the impacts of (i) significantly higher catastrophe losses, (ii) loss cost trends, (iii) higher business volumes and (iv) higher non-catastrophe fire-related losses.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in 2018 was $2.39 billion, $102 million or 4% higher than in 2017. Amortization of deferred acquisition costs in 2017 was $2.29 billion, $65 million or 3% higher than in 2016. The increases in both 2018 and 2017 were generally consistent with the increases in earned premiums.

General and Administrative Expenses

General and administrative expenses in 2018 were $2.62 billion, $60 million or 2% higher than in 2017, primarily reflecting the impact of the acquisition of Simply Business in August 2017. General and administrative expenses in 2017 of $2.56 billion were comparable with 2016.

Income Tax Expense

Income tax expense in 2018 was $259 million, $189 million or 42% lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the TCJA and (ii) the $164 million decrease in income before income taxes in 2018, partially offset by (iii) the $15 million reduction in income tax expense in 2017 resulting from the resolution of prior year tax matters. Income tax expense in 2017 was $448 million, $208 million or 32% lower than in 2016, primarily reflecting the impact of the $577 million decrease in income before income taxes in 2017 and the $15 million reduction in income tax expense resulting from the resolution of prior year tax matters.

Combined Ratio

The combined ratio of 99.1% in 2018 was 1.3 points higher than the combined ratio of 97.8% in 2017. The loss and loss adjustment expense ratio of 67.8% in 2018 was 1.9 points higher than the loss and loss adjustment expense ratio of 65.9% in 2017. The underwriting expense ratio of 31.3% in 2018 was 0.6 points lower than the underwriting expense ratio of 31.9% in 2017.

Catastrophe losses in 2018 and 2017 accounted for 4.4 points and 6.0 points, respectively, of the combined ratio. Net favorable prior year reserve development in 2018 and 2017 provided 1.0 points and 3.1 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2018 was 0.8 points higher than the 2017 ratio on the same basis, primarily reflecting higher loss estimates in the domestic commercial automobile product line for bodily injury liability coverages.

The combined ratio of 97.8% in 2017 was 3.7 points higher than the combined ratio of 94.1% in 2016. The loss and loss adjustment expense ratio of 65.9% in 2017 was 4.2 points higher than the loss and loss adjustment expense ratio of 61.7% in 2016. The underwriting expense ratio of 31.9% in 2017 was 0.5 points lower than the underwriting expense ratio of 32.4% in 2016.

Catastrophe losses in 2017 and 2016 accounted for 6.0 points and 3.4 points of the combined ratio, respectively. Net favorable prior year reserve development provided 3.1 points of benefit to the combined ratio in both 2017 and 2016. The underlying combined ratio in 2017 was 1.1 points higher than the 2016 ratio on the same basis, primarily reflecting the impacts of (i) loss cost trends that modestly exceeded earned pricing and (ii) higher non-catastrophe fire-related losses.

Written Premiums

Business Insurance’s gross and net written premiums by market were as follows:



	Gross Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Select Accounts	$	2,841	$	2,817	$	2,792
Middle Market	8,537		8,051		7,691
National Accounts	1,601		1,556		1,683
National Property and Other	2,036		1,902		1,989
Total Domestic	15,015		14,326		14,155
International	1,240		1,147		1,077
Total Business Insurance	$	16,255	$	15,473	$	15,232



	Net Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Select Accounts	$	2,828	$	2,800	$	2,729
Middle Market	8,214		7,756		7,379
National Accounts	1,025		1,010		1,058
National Property and Other	1,805		1,691		1,779
Total Domestic	13,872		13,257		12,945
International	1,084		1,013		955
Total Business Insurance	$	14,956	$	14,270	$	13,900

Gross written premiums in 2018 and 2017 increased by 5% and 2%, respectively, over the respective prior year periods. Net written premiums in 2018 and 2017 increased by 5% and 3%, respectively, over the respective prior year amounts.

Select Accounts. Net written premiums of $2.83 billion in 2018 increased by 1% over 2017. Business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive and were higher than in 2017. New business premiums in 2018 increased over 2017. Net written premiums of $2.80 billion in 2017 increased by 3% over 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive but were lower than in 2016. New business premiums in 2017 increased over 2016.

Middle Market. Net written premiums of $8.21 billion in 2018 increased by 6% over 2017. Business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive and were higher than in 2017. New business premiums in 2018 were lower than in 2017. Net written premiums of $7.76 billion in 2017 increased by 5% over 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive and were higher than in 2016. New business premiums in 2017 increased slightly over 2016.

National Accounts. Net written premiums of $1.03 billion in 2018 increased by 1% over 2017. Business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive and were higher than in 2017. New business premiums in 2018 decreased from 2017. Net written premiums of $1.01 billion in 2017 decreased by 5% from 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained slightly positive but were lower than in 2016. New business premiums in 2017 decreased from 2016.

National Property and Other. Net written premiums of $1.81 billion in 2018 increased by 7% over 2017. Business retention rates were strong in 2018 and increased over 2017. Renewal premium changes in 2018 remained positive and were higher than in 2017. New business premiums in 2018 increased over 2017. Net written premiums of $1.69 billion in 2017 decreased by 5% from 2016. Business retention rates in 2017 declined from 2016. Renewal premium changes in 2017 remained positive and were higher than in 2016. New business premiums in 2017 decreased from 2016.

International. Net written premiums of $1.08 billion in 2018 increased by 7% over 2017, primarily driven by increases in Canada and in the Company's operations at Lloyd's. Net written premiums of $1.01 billion in 2017 increased by 6% over 2016, primarily driven by increases in the Company’s European operations, including Lloyd’s, as well as in Canada.

Bond & Specialty Insurance

Results of Bond & Specialty Insurance were as follows:



(for the year ended December 31, in millions)	2018			2017			2016
Revenues
Earned premiums	$	2,420		$	2,307		$	2,260
Net investment income	233			228			239
Other revenues	23			24			21
Total revenues	2,676			2,559			2,520

Total claims and expenses	1,685			1,795			1,499

Segment income before income taxes	991			764			1,021
Income tax expense	198			208			309
Segment income	$	793		$	556		$	712

Loss and loss adjustment expense ratio	31.5		%	38.6		%	27.4		%
Underwriting expense ratio	37.5			38.8			38.3
Combined ratio	69.0		%	77.4		%	65.7		%

Overview

Segment income in 2018 was $793 million, $237 million or 43% higher than segment income of $556 million in 2017. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher net favorable prior year reserve development and (ii) higher underlying underwriting margins. Net favorable prior year reserve development in 2018 and 2017 was $266 million and $140 million, respectively. Catastrophe losses in 2018 and 2017 were $16 million and $6 million, respectively. The higher underlying underwriting margins primarily resulted from the impacts of (i) a lower level of international

surety losses and (ii) higher business volumes. Income tax expense in 2018 was lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the TCJA, partially offset by (ii) the increase in segment income before income taxes and (iii) the $17 million reduction in income tax expense in 2017 as a result of the resolution of prior year tax matters.

Segment income in 2017 was $556 million, $156 million or 22% lower than segment income of $712 million in 2016. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) lower net favorable prior year reserve development and (ii) lower underlying underwriting margins. Net favorable prior year reserve development in 2017 and 2016 was $140 million and $350 million, respectively. Catastrophe losses in both 2017 and 2016 were $6 million. The lower underlying underwriting margins primarily reflected a higher level of international surety losses. Income tax expense in 2017 was lower than in 2016, primarily reflecting the impacts of (i) the decrease in segment income before income taxes and (ii) the $17 million reduction in income tax expense in 2017 as a result of the resolution of prior year tax matters.

Revenues

Earned Premiums

Earned premiums in 2018 were $2.42 billion, $113 million or 5% higher than in 2017. Earned premiums in 2017 were $2.31 billion, $47 million or 2% higher than in 2016. The increase in earned premiums in both 2018 and 2017 reflected increases in net written premiums over the preceding twelve months.

Net Investment Income

Net investment income in 2018 was $233 million, $5 million or 2% higher than in 2017. Net investment income in 2017 was $228 million, $11 million or 5% lower than in 2016. Included in Bond & Specialty Insurance are certain legal entities whose invested assets and related net investment income are reported exclusively in this segment and not allocated among all business segments. As a result, reported net investment income in Bond & Specialty Insurance reflects a significantly smaller proportion of allocated net investment income, including net investment income from the Company’s non-fixed maturity investments that experienced a decrease in investment income in 2018 and an increase in investment income in 2017. Refer to the “Net Investment Income” section of the “Consolidated Results of Operations” discussion for a description of the factors contributing to the increases in the Company’s consolidated net investment income in 2018 and 2017 compared with the respective prior years. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company’s net investment income allocation methodology.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2018 were $772 million, $127 million or 14% lower than in 2017, primarily reflecting the impacts of (i) higher net favorable prior year reserve development and (ii) a lower level of international surety losses, partially offset by (iii) higher business volumes. Claims and claim adjustment expenses in 2017 were $899 million, $266 million or 42% higher than in 2016, primarily reflecting (i) lower net favorable prior year reserve development and (ii) a higher level of international surety losses.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in 2018 was $454 million, $22 million or 5% higher than in 2017. Amortization of deferred acquisition costs in 2017 was $432 million, $11 million or 3% higher than in 2016. The increases in both years were generally consistent with the increases in earned premiums.

General and Administrative Expenses

General and administrative expenses in 2018 were $459 million, $5 million or 1% lower than in 2017. General and administrative expenses in 2017 were $464 million, $19 million or 4% higher than in 2016, primarily reflecting higher employee and technology related expenses.

Income Tax Expense

Income tax expense in 2018 was $198 million, $10 million or 5% lower than in 2017, primarily reflecting the impacts of (i) the lower U.S. corporate income tax rate resulting from the TCJA, partially offset by (ii) the $227 million increase in income before income taxes in 2018 and (iii) the $17 million reduction in income tax expense in 2017 resulting from the resolution of prior year tax matters. Income tax expense in 2017 was $208 million, $101 million or 33% lower than in 2016, primarily reflecting the impact of the $257 million decrease in income before income taxes in 2017 and the $17 million reduction in income tax expense resulting from the resolution of prior year tax matters.

Combined Ratio

The combined ratio of 69.0% in 2018 was 8.4 points lower than the combined ratio of 77.4% in 2017. The loss and loss adjustment expense ratio of 31.5% in 2018 was 7.1 points lower than the loss and loss adjustment expense ratio of 38.6% in 2017. The underwriting expense ratio of 37.5% in 2018 was 1.3 points lower than the underwriting expense ratio of 38.8% in 2017.

Net favorable prior year reserve development in 2018 and 2017 provided 11.0 points and 6.1 points of benefit, respectively, to the combined ratio. Catastrophe losses in 2018 and 2017 accounted for 0.6 points and 0.3 points, respectively, of the combined ratio. The underlying combined ratio in 2018 was 3.8 points lower than the 2017 ratio on the same basis, primarily reflecting the impacts of (i) a lower level of international surety losses and (ii) higher levels of earned premiums.

The combined ratio of 77.4% in 2017 was 11.7 points higher than the combined ratio of 65.7% in 2016. The loss and loss adjustment expense ratio of 38.6% in 2017 was 11.2 points higher than the loss and loss adjustment expense ratio of 27.4% in 2016. The underwriting expense ratio of 38.8% in 2017 was 0.5 points higher than the underwriting expense ratio of 38.3% in 2016.

Net favorable prior year reserve development in 2017 and 2016 provided 6.1 points and 15.5 points of benefit, respectively, to the combined ratio. Catastrophe losses in 2017 and 2016 accounted for 0.3 points of the combined ratio in each year. The underlying combined ratio in 2017 was 2.3 points higher than the 2016 ratio on the same basis, primarily reflecting the impact of a higher level of international surety losses.

Written Premiums

Bond & Specialty Insurance’s gross and net written premiums were as follows:



	Gross Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Management Liability	$	1,523	$	1,422	$	1,387
Surety	887		844		796
Total Domestic	2,410		2,266		2,183
International	255		214		189
Total Bond & Specialty Insurance	$	2,665	$	2,480	$	2,372



	Net Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Management Liability	$	1,455	$	1,367	$	1,342
Surety	835		793		757
Total Domestic	2,290		2,160		2,099
International	238		199		172
Total Bond & Specialty Insurance	$	2,528	$	2,359	$	2,271

Gross and net written premiums in 2018 both increased by 7% over 2017. Gross and net written premiums in 2017 increased by 5% and 4%, respectively, over 2016.

Domestic. Net written premiums in 2018 were $2.29 billion, $130 million or 6% higher than in 2017. Excluding the surety line of business, for which the following are not relevant measures, business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive but were lower than in 2017. New business premiums in 2018 increased over 2017. Net written premiums of $2.16 billion in 2017 increased by 3% over 2016. Excluding the surety line of business, for which the following are not relevant measures, business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive and were comparable with 2016. New business premiums in 2017 increased over 2016.

International. Net written premiums in 2018 were $238 million, $39 million or 20% higher than in 2017, primarily driven by increases in the United Kingdom. Net written premiums of $199 million in 2017 increased by 16% over 2016, driven by increases in the United Kingdom and Canada.

Personal Insurance

Results of Personal Insurance were as follows:



(for the year ended December 31, in millions)	2018			2017			2016
Revenues
Earned premiums	$	9,917		$	9,230		$	8,419
Net investment income	408			383			362
Fee income	20			17			16
Other revenues	66			60			63
Total revenues	10,411			9,690			8,860

Total claims and expenses	10,072			9,606			8,151

Segment income before income taxes	339			84			709
Income tax expense (benefit)	42			(44		)	192
Segment income	$	297		$	128		$	517

Loss and loss adjustment expense ratio	74.1		%	76.3		%	67.5		%
Underwriting expense ratio	26.5			26.8			28.3
Combined ratio	100.6		%	103.1		%	95.8		%

Overview

Segment income in 2018 was $297 million, $169 million or 132% higher than segment income of $128 million in 2017. The increase in segment income before income taxes primarily reflected the pre-tax impacts of (i) higher underlying underwriting margins, (ii) higher net favorable prior year reserve development, (iii) higher net investment income and (iv) lower catastrophe losses. Net favorable prior year reserve development in 2018 and 2017 was $109 million and $13 million, respectively. Catastrophe losses in 2018 and 2017 were $1.06 billion and $1.09 billion, respectively. The higher underlying underwriting margins primarily resulted from the impacts of (i) earned pricing that exceeded loss cost trends in Agency Automobile, partially offset by (ii) higher non-catastrophe weather-related losses and non-weather related losses in Agency Homeowners and Other. Income tax expense in 2018 was higher than in 2017, primarily reflecting the impacts of (i) the increase in segment income before income taxes and (ii) the $7 million reduction in income tax expense in 2017 as a result of the resolution of prior year tax matters, partially offset by (iii) the lower U.S. corporate income tax rate resulting from the TCJA.

Segment income in 2017 was $128 million, $389 million or 75% lower than segment income of $517 million in 2016. The decrease in segment income before income taxes primarily reflected the pre-tax impacts of (i) significantly higher catastrophe losses, partially offset by (ii) higher net investment income, (iii) higher underlying underwriting margins and (iv) net favorable prior year reserve development as compared to net unfavorable prior year reserve development in 2016. Catastrophe losses in 2017 and 2016 were $1.09 billion and $408 million, respectively. Net favorable prior year reserve development in 2017 was $13 million, compared with net unfavorable prior year reserve development of $3 million in 2016. The higher underlying underwriting margins primarily resulted from the impacts of (i) increased business volumes and (ii) earned pricing that modestly exceeded loss cost trends, partially offset by (iii) higher non-catastrophe weather-related losses. Income tax expense in 2017 was lower than in 2016, primarily reflecting the impacts of (i) the decrease in segment income before income taxes and (ii) the $7 million reduction in income tax expense as a result of the resolution of prior year tax matters.

Revenues

Earned Premiums

Earned premiums in 2018 were $9.92 billion, $687 million or 7% higher than in 2017. Earned premiums in 2017 were $9.23 billion, $811 million or 10% higher than in 2016. The increase in earned premiums in both 2018 and 2017 reflected increases in net written premiums over the preceding twelve months.

Net Investment Income

Net investment income in 2018 was $408 million, $25 million or 7% higher than in 2017. Net investment income in 2017 was $383 million, $21 million or 6% higher than in 2016. Refer to the “Net Investment Income” section of “Consolidated Results of Operations” for a discussion of the increases in the Company’s net investment income in 2018 and 2017 as compared with the respective prior year. In addition, refer to note 2 of notes to the consolidated financial statements for a discussion of the Company’s net investment income allocation methodology.

Other Revenues

Other revenues in all years presented included installment premium charges.

Claims and Expenses

Claims and Claim Adjustment Expenses

Claims and claim adjustment expenses in 2018 were $7.35 billion, $301 million or 4% higher than in 2017, primarily reflecting the impacts of (i) higher business volumes, (ii) loss cost trends and (iii) higher non-catastrophe weather-related losses and non-weather related losses in Agency Homeowners and Other, partially offset by (iv) higher net favorable prior year reserve development and (v) lower catastrophe losses. Claims and claim adjustment expenses in 2017 were $7.05 billion, $1.36 billion or 24% higher than in 2016, primarily reflecting the impacts of (i) significantly higher catastrophe losses, (ii) higher business volumes, (iii) loss cost trends and (iv) higher non-catastrophe weather-related losses, partially offset by (v) net favorable prior year reserve development as compared with net unfavorable prior year reserve development in 2016.

Factors contributing to prior year reserve development during the year ended December 31, 2018 are discussed in more detail in note 7 of notes to the consolidated financial statements. Net prior year reserve development in 2017 and 2016 was not significant.

Amortization of Deferred Acquisition Costs

Amortization of deferred acquisition costs in 2018 was $1.54 billion, $91 million or 6% higher than in 2017. Amortization of deferred acquisition costs in 2017 was $1.45 billion, $105 million or 8% higher than in 2016. The increases in both 2018 and 2017 were generally consistent with the increases in earned premiums.

General and Administrative Expenses

General and administrative expenses in 2018 were $1.19 billion, $74 million or 7% higher than in 2017, primarily reflecting the impact of variable costs associated with higher business volumes. General and administrative expenses in 2017 were $1.11 billion, $13 million or 1% lower than in 2016.

Income Tax Expense (Benefit)

Income tax expense in 2018 was $42 million, compared with an income tax benefit of $(44) million in 2017, primarily reflecting the impacts of (i) the $255 million increase in income before income taxes in 2018 and (ii) the $7 million reduction in income tax expense in 2017 resulting from the resolution of prior year tax matters, partially offset by (iii) the lower U.S. corporate income tax rate resulting from the TCJA. The income tax benefit in 2017 was $(44) million, compared with income tax expense of $192 million in 2016, primarily reflecting the impacts of (i) the $625 million decrease in income before income taxes in 2017 and (ii) the $7 million reduction in income tax expense resulting from the resolution of prior year tax matters. The level of income tax expense (benefit) in all years reflected the impact of tax-exempt investment income on the calculation of the Company’s tax provision.

Combined Ratio

The combined ratio of 100.6% in 2018 was 2.5 points lower than the combined ratio of 103.1% in 2017. The loss and loss adjustment expense ratio of 74.1% in 2018 was 2.2 points lower than the loss and loss adjustment expense ratio of 76.3% in 2017. The underwriting expense ratio of 26.5% in 2018 was 0.3 points lower than the underwriting expense ratio of 26.8% in 2017.

Catastrophe losses accounted for 10.7 points and 11.7 points of the combined ratio in 2018 and 2017, respectively. Net favorable prior year reserve development in 2018 and 2017 provided 1.1 and 0.1 points of benefit, respectively, to the combined ratio. The underlying combined ratio in 2018 was 0.5 points lower than the 2017 ratio on the same basis, primarily reflecting the impacts of (i) earned pricing that exceeded loss cost trends in Agency Automobile and (ii) the benefit of higher levels of earned premiums on the underwriting expense ratio, partially offset by (iii) higher non-catastrophe weather-related losses and non-weather related losses in Agency Homeowners and Other.

The combined ratio of 103.1% in 2017 was 7.3 points higher than the combined ratio of 95.8% in 2016. The loss and loss adjustment expense ratio of 76.3% in 2017 was 8.8 points higher than the loss and loss adjustment expense ratio of 67.5% in 2016. The underwriting expense ratio of 26.8% in 2017 was 1.5 points lower than the underwriting expense ratio of 28.3% in 2016.

Catastrophe losses accounted for 11.7 points and 4.9 points of the combined ratio in 2017 and 2016, respectively. Net favorable prior year reserve development in 2017 provided 0.1 points of benefit to the loss and loss adjustment expense ratio. Net unfavorable prior year reserve development in 2016 had no impact on the loss and loss adjustment expense ratio. The underlying combined ratio in 2017 was 0.6 points higher than the 2016 ratio on the same basis, primarily reflecting the impacts of (i) higher non-catastrophe weather-related losses, (ii) the tenure impact of higher levels of new business in recent years in the Automobile product line and (iii) a higher level of automobile business relative to homeowners and other business, partially offset by (iv) the benefit of higher levels of earned premiums on the underwriting expense ratio and (v) earned pricing that modestly exceeded loss cost trends.

Written Premiums

Personal Insurance’s gross and net written premiums were as follows:



	Gross Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Agency:
Automobile	$	4,998	$	4,671	$	4,123
Homeowners and Other	4,213		4,000		3,843
Total Agency	9,211		8,671		7,966
Direct-to-Consumer	398		362		310
Total Domestic	9,609		9,033		8,276
International	723		662		615
Total Personal Insurance	$	10,332	$	9,695	$	8,891



	Net Written Premiums
(for the year ended December 31, in millions)	2018		2017		2016
Domestic:
Agency:
Automobile	$	4,972	$	4,646	$	4,103
Homeowners and Other	4,148		3,933		3,772
Total Agency	9,120		8,579		7,875
Direct-to-Consumer	396		361		309
Total Domestic	9,516		8,940		8,184
International	708		650		603
Total Personal Insurance	$	10,224	$	9,590	$	8,787

Domestic Agency Written Premiums

Personal Insurance’s domestic Agency business comprises business written through agents, brokers and other intermediaries.

Domestic Agency gross and net written premiums in 2018 were both 6% higher than in 2017.

Domestic Agency Automobile net written premiums of $4.97 billion in 2018 were 7% higher than in 2017. Business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive but were lower than in 2017. New business premiums in 2018 decreased from 2017.

Domestic Agency Homeowners and Other net written premiums of $4.15 billion in 2018 were 5% higher than in 2017. Business retention rates remained strong in 2018. Renewal premium changes in 2018 remained positive and were higher than in 2017. New business premiums in 2018 increased over 2017.

Domestic Agency gross and net written premiums in 2017 were both 9% higher than in 2016.

Domestic Agency Automobile net written premiums of $4.65 billion in 2017 were 13% higher than in 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive and were higher than in 2016. New business premiums in 2017 decreased from 2016.

Domestic Agency Homeowners and Other net written premiums of $3.93 billion in 2017 were 4% higher than in 2016. Business retention rates remained strong in 2017. Renewal premium changes in 2017 remained positive but were lower than in 2016. New business premiums in 2017 increased over 2016.

For its domestic Agency business, Personal Insurance had approximately 7.2 million and 6.9 million active policies at December 31, 2018 and 2017, respectively.

Direct-to-Consumer and International Written Premiums

Direct-to-Consumer net written premiums in 2018 were 10% higher than in 2017. Direct-to-Consumer net written premiums in 2017 were 17% higher than in 2016. The increase in 2018 was primarily driven by growth in both automobile and homeowners net written premiums. The increase in 2017 was primarily driven by growth in automobile net written premiums.

International net written premiums in 2018 were 9% higher than in 2017, primarily driven by growth in automobile net written premiums. International net written premiums in 2017 were 8% higher than in 2016, primarily driven by growth in automobile net written premiums and the impact of changes in foreign currency exchange rates.

For its International and Direct-to-Consumer business, Personal Insurance had approximately 900,000 and 878,000 active policies at December 31, 2018 and 2017, respectively.

Interest Expense and Other



(for the year ended December 31, in millions)	2018			2017			2016
Income (loss)	$	(298	)	$	(254	)	$	(244	)

The Income (loss) for Interest Expense and Other in 2018 was $44 million higher than in 2017. The Income (loss) for Interest Expense and Other in 2017 was $10 million higher than in 2016. Pre-tax interest expense in 2018, 2017 and 2016 was $352 million, $369 million and $363 million, respectively. After-tax interest expense in 2018, 2017 and 2016 was $278 million, $240 million and $236 million, respectively. The increase in after-tax interest expense in 2018 compared with 2017 primarily reflected the impact of the lower U.S. corporate income tax rate in 2018 resulting from the TCJA.

ASBESTOS CLAIMS AND LITIGATION

The Company believes that the property and casualty insurance industry has suffered from court decisions and other trends that have expanded insurance coverage for asbestos claims far beyond the original intent of insurers and policyholders. The Company has received and continues to receive a significant number of asbestos claims. Factors underlying these claim filings include continued intensive advertising by lawyers seeking asbestos claimants and the focus by plaintiffs on defendants who were not

traditionally primary targets of asbestos litigation. The focus on these defendants is primarily the result of the number of traditional asbestos defendants who have sought bankruptcy protection in previous years. The bankruptcy of many traditional defendants has also caused increased settlement demands against those policyholders who are not in bankruptcy but remain in the tort system. Currently, in many jurisdictions, those who allege very serious injury and who can present credible medical evidence of their injuries are receiving priority trial settings in the courts, while those who have not shown any credible disease manifestation are having their hearing dates delayed or placed on an inactive docket. Prioritizing claims involving credible evidence of injuries, along with the focus on defendants who were not traditionally primary targets of asbestos litigation, contributes to the claims and claim adjustment expense payment patterns experienced by the Company. The Company’s asbestos-related claims and claim adjustment expense experience also has been impacted by the unavailability of other insurance sources potentially available to policyholders, whether through exhaustion of policy limits or through the insolvency of other participating insurers.

The Company continues to be involved in disputes, including litigation, with a number of policyholders, some of whom are in bankruptcy over coverage for asbestos-related claims. Many coverage disputes with policyholders are only resolved through settlement agreements. Because many policyholders make exaggerated demands, it is difficult to predict the outcome of settlement negotiations. Settlements involving bankrupt policyholders may include extensive releases which are favorable to the Company, but which could result in settlements for larger amounts than originally anticipated. Although the Company has seen a reduction in the overall risk associated with these disputes, it remains difficult to predict the ultimate cost of these claims. As in the past, the Company will continue to pursue settlement opportunities.

In addition to claims against policyholders, proceedings have been launched directly against insurers, including the Company, by individuals challenging insurers’ conduct with respect to the handling of past asbestos claims and by individuals seeking damages arising from alleged asbestos-related bodily injuries. It is possible that the filing of other direct actions against insurers, including the Company, could be made in the future. It is difficult to predict the outcome of these proceedings, including whether the plaintiffs would be able to sustain these actions against insurers based on novel legal theories of liability. The Company believes it has meritorious defenses to any such claims and has received favorable rulings in certain jurisdictions.

On January 29, 2009, the Company and PPG Industries, Inc. (PPG), along with approximately 30 other insurers of PPG, agreed in principle to settle asbestos-related coverage litigation under insurance policies issued to PPG (the “Agreement”). The Agreement was 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. On April 27, 2016, the Amended Plan became effective and all the remaining conditions to the Agreement were satisfied. The Company fully satisfied its obligation under the Agreement by making a discounted payment in the second quarter of 2016. The Company’s payment totaled $524 million, of which $518 million was related to asbestos reserves.

Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually. Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

The Company categorizes its asbestos reserves as follows:



	Number of Policyholders		Total Net Paid				Net Asbestos Reserves
(at and for the year ended December 31, $ in millions)	2018	2017	2018		2017		2018		2017
Policyholders with settlement agreements	11	10	$	20	$	12	$	53	$	32
Home office and field office policyholders	1,466	1,558	188		218		1,089		1,097
Assumed reinsurance and other	—	—	17		41		139		152
Total	1,477	1,568	$	225	$	271	$	1,281	$	1,281

The policyholders with settlement agreements category includes certain policyholders with whom the Company has entered into permanent settlement agreements. Reserves in this category are based on the expected payout for each policyholder under the applicable agreement. The home office and field office category relates to all other policyholders and also includes IBNR reserves and reserves for the costs of defending asbestos-related coverage litigation. IBNR reserves in this category include amounts for

new claims and adverse development on existing policyholders in this category, as well as reserves for claims from policyholders reporting asbestos claims for the first time and for policyholders for which there is, or may be, litigation. Policyholders are identified for the annual home office review based upon, among other factors: a combination of past payments and current case reserves in excess of a specified threshold (currently $100,000), perceived level of exposure, number of reported claims, products/completed operations and potential “non-product” exposures, size of policyholder and geographic distribution of products or services sold by the policyholder. The assumed reinsurance and other category primarily consists of reinsurance of excess coverage, including various pool participations.

In the third quarter of 2018, the Company completed its annual in-depth asbestos claim review, including a review of active policyholders and litigation cases for potential product and “non-product” liability, and noted the continuation of the following trends:


•	a high level of litigation activity in certain jurisdictions involving individuals alleging serious asbestos-related illness, primarily involving mesothelioma claims;


•	while overall payment patterns have been generally stable, there has been an increase in severity for certain policyholders due to the high level of litigation activity; and


•	a moderate level of asbestos-related bankruptcy activity.

In the home office and field office category, which accounts for the vast majority of policyholders with active asbestos-related claims, the number of policyholders tendering asbestos claims for the first time, the number of policyholders with open asbestos claims and net asbestos-related payments declined slightly when compared to 2017. Payments on behalf of policyholders in this category continue to be influenced by a 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 Company’s quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders in the home office and field office category and the assumed reinsurance and other category as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment.

The completion of these reviews and analyses in 2018, 2017 and 2016 resulted in $225 million increases in each year to the Company’s net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company’s estimate of projected settlement and defense costs related to a broad number of policyholders in the home office and field office category. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be higher than previously anticipated due to the impact of the current litigation environment surrounding mesothelioma claims discussed above. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company’s overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company’s overall view of the current underlying asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.

Net asbestos paid loss and loss expenses in 2018, 2017 and 2016 were $225 million, $271 million and $708 million, respectively. Net payments in 2016 included the $458 million payment related to the PPG settlement, as described above. Approximately 9%, 4% and 69% of total net paid losses in 2018, 2017 and 2016, respectively, related to policyholders with whom the Company had entered into settlement agreements limiting the Company’s liability.

The following table displays activity for asbestos losses and loss expenses and reserves:



(at and for the year ended December 31, in millions)	2018			2017			2016
Beginning reserves:
Gross	$	1,538		$	1,512		$	1,989
Ceded	(257		)	(186		)	(179		)
Net	1,281			1,326			1,810
Incurred losses and loss expenses:
Gross	343			340			355
Ceded	(118		)	(115		)	(130		)
Net	225			225			225
Paid loss and loss expenses:
Gross	273			315			831
Ceded	(48		)	(44		)	(123		)
Net	225			271			708
Foreign exchange and other:
Gross	—			1			(1		)
Ceded	—			—			—
Net	—			1			(1		)
Ending reserves:
Gross	1,608			1,538			1,512
Ceded	(327		)	(257		)	(186		)
Net	$	1,281		$	1,281		$	1,326

See “—Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

ENVIRONMENTAL CLAIMS AND LITIGATION

The Company has received and continues to receive claims from policyholders who allege that they are liable for injury or damage arising out of their alleged disposition of toxic substances. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties.

The Company has also been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that some court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1980s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims, when submitted, rarely indicate the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track of the monetary amount being sought in those few claims which indicate a monetary amount.

The resolution of environmental exposures by the Company generally occurs through settlements with policyholders as opposed to claimants. Generally, the Company strives to extinguish any obligations it may have under any policy issued to the policyholder for past, present and future environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form of settlement is commonly referred to as a “buy-back” of policies for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation which the Company may have for other claims, including, but not limited to, asbestos and other cumulative injury claims. The Company and its policyholders may also agree to settlements which only extinguish any liability arising from known specified sites or claims. In many instances, these agreements also include indemnities and hold harmless provisions to protect the Company. The Company’s general purpose in executing these agreements is to reduce the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of this analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the

alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. Conventional actuarial methods are not used to estimate these reserves.

The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. As a result of these factors, in 2018, 2017 and 2016, the Company increased its net environmental reserves by $55 million, $65 million and $82 million, respectively.

At December 31, 2018, approximately 94% of the net environmental reserve (approximately $314 million) was carried in a bulk reserve and included unresolved environmental claims, incurred but not reported environmental claims and the anticipated cost of coverage litigation disputes relating to these claims. The bulk reserve the Company carries is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. The balance, approximately 6% of the net environmental reserve (approximately $20 million), consists of case reserves.

The following table displays activity for environmental losses and loss expenses and reserves:



(at and for the year ended December 31, in millions)	2018			2017			2016
Beginning reserves:
Gross	$	373		$	395		$	375
Ceded	(13		)	(13		)	(14		)
Net	360			382			361
Incurred losses and loss expenses:
Gross	71			74			87
Ceded	(16		)	(9		)	(5		)
Net	55			65			82
Paid loss and loss expenses:
Gross	86			97			67
Ceded	(6		)	(9		)	(6		)
Net	80			88			61
Foreign exchange and other:
Gross	—			1			—
Ceded	(1		)	—			—
Net	(1		)	1			—
Ending reserves:
Gross	358			373			395
Ceded	(24		)	(13		)	(13		)
Net	$	334		$	360		$	382

UNCERTAINTY REGARDING ADEQUACY OF ASBESTOS AND ENVIRONMENTAL RESERVES

As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information

becomes available and as claims develop. Changes in the legal, regulatory and legislative environment may impact the resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. Changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims could affect the settlement of asbestos and environmental claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current insurance reserves. In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods.

INVESTMENT PORTFOLIO

The Company’s invested assets at December 31, 2018 were $72.28 billion, of which 93% was invested in fixed maturity and short-term investments, 1% in equity securities, 1% in real estate investments and 5% in other investments. Because the primary purpose of the investment portfolio is to fund future claims payments, the Company employs a conservative investment philosophy. A significant majority of funds available for investment are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

The carrying value of the Company’s fixed maturity portfolio at December 31, 2018 was $63.46 billion. The Company closely monitors the duration of its fixed maturity investments, and investment purchases and sales are executed with the objective of having adequate funds available to satisfy the Company’s insurance and debt obligations. The weighted average credit quality of the Company’s fixed maturity portfolio, both including and excluding U.S. Treasury securities, was “Aa2” at both December 31, 2018 and 2017. Below investment grade securities represented 2.3% and 2.7% of the total fixed maturity investment portfolio at December 31, 2018 and 2017, respectively. The weighted average effective duration of fixed maturities and short-term securities was 4.5 (4.7 excluding short-term securities) at December 31, 2018 and 4.0 (4.3 excluding short-term securities) at December 31, 2017. The increase in duration compared with December 31, 2017 primarily reflected the increase in market interest rates as well as changes in the Company's investment portfolio following the enactment of the Tax Cuts and Jobs Act of 2017.

The carrying values of investments in fixed maturities classified as available for sale at December 31, 2018 and 2017 were as follows:



	2018			2017
(at December 31, in millions)	Carrying Value		Weighted Average Credit Quality (1)	Carrying Value		Weighted Average Credit Quality (1)
U.S. Treasury securities and obligations of U.S. government and government agencies and authorities	$	2,064	Aaa/Aa1	$	2,076	Aaa/Aa1
Obligations of states, municipalities and political subdivisions:	0
Local general obligation	14,572		Aaa/Aa1	13,906		Aaa/Aa1
Revenue	9,853		Aaa/Aa1	11,626		Aaa/Aa1
State general obligation	1,334		Aaa/Aa1	1,484		Aaa/Aa1
Pre-refunded	2,852		Aaa/Aa1	3,899		Aaa/Aa1
Total obligations of states, municipalities and political subdivisions	28,611			30,915
Debt securities issued by foreign governments	1,257		Aaa/Aa1	1,509		Aaa/Aa1
Mortgage-backed securities, collateralized mortgage obligations and pass-through securities	2,573		Aaa/Aa1	2,410		Aa1
All other corporate bonds and redeemable preferred stock:
Financial:
Bank	3,641		A1	3,132		A2
Insurance	1,006		A1	752		A1
Finance/leasing	39		Ba2	25		B1
Brokerage and asset management	80		A1	60		A2
Total financial	4,766			3,969
Industrial	16,957		A3	15,136		A3
Public utility	3,222		A2	2,610		A2
Canadian municipal securities	1,165		Aa2	1,207		Aa2
Sovereign corporate securities (2)	629		Aaa	605		Aaa
Commercial mortgage-backed securities and project loans (3)	1,217		Aaa	1,168		Aaa
Asset-backed and other	1,003		Aa1	1,089		Aa2
Total all other corporate bonds and redeemable preferred stock	28,959			25,784
Total fixed maturities	$	63,464	Aa2	$	62,694	Aa2


(1)	Rated using external rating agencies or by the Company when a public rating does not exist.


(2)	Sovereign corporate securities include corporate securities that are backed by a government and include sovereign banks and securities issued under the Federal Ship Financing Programs.


(3)	Included in commercial mortgage-backed securities and project loans at December 31, 2018 and 2017 were $456 million and $471 million of securities guaranteed by the U.S. government, respectively, and $2 million and $4 million of securities guaranteed by government sponsored enterprises, respectively.

The following table sets forth the Company’s fixed maturity investment portfolio rated using external ratings agencies or by the Company when a public rating does not exist:



(at December 31, 2018, in millions)	Carrying Value		Percent of Total Carrying Value
Quality Rating:
Aaa	$	26,089	41.1	%
Aa	16,027		25.3
A	10,539		16.6
Baa	9,334		14.7
Total investment grade	61,989		97.7
Below investment grade	1,475		2.3
Total fixed maturities	$	63,464	100.0	%

Obligations of States, Municipalities and Political Subdivisions

The Company’s fixed maturity investment portfolio at December 31, 2018 and 2017 included $28.61 billion and $30.92 billion, respectively, of securities which are obligations of states, municipalities and political subdivisions (collectively referred to as the municipal bond portfolio). The municipal bond portfolio is diversified across the United States, the District of Columbia and Puerto Rico and includes general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers. Included in the municipal bond portfolio at December 31, 2018 and 2017 were $2.85 billion and $3.90 billion, respectively, of pre-refunded bonds, which are bonds for which states or municipalities have established irrevocable trusts, almost exclusively comprised of U.S. Treasury securities and obligations of U.S. government and government agencies and authorities. These trusts were created to fund the payment of principal and interest due under the bonds. The irrevocable trusts are verified as to their sufficiency by an independent verification agent of the underwriter, issuer or trustee. All of the Company’s holdings of securities issued by Puerto Rico and related entities have been pre-refunded and therefore are defeased by U.S. Treasury securities.

The following table shows the geographic distribution of the $25.76 billion of municipal bonds at December 31, 2018 that were not pre-refunded.



(at December 31, 2018, in millions)	State General Obligation		Local General Obligation		Revenue		Total Carrying Value		Weighted Average Credit Quality(1)
State:
Texas	$	48	$	2,561	$	982	$	3,591	Aaa
Washington	106		1,270		487		1,863		Aa1
Virginia	40		761		845		1,646		Aaa/Aa1
Minnesota	100		1,050		239		1,389		Aaa/Aa1
North Carolina	88		756		442		1,286		Aaa/Aa1
California	—		839		403		1,242		Aaa/Aa1
Massachusetts	—		88		990		1,078		Aaa/Aa1
Colorado	—		637		273		910		Aa1
Maryland	32		635		167		834		Aaa/Aa1
Georgia	147		518		160		825		Aaa/Aa1
Wisconsin	151		366		168		685		Aa1
Tennessee	63		533		80		676		Aa1
South Carolina	50		500		106		656		Aa1
Oregon	154		326		170		650		Aa1
All others (2)	355		3,732		4,341		8,428		Aaa/Aa1
Total	$	1,334	$	14,572	$	9,853	$	25,759	Aaa/Aa1


(1)	Rated using external rating agencies or by the Company when a public rating does not exist. Ratings shown are the higher of the rating of the underlying issuer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default.


(2)	No other single state accounted for 2.5% or more of the total non-pre-refunded municipal bonds.

The following table displays the funding sources for the $9.85 billion of municipal bonds identified as revenue bonds in the foregoing table at December 31, 2018.



(at December 31, 2018, in millions)	Carrying Value		Weighted Average Credit Quality(1)
Source:
Water and sewer	$	3,903	Aaa/Aa1
Higher education	2,414		Aaa/Aa1
Power utilities	803		Aa1
Transportation	744		Aa1
Special tax	544		Aa1
Health care	80		Aa2
Housing	41		Aaa/Aa1
Industrial	21		A2
Lease	13		Aa1
Property tax	12		Aa2
Other revenue sources	1,278		Aaa/Aa1
Total	$	9,853	Aaa/Aa1


(1)	Rated using external rating agencies or by the Company when a public rating does not exist. Ratings shown are the higher of the rating of the underlying issuer or the insurer in the case of securities enhanced by third-party insurance for the payment of principal and interest in the event of issuer default.

The Company bases its investment decision on the underlying credit characteristics of the municipal security. The weighted average credit rating of the municipal bond portfolio was “Aaa/Aa1” at December 31, 2018.

Debt Securities Issued by Foreign Governments

The following table shows the geographic distribution of the Company’s long-term fixed maturity investments in debt securities issued by foreign governments at December 31, 2018.



(at December 31, 2018, in millions)	Carrying Value		Weighted Average Credit Quality (1)
Foreign Government:
Canada	$	849	Aaa
United Kingdom	369		Aa2
All Others (2)	39		Baa1
Total	$	1,257	Aaa/Aa1


(1)	Rated using external rating agencies or by the Company when a public rating does not exist.

(2) No other country accounted for 2.5% or more of total debt securities issued by foreign governments.

The following table shows the Company’s Eurozone exposure at December 31, 2018 to all debt securities issued by foreign governments, financial companies, sovereign corporations (including sovereign banks) whose securities are backed by the respective country’s government and all other corporate securities (comprised of industrial corporations and utility companies) which could be affected if economic conditions deteriorated due to a prolonged recession.



				Corporate Securities
	Debt Securities Issued by Foreign Governments			Financial			Sovereign Corporates			All Other
(at December 31, 2018, in millions)	Carrying Value		Weighted Average Credit Quality (1)	Carrying Value		Weighted Average Credit Quality (1)	Carrying Value		Weighted Average Credit Quality (1)	Carrying Value		Weighted Average Credit Quality (1)
Eurozone Periphery
Spain	$	—	—	$	79	A2	$	—	—	$	21	Baa2
Ireland	—		—	—		—	—		—	138		Baa2
Greece	—		—	—		—	—		—	—		—
Italy	—		—	—		—	—		—	—		—
Portugal	—		—	—		—	—		—	—		—
Subtotal	—			79			—			159
Eurozone Non-Periphery
Germany	—		—	13		Baa2	309		Aaa/Aa1	487		A3
France	—		—	4		A1	—		—	536		A2
Netherlands	—		—	155		A1	78		Aaa	465		A1
Austria	—		—	—		—	—		—	—		—
Finland	1		Aa1	—		—	—		—	—		—
Belgium	—		—	—		—	—		—	112		Baa1
Luxembourg	—		—	—		—	—		—	80		Aa3
Subtotal	1			172			387			1,680
Total	$	1		$	251		$	387		$	1,839


(1)	Rated using external rating agencies or by the Company when a public rating does not exist. The table includes $323 million of short-term securities which have high ratings issued by external rating agencies for short-term issuances. For purposes of this table, the short-term securities, which are rated “A-1+” and/or “P-1,” are included as “Aaa” rated securities.

In addition to fixed maturities noted in the foregoing table, the Company has exposure totaling $141 million to private equity limited partnerships and real estate partnerships (both of which are included in other investments in the Company’s consolidated balance sheet) whose primary investing focus is across Europe. The Company has unfunded commitments totaling $131 million to these partnerships. The Company has no non-redeemable preferred stock issued by companies in the Eurozone.

Mortgage-Backed Securities, Collateralized Mortgage Obligations and Pass-Through Securities

The Company’s fixed maturity investment portfolio at December 31, 2018 and 2017 included $2.57 billion and $2.41 billion, respectively, of residential mortgage-backed securities, including pass-through-securities and collateralized mortgage obligations (CMOs), all of which are subject to prepayment risk (either shortening or lengthening of duration). While prepayment risk for securities and its effect on income cannot be fully controlled, particularly when interest rates move dramatically, the Company’s investment strategy generally favors securities that reduce this risk within expected interest rate ranges. The Company makes investments in residential CMOs that are either guaranteed by GNMA, FNMA or FHLMC, or if not guaranteed, are senior or super-senior positions within their respective securitizations. Both guaranteed and non-guaranteed residential CMOs allocate the distribution of payments from the underlying mortgages among different classes of bondholders. In addition, non-guaranteed residential CMOs provide structures that allocate the impact of credit losses to different classes of bondholders. Senior and super-senior CMOs are protected, to varying degrees, from credit losses as those losses are initially allocated to subordinated bondholders. The Company’s investment strategy is to purchase CMO tranches that are expected to offer the most favorable return given the Company’s assessment of associated risks. The Company does not purchase residual interests in CMOs. For more information regarding the Company’s investments in residential mortgage-backed securities, see note 3 of notes to the consolidated financial statements.

Commercial Mortgage-Backed Securities and Project Loans

At December 31, 2018 and 2017, the Company held commercial mortgage-backed securities (including FHA project loans) of $1.22 billion and $1.17 billion, respectively. 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 and the underlying credit strength of these securities. For more information regarding the Company’s investments in commercial mortgage-backed securities, see note 3 of notes to the consolidated financial statements.

Equity Securities, Real Estate and Short-Term Investments

See note 1 of notes to the consolidated financial statements for further information about these invested asset classes.

Other Investments

The Company also invests in private equity limited partnerships, hedge funds and real estate partnerships. Also included in other investments are non-public common and preferred equities and derivatives. These asset classes have historically provided a higher return than fixed maturities but are subject to more volatility. At December 31, 2018 and 2017, the carrying value of the Company's other investments was $3.56 billion and $3.53 billion, respectively. The Company has unfunded commitments to private equity limited partnerships and real estate partnerships in which it invests. These commitments totaled $1.60 billion and $1.56 billion at December 31, 2018 and 2017, respectively. It is the opinion of the Company’s management that the Company has adequate liquidity to meet these commitments.

Securities Lending

The Company has, from time to time, engaged in securities lending activities from which it generates net investment income by lending certain of its investments to other institutions for short periods of time. At December 31, 2018 and 2017, the Company had $367 million and $304 million of securities on loan, respectively, as part of a tri-party lending agreement. The average monthly balance of securities on loan during 2018 and 2017 was $319 million and $318 million, respectively. Borrowers of these securities provide collateral equal to at least 102% of the market value of the loaned securities plus accrued interest. The Company has not incurred any investment losses in its securities lending program for the years ended December 31, 2018, 2017 and 2016.

Lloyd’s Trust Deposits

The Company meets its capital requirements to support its underwriting at Lloyd’s using a combination of trust deposits and uncollateralized letters of credit. Securities with a fair value of approximately $115 million and $37 million held by a wholly-owned subsidiary at December 31, 2018 and 2017, respectively, and $33 million held by TRV at both December 31, 2018 and 2017 were pledged into Lloyd’s trust accounts to provide a portion of the Lloyd’s capital requirements. For more information regarding the Company’s utilization of uncollateralized letters of credit, see “Liquidity and Capital Resources” herein.

Net Unrealized Investment Gains (Losses)

The net unrealized investment gains (losses) that were included in shareholders' equity were as follows:



(at December 31, in millions)	2018			2017		2016
Fixed maturities	$	(137	)	$	1,378	$	865
Equity securities	—			13		228
Other investments	—			23		19
Unrealized investment gains (losses) before tax	(137		)	1,414		1,112
Tax expense (benefit)	(24		)	460		382
Net unrealized investment gains (losses) included in accumulated other comprehensive income at year end	(113		)	954		730
Tax effect of TCJA	—			158		—
Net unrealized investment gains (losses) included in shareholders' equity at end of year	$	(113	)	$	1,112	$	730

Net unrealized investment losses included in shareholders’ equity at December 31, 2018 compared with net unrealized gains at December 31, 2017 reflected the impact of an increase in market interest rates in 2018. Equity securities, which include public common and non-redeemable preferred stocks, are reported at fair value with changes in fair value recognized in net income. Prior to January 1, 2018, equity securities were classified as available for sale and changes in their fair value were charged or credited directly to other comprehensive income.

At December 31, 2018, the amount of gross unrealized losses for all fixed maturity investments reported at fair value for which fair value was less than 80% of amortized cost for fixed maturity investments was not significant.

For fixed maturity investments where fair value is less than the carrying value and the Company did not reach a decision to impair, the Company continues to have the intent and ability to hold such investments to a projected recovery in value, which may not be until maturity.

At December 31, 2018 and 2017, below investment grade securities comprised 2.3% and 2.7%, respectively, of the fair value of the Company’s fixed maturity investment portfolio. Included in below investment grade securities at December 31, 2018 were securities in an unrealized loss position that, in the aggregate, had an amortized cost of $1.37 billion and a fair value of $1.29 billion, resulting in a net pre-tax unrealized investment loss of $81 million. These securities in an unrealized loss position represented approximately 2.2% of the total amortized cost and 2.0% of the fair value of the fixed maturity portfolio at December 31, 2018 and accounted for 9.5% of the total gross pre-tax unrealized investment loss in the fixed maturity portfolio at December 31, 2018.

Impairment Charges

Impairment charges included in net realized investment gains in the consolidated statement of income were $1 million, $14 million and $29 million for the years ended December 31, 2018, 2017 and 2016, respectively. See note 3 of notes to the consolidated financial statements for further information.

Purchases and Sales of Investment Securities

Purchases and sales of investments are based on cash requirements, the characteristics of the insurance liabilities and current market conditions. The Company identifies investments to be sold to achieve its primary investment goals of assuring the Company’s ability to meet policyholder obligations as well as to optimize investment returns, given these obligations.

During the year ended December 31, 2018, the Company incurred pre-tax realized losses of $18 million on the sale of fixed maturity investments having a fair value of $786 million.

CATASTROPHE MODELING

The Company uses various analyses and methods, including proprietary and third-party computer modeling processes, to make underwriting and reinsurance decisions designed to manage its exposure to catastrophic events. There are no industry-standard methodologies or assumptions for projecting catastrophe exposure. Accordingly, catastrophe estimates provided by different insurers may not be comparable.

The Company actively monitors and evaluates changes in third-party models and, when necessary, calibrates the catastrophe risk model estimates delivered via its own proprietary modeling processes. The Company considers historical loss experience, recent events, underwriting practices, market share analyses, external scientific analysis and various other factors including non-modeled losses, to refine its proprietary view of catastrophe risk. These proprietary models are continually updated as new information and techniques emerge.

The tables below set forth the probabilities that estimated losses, comprising claims and allocated claim adjustment expenses (but excluding unallocated claim adjustment expenses), from a single event occurring in a one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars, net of tax, and as a percentage of the Company’s common equity), based on the proprietary and third-party computer models utilized by the Company at December 31, 2018. For example, on the basis described below the tables, the Company estimates that there is a one percent chance that the Company’s loss from a single U.S. and Canadian hurricane in a one-year timeframe would equal or exceed $1.6 billion, or 7% of the Company’s common equity at December 31, 2018.



	Dollars (in billions)
Likelihood of Exceedance (1)	Single U.S. and Canadian Hurricane		Single U.S. and Canadian Earthquake
2.0% (1-in-50)	$	1.2	$	0.5
1.0% (1-in-100)	$	1.6	$	0.7
0.4% (1-in-250)	$	2.2	$	1.2
0.1% (1-in-1,000)	$	4.6	$	1.8



	Percentage of Common Equity (2)
Likelihood of Exceedance	Single U.S. and Canadian Hurricane		Single U.S. and Canadian Earthquake
2.0% (1-in-50)	5	%	2	%
1.0% (1-in-100)	7	%	3	%
0.4% (1-in-250)	9	%	5	%
0.1% (1-in-1,000)	20	%	8	%

(1)

An event that has, for example, a 2% likelihood of exceedance is sometimes described as a “1-in-50 year event.” As noted above, however, the probabilities in the table represent the likelihood of losses from a single event equaling or exceeding the indicated threshold loss amount in a one-year timeframe, not over a multi-year timeframe. Also, because the probabilities relate to a single event, the probabilities do not address the likelihood of more than one event occurring in a particular period, and, therefore, the amounts do not address potential aggregate catastrophe losses occurring in a one-year timeframe.

(2)

The percentage of common equity is calculated by dividing (a) indicated loss amounts in dollars by (b) total common equity excluding net unrealized investment gains and losses, net of taxes, included in shareholders’ equity. Net unrealized investment gains and losses can be significantly impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. Accordingly, the Company’s management uses the percentage of common equity calculated on this basis as a metric to evaluate the potential impact of a single hurricane or single earthquake on the Company’s financial position for purposes of making underwriting and reinsurance decisions.

The threshold loss amounts in the tables above, which are based on the Company’s in-force portfolio at December 31, 2018 and catastrophe reinsurance program at January 1, 2019, are net of reinsurance, after-tax and exclude unallocated claim adjustment expenses, which historically have been less than 10% of loss estimates. For further information regarding the Company’s reinsurance, see “Item 1 - Reinsurance.” The amounts for hurricanes reflect U.S. and Canadian exposures and include property exposures, property residual market exposures and an adjustment for certain non-property exposures. The hurricane loss amounts are based on the Company’s catastrophe risk model estimates and include losses from the hurricane hazards of wind and storm surge. The amounts for earthquakes reflect U.S. and Canadian property and workers’ compensation exposures. The Company does not believe that the inclusion of hurricane or earthquake losses arising from other geographical areas or other exposures would materially change the estimated threshold loss amounts.

Catastrophe modeling relies upon inputs based on experience, science, engineering and history. These inputs reflect a significant amount of judgment and are subject to changes which may result in volatility in the modeled output. Catastrophe modeling output may also fail to account for risks that are outside the range of normal probability or are otherwise unforeseeable. Catastrophe modeling assumptions include, among others, the portion of purchased reinsurance that is collectible after a catastrophic event, which may prove to be materially incorrect. Consequently, catastrophe modeling estimates are subject to significant uncertainty. In the tables above, the uncertainty associated with the estimated threshold loss amounts increases significantly as the likelihood of exceedance decreases. In other words, in the case of a relatively more remote event (e.g., 1-in-1,000), the estimated threshold loss amount is relatively less reliable. Actual losses from an event could materially exceed the indicated threshold loss amount. In addition, more than one such event could occur in any period.

Moreover, the Company is exposed to the risk of material losses from other than property and workers’ compensation coverages arising out of hurricanes and earthquakes, and it is exposed to catastrophe losses from perils other than hurricanes and earthquakes, such as tornadoes and other windstorms, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions and other naturally-occurring events, such as solar flares, as well as acts of terrorism and cyber events.

For more information about the Company’s exposure to catastrophe losses, see “Item 1A-Risk Factors-Catastrophe losses could materially and adversely affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance” and “Item 1A-Risk Factors- We may be adversely affected if our pricing and capital models provide materially different indications than actual results.”

CHANGING CLIMATE CONDITIONS

Severe weather events over the last two decades have underscored the unpredictability of future climate trends and created uncertainty regarding insurers’ exposures to financial loss as a result of catastrophes and other weather-related events. During that time period, the insurance industry experienced increased catastrophe losses due to a number of potential causal factors, including, in addition to weather/climate variability, more people living in high-risk areas, population growth in areas with weaker enforcement of building codes, urban expansion and an increase in the average size of a house. For example, hurricane and storm surge activity have impacted areas further inland than previously experienced, and demographic changes have resulted in larger populations in coastal areas which historically have been subject to severe storms, thus expanding the Company’s potential for losses from hurricanes. Additionally, both the frequency and severity of tornado and hail storms in the United States have been more volatile during the last decade. The frequency and severity of wildfire losses have been elevated in more recent years. Demographic changes in areas prone to wildfires have expanded the Company’s potential for losses from wildfires. Moreover, the Company’s catastrophe models may be less reliable due to the increased unpredictability in frequency and severity of severe weather events, emerging trends in climate conditions, inadequate reflection of regulatory changes and the other factors mentioned above. Accordingly, the Company may be subject to increased losses from catastrophes and other weather-related events.

The Company discusses how potentially changing climate conditions may present other issues for its business under “Item 1A - Risk Factors” and “Outlook.” For example, among other things:

•

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 liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance” and “-Outlook-Underwriting Gain/Loss.”

•

Changing climate conditions could also impact the creditworthiness of issuers of securities in which the Company invests. For example, water supply adequacy could impact the creditworthiness of bond issuers in the Southwestern United States, and more frequent and/or severe hurricanes could impact the creditworthiness of issuers in the Southeastern United States, among other areas. See “Risk Factors-Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced returns or material realized or unrealized losses.”

•

Increased regulation adopted in response to potential changes in climate conditions may impact the Company and its customers. For example, state insurance regulation could impact the Company’s ability to manage property exposures in areas vulnerable to significant climate driven losses. If the Company is unable to implement risk-based pricing, modify policy terms or reduce exposures to the extent necessary to address rising losses related to catastrophes and smaller scale weather events (should those increased losses occur), its business may be adversely affected. See “Risk Factors-Catastrophe losses could materially and adversely affect our results of operations, our financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital and the availability and cost of reinsurance.” In addition, climate change regulation could increase the Company’s customers’ costs of doing business. For example, insureds faced with carbon management regulatory requirements may have less available capital for investment in loss prevention and safety features which may, over time, increase loss exposures. Increased regulation may also result in reduced economic activity, which would decrease the amount of insurable assets and businesses.

•

The full range of potential liability exposures related to changing climate conditions continues to evolve. Through the Company’s Emerging Issues Committee and its Committee on Climate, Energy and the Environment, the Company works with its business units and corporate groups, as appropriate, to identify and try to assess climate change-related liability issues, which are continually evolving and often hard to fully evaluate. The Company regularly reviews emerging issues, including changing climate conditions, to consider potential changes to its modeling and the use of such modeling, as well as to help determine the need for new underwriting strategies, coverage modifications or new products. See “Risk Factors-The effects of emerging claim and coverage issues on our business are uncertain.”

REINSURANCE RECOVERABLES

The Company reinsures a portion of the risks it underwrites in order to control its exposure to losses. For additional discussion regarding the Company’s reinsurance coverage, see “Part I—Item 1—Reinsurance.”

The following table summarizes the composition of the Company’s reinsurance recoverables:



(at December 31, in millions)	2018			2017
Gross reinsurance recoverables on paid and unpaid claims and claim adjustment expenses	$	3,485		$	3,303
Allowance for uncollectible reinsurance	(110		)	(111		)
Net reinsurance recoverables	3,375			3,192
Mandatory pools and associations	2,005			2,011
Structured settlements	2,990			3,106
Total reinsurance recoverables	$	8,370		$	8,309

Net reinsurance recoverables at December 31, 2018 increased by $183 million over December 31, 2017, primarily reflecting the 2018 impacts of catastrophe losses and the asbestos reserve increase, partially offset by cash collections.

The following table presents the Company’s top five reinsurer groups by reinsurance recoverable at December 31, 2018 (in millions). Also included is the A.M. Best rating of the Company's predominant reinsurer from each such reinsurer group at February 14, 2019:



Reinsurer Group	Reinsurance Recoverable		A.M. Best Rating of Group’s Predominant Reinsurer
Swiss Re Group	$	473	A+	second highest of 16 ratings
Munich Re Group	305		A+	second highest of 16 ratings
Berkshire Hathaway	278		A++	highest of 16 ratings
Axa Group (1)	188		A+	second highest of 16 ratings
Sompo Japan Nipponkoa Group	129		A+	second highest of 16 ratings

(1) On September 12, 2018, Axa SA completed its acquisition of XL Group Ltd.

At December 31, 2018, the Company held $857 million of collateral in the form of letters of credit, funds and trust agreements held to fully or partially collateralize certain reinsurance recoverables.

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 adjustment expense reserves, as the Company retains the contingent liability to the claimant. If it is expected that the life insurance company is not able to pay, the Company would recognize an impairment of the related reinsurance recoverable if, and to the extent, the purchased annuities are not covered by state guaranty associations. In the event that the life insurance company fails to make the required annuity payments, the Company would be required to make such payments. The following table presents the Company’s top five groups by structured settlements at December 31, 2018 (in millions). Also included is the A.M. Best rating of the Company’s predominant insurer from each such insurer group at February 14, 2019:



Group	Structured Settlements		A.M. Best Rating of Group’s Predominant Insurer
Fidelity & Guaranty Life Group	$	809	A-	fourth highest of 16 ratings
Genworth Financial Group (1)	356		B+	sixth highest of 16 ratings
John Hancock Group	273		A+	second highest of 16 ratings
Brighthouse Financial, Inc.	266		A	third highest of 16 ratings
Symetra Financial Corporation	251		A	third highest of 16 ratings

(1) On October 23, 2016, Genworth Financial (Genworth) announced that they have entered into a definitive agreement under which China Oceanwide Holdings Group Co., Ltd. (China Oceanwide) agreed to acquire all of the outstanding shares of Genworth. China Oceanwide is a privately held, family-owned international financial holding group headquartered in Beijing, China. On March 7, 2017, Genworth stockholders adopted the merger agreement, and the acquisition is pending the receipt of required regulatory approvals. On January 30, 2019, the parties agreed to extend the closing deadline for the transaction to March 15, 2019.

The Company considers the ratings and related outlook assigned to reinsurance companies and life insurance companies by various independent ratings agencies in assessing the adequacy of its allowance for uncollectible amounts.

OUTLOOK

The following discussion provides outlook information for certain key drivers of the Company’s results of operations and capital position.

Premiums. The Company’s earned premiums are a function of net written premium volume. Net written premiums comprise both renewal business and new business and are recognized as earned premium over the life of the underlying policies. When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured). Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations. Property and casualty insurance market conditions are expected to remain competitive. Net written premiums may also be impacted by the structure of reinsurance programs and related costs, as well as changes in foreign currency exchange rates.

Overall, the Company expects retention levels (the amount of expiring premium that renews, before the impact of renewal premium changes) will remain strong by historical standards during 2019. In Business Insurance, the Company expects that domestic renewal premium changes in 2019 will remain positive and will be broadly consistent with the levels attained in 2018. In Bond & Specialty Insurance, the Company expects that renewal premium changes with respect to domestic management liability business during 2019 will remain positive and will be broadly consistent with the levels attained in 2018. With respect to domestic surety business within Bond & Specialty Insurance, the Company expects that net written premium volume during 2019 will be slightly higher than the levels attained in 2018. In Personal Insurance, the Company expects that domestic Agency Automobile renewal premium changes during 2019 will remain positive but will be lower than the levels attained in 2018. The Company expects that domestic Agency Homeowners and Other renewal premium changes during 2019 will remain positive and will be higher than the levels attained in 2018. The need for state regulatory approval for changes to personal and many commercial property and casualty insurance prices, as well as competitive market conditions, may impact the timing and extent of renewal premium changes. Given the relatively smaller amount of premium that the Company generates from outside the United States and the transactional nature of some of those markets, particularly Lloyd’s, international renewal premium changes in each segment during 2019 could be somewhat higher, broadly consistent with or somewhat lower than the levels attained in 2018.

Property and casualty insurance market conditions are expected to remain competitive during the next twelve months for new business. In each of the Company’s business segments, new business generally has less of an impact on underwriting profitability than renewal business, given the volume of new business relative to renewal business. However, in periods of meaningful increases in new business, despite its positive impact on underwriting gains over time, the impact of higher new business levels may negatively impact the combined ratio for a period of time.

Economic conditions in the United States and elsewhere could change, due to a variety of factors, including the political and regulatory environment, changes to fiscal stimulus programs, inflation or deflation (including the impact of rapid changes in wages and/or commodity prices), the imposition of tariffs or other barriers to international trade, fluctuations in interest rates and foreign currency exchange rates, high levels of global debt after an extended period of low interest rates, the United Kingdom’s withdrawal

from the European Union, a shutdown of the U.S. government, the failure by the U.S. government to raise the debt ceiling, changes to the U.S. Federal budget and further potential changes in tax laws in the United States or modification of the Affordable Care Act. The resulting changes in levels of economic activity could positively or negatively impact exposure changes at renewal and the Company’s ability to write business at acceptable rates. Additionally, changes in levels of economic activity could positively or negatively impact audit premium adjustments, policy endorsements and mid-term cancellations after policies are written. All of the foregoing, in turn, could positively or negatively impact net written premiums during the next twelve months, and because earned premiums are a function of net written premiums, earned premiums could be impacted on a lagging basis.

Underwriting Gain/Loss. The Company’s underwriting gain/loss can be significantly impacted by catastrophe losses and net favorable or unfavorable prior year reserve development, as well as underlying underwriting margins. Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss activity; changes in current period loss estimates resulting from prior period loss development; changes in business mix; changes in reinsurance coverages and/or costs; premium adjustments; and variability in expenses and assessments.

Catastrophe losses and non-catastrophe weather-related losses are inherently unpredictable from period to period. The Company’s results of operations could be adversely impacted if significant catastrophe and non-catastrophe weather-related losses were to occur.

For a number of years, the Company’s results have included significant amounts of net favorable prior year reserve development driven by better than expected loss experience. However, given the inherent uncertainty in estimating claims and claim adjustment expense reserves, loss experience could develop such that the Company recognizes higher or lower levels of favorable prior year reserve development, no favorable prior year reserve development or unfavorable prior year reserve development in future periods. In addition, the ongoing review of prior year claims and claim adjustment expense reserves, or other changes in current period circumstances, may result in the Company revising current year loss estimates upward or downward in future periods of the current year.

It is possible that changes in economic conditions could lead to higher or lower inflation than the Company had anticipated, which could in turn lead to an increase or decrease in the Company’s loss costs and the need to strengthen or reduce 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 require a relatively longer period of time to finalize and settle claims for a given accident year and, accordingly, are relatively more inflation sensitive. For a further discussion, see “Part I-Item 1A-Risk Factors-If actual claims exceed our claims and claim adjustment expense reserves, or if changes in the estimated level of claims and claim adjustment expense reserves are necessary, including as a result of, among other things, changes in the legal, regulatory and economic environments in which the Company operates, our financial results could be materially and adversely affected.”

In Business Insurance, the Company expects underlying underwriting margins during 2019 in aggregate will be higher than in 2018, and the underlying combined ratio during 2019 in aggregate will be lower than in 2018, assuming loss activity, primarily large losses, returns to lower and more normal levels, with the improvements expected to be in the second through fourth quarters of the year.

In Bond & Specialty Insurance, the Company expects underlying underwriting margins and the underlying combined ratio during 2019 in aggregate will be broadly consistent with 2018.

In Personal Insurance, the Company expects underlying underwriting margins during 2019 in aggregate will be slightly higher than in 2018, and the underlying combined ratio during 2019 in aggregate will be broadly consistent with 2018. In Agency Automobile, the Company expects underlying underwriting margins and the underlying combined ratio during 2019 in aggregate will be broadly consistent with 2018. In the first half of 2019, the Company expects Agency Automobile underlying underwriting margins will be higher and the underlying combined ratio will be lower than in the same period of 2018. In the second half of 2019, the Company expects Agency Automobile underlying underwriting margins will be lower and the underlying combined ratio will be higher than in the same period of 2018. In Agency Homeowners and Other, the Company expects underlying underwriting margins during 2019 in aggregate will be slightly higher than in 2018, and the underlying combined ratio during 2019 in aggregate will be broadly consistent with 2018, assuming non-catastrophe weather-related losses and non-weather related losses return to lower and more normal levels. In the first half of 2019, the Company expects Agency Homeowners and Other underlying underwriting margins will be lower and the underlying combined ratio will be higher than in the same period of 2018. In the second half of 2019, the Company expects Agency Homeowners and Other underlying underwriting margins will be higher and the underlying combined ratio will be lower than in the same period of 2018.

Investment Portfolio. The Company expects to continue to focus its investment strategy on maintaining a high-quality investment portfolio and a relatively short average effective duration. The weighted average effective duration of fixed maturities and short-

term securities was 4.5 (4.7 excluding short-term securities) at December 31, 2018. From time to time, the Company enters into short positions in U.S. Treasury futures contracts to manage the duration of its fixed maturity portfolio. At December 31, 2018, the Company had no open U.S. Treasury futures contracts. The Company continually evaluates its investment alternatives and mix. Currently, the majority of the Company’s investments are comprised of a widely diversified portfolio of high-quality, liquid, taxable U.S. government, tax-exempt U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds.

The Company also invests much smaller amounts in equity securities, real estate, private equity limited partnerships, hedge funds, and real estate partnerships and joint ventures. These investment classes have the potential for higher returns but also the potential for higher degrees of risk, including less stable rates of return and less liquidity.

Net investment income is a material contributor to the Company’s results of operations. Based on the impacts of (i) slightly higher levels of fixed income investments (fixed maturity and short-term investments) and (ii) slightly higher yields on fixed income investments, the Company expects after-tax net investment income for the twelve months ending December 31, 2019 from those portfolios will be approximately $80 million to $100 million higher than the twelve months ended December 31, 2018. The impact of future market conditions on net investment income from the non-fixed maturity investment portfolio during the next twelve months is hard to predict. If general economic conditions and/or investment market conditions change during the next twelve months, the Company could experience an increase or decrease in net investment income and/or significant realized investment gains or losses (including impairments).

The Company had a net pre-tax unrealized investment loss of $137 million ($113 million after-tax) in its fixed maturity investment portfolio at December 31, 2018. While the Company does not attempt to predict future interest rate movements, a rising interest rate environment would reduce the market value of fixed maturity investments and, therefore, reduce shareholders’ equity, and a declining interest rate environment would have the opposite effects. The Company’s investment portfolio has benefited from certain tax exemptions (primarily those related to interest from municipal bonds) and certain other tax laws, including, but not limited to, those governing dividends-received deductions and tax credits (such as foreign tax credits). Changes in these laws could adversely impact the value of the Company’s investment portfolio. See “Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact us” included in “Part I—Item 1A—Risk Factors.”

For further discussion of the Company’s investment portfolio, see “Investment Portfolio.” For a discussion of the risks to the Company’s business during or following a financial market disruption and risks to the Company’s investment portfolio, see the risk factors entitled “During or following a period of financial market disruption or an economic downturn, our business could be materially and adversely affected” and “Our investment portfolio is subject to credit and interest rate risk, and may suffer reduced returns or material realized or unrealized losses” included in “Part I-Item 1A-Risk Factors.” For a discussion of the risks to the Company’s investments from foreign currency exchange rate fluctuations, see the risk factor entitled “We are also subject to a number of additional risks associated with our business outside the United States” included in “Part I—Item 1A—Risk Factors” and see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Rate Risk.”

Capital Position. The Company believes it has a strong capital position and, as part of its ongoing efforts to create shareholder value, expects to continue to return capital not needed to support its business operations to its shareholders. The Company expects that, generally over time, the combination of dividends to common shareholders and common share repurchases will likely not exceed net income. In addition, the timing and actual number of shares to be repurchased in the future will depend on a variety of additional factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. For information regarding the Company’s common share repurchases in 2018, see “Liquidity and Capital Resources.”

As a result of the Company’s business outside of the United States, primarily in Canada, the United Kingdom (including Lloyd’s), the Republic of Ireland and Brazil, the Company’s capital is also subject to the effects of changes in foreign currency exchange rates. For example, strengthening of the U.S. dollar in comparison to other currencies could result in a reduction of shareholders’ equity. For additional discussion of the Company’s foreign exchange market risk exposure, see “Part II—Item 7A—Quantitative and Qualitative Disclosures About Market Risk.”

Many of the statements in this “Outlook” section are forward-looking statements, which are subject to risks and uncertainties that are often difficult to predict and beyond the Company’s control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Further, such forward-looking statements speak only as of the date of this report and the Company undertakes no obligation to update them. See “—Forward Looking Statements.” For a discussion of potential

risks and uncertainties that could impact the Company’s results of operations or financial position, see “Part I—Item 1A—Risk Factors” and “Critical Accounting Estimates.”

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the cash requirements of its business operations and to satisfy general corporate purposes when needed.

Operating Company Liquidity. The liquidity requirements of the Company’s insurance subsidiaries are met primarily by funds generated from premiums, fees, income received on investments and investment maturities. Cash provided from these sources is used primarily for claims and claim adjustment expense payments and operating expenses. The insurance subsidiaries’ liquidity requirements can be impacted by, among other factors, the timing and amount of catastrophe claims, which are inherently unpredictable, as well as the timing and amount of reinsurance recoveries, which may be affected by reinsurer solvency and reinsurance coverage disputes. Additionally, the variability of asbestos-related claim payments, as well as the volatility of potential judgments and settlements arising out of litigation, may also result in increased liquidity requirements. It is the opinion of the Company’s management that the insurance subsidiaries’ future liquidity needs will be adequately met from all of the sources described above. Subject to restrictions imposed by states in which the Company’s insurance subsidiaries are domiciled, the Company’s principal insurance subsidiaries pay dividends to their respective parent companies, which, in turn, pay dividends to the corporate holding (parent) company (TRV). For further information regarding restrictions on dividends paid by the Company’s insurance subsidiaries, see “Part I—Item 1—Regulation.”

Holding Company Liquidity. TRV’s liquidity requirements primarily include shareholder dividends, debt servicing, common share repurchases and, from time to time, contributions to its qualified domestic pension plan. At December 31, 2018, TRV held total cash and short-term invested assets in the United States aggregating $1.42 billion and having a weighted average maturity of 52 days. TRV has established a holding company liquidity target equal to its estimated annual pre-tax interest expense and common shareholder dividends (currently approximately $1.17 billion). TRV’s holding company liquidity of $1.42 billion at December 31, 2018 exceeded this target and it is the opinion of the Company’s management that these assets are sufficient to meet TRV’s current liquidity requirements.

TRV is not dependent on dividends or other forms of repatriation from its foreign operations to support its liquidity needs. The undistributed earnings of the Company’s foreign operations are intended to be permanently reinvested in those operations, and such earnings were not material to the Company’s financial position or liquidity at December 31, 2018.

TRV has a shelf registration statement filed with the Securities and Exchange Commission that expires on June 17, 2019 which permits it to issue securities from time to time. TRV also has a $1.0 billion line of credit facility with a syndicate of financial institutions that expires on June 4, 2023. At December 31, 2018, the Company had $100 million of commercial paper outstanding. TRV is not reliant on its commercial paper program to meet its operating cash flow needs.

The Company utilized uncollateralized letters of credit issued by major banks with an aggregate limit of approximately $338 million to provide a portion of the capital needed to support its obligations at Lloyd’s at December 31, 2018. If uncollateralized letters of credit are not available at a reasonable price or at all in the future, the Company can collateralize these letters of credit or may have to seek alternative means of supporting its obligations at Lloyd’s, which could include utilizing holding company funds on hand.

Operating Activities

Net cash flows provided by operating activities were $4.38 billion, $4.15 billion and $4.47 billion in 2018, 2017 and 2016, respectively. The increase in cash flows in 2018 primarily reflected (i) higher levels of collected premiums, (ii) lower income tax payments and (iii) a lower discretionary contribution to the Company’s U.S. qualified non-contributory defined benefit pension plan, partially offset by higher levels of payments for (iv) claims and claim adjustment expenses and (v) commission expenses. The higher level of payments for claims and claim adjustment expenses in 2018 included the impact of payments related to catastrophe losses incurred in both 2018 and 2017 and increased business volumes. The decrease in cash flows in 2017 reflected (i) higher levels of payments for claims and claim adjustment expenses, (ii) the inclusion in 2016 of proceeds from the settlement of a reinsurance dispute as discussed in more detail in note 16 of notes to the consolidated financial statements, (iii) higher commission expenses and (iv) a higher discretionary contribution to the Company’s U.S. qualified non-contributory defined benefit pension plan, partially offset by (v) higher levels of collected premiums and (vi) lower income tax payments. The higher level of payments for claims and claim adjustment expenses in 2017 included the impact of increased business volumes and a higher level of catastrophe losses, partially offset by the inclusion in 2016 of the Company’s $524 million payment related to the settlement of the PPG Industries, Inc. litigation as described in more detail in the “Asbestos Claims and Litigation” section. In 2018, 2017

and 2016, the Company voluntarily made contributions totaling $200 million, $300 million and $200 million, respectively, to its qualified domestic pension plan. The qualified domestic pension plan was 109% and 108% funded at December 31, 2018 and 2017, respectively.

Investing Activities

Net cash used in investing activities was $2.33 billion, $2.20 billion and $1.73 billion in 2018, 2017 and 2016, respectively. The Company’s consolidated total investments at December 31, 2018 decreased by $224 million, or less than 1% from year-end 2017, as the impacts of (i) net unrealized losses on investments at December 31, 2018 as compared with net unrealized gains on investments at December 31, 2017, as a result of increases in market interest rates during 2018, (ii) common share repurchases and (iii) dividends paid to shareholders were largely offset by (iv) net cash flows provided by operating activities. The Company’s consolidated total investments at December 31, 2017 increased by $2.01 billion, or 3% over year-end 2016, primarily reflecting the impacts of (i) net cash flows provided by operating activities and (ii) an increase in the net unrealized appreciation of investments, partially offset by (iii) common share repurchases, (iv) dividends paid to shareholders and (v) the cost of acquiring Simply Business.

The Company’s investment portfolio is managed to support its insurance operations; accordingly, the portfolio is positioned to meet obligations to policyholders. As such, the primary goals of the Company’s asset-liability management process are to satisfy the insurance liabilities and maintain sufficient liquidity to cover fluctuations in projected liability cash flows. Generally, the expected principal and interest payments produced by the Company’s fixed maturity portfolio adequately fund the estimated runoff of the Company’s insurance reserves. Although this is not an exact cash flow match in each period, the substantial amount by which the market value of the fixed maturity portfolio exceeds the value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high quality liquid bonds, contributes to the Company’s ability to fund claim payments without having to sell illiquid assets or access credit facilities.

Financing Activities

Net cash flows used in financing activities were $2.01 billion, $1.92 billion and $2.81 billion in 2018, 2017 and 2016, respectively. The totals in each year primarily reflected common share repurchases, dividends paid to shareholders and the payment of debt, partially offset by the issuance of debt and proceeds from employee stock option exercises. Common share repurchases in 2018, 2017 and 2016 were $1.32 billion, $1.44 billion and $2.47 billion, respectively.

Debt Transactions.

On March 7, 2018, the Company issued $500 million aggregate principal amount of 4.05% senior notes that will mature on March 7, 2048. The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $491 million. Interest on the senior notes is payable semi-annually in arrears on March 7 and September 7. Prior to September 7, 2047, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to but excluding September 7, 2047 on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current Treasury rate (as defined in the senior notes), plus 15 basis points. On or after September 7, 2047, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

On May 15, 2018, the Company's $500 million, 5.80% senior notes matured and were fully paid.

On May 22, 2017, the Company issued $700 million aggregate principal amount of 4.00% senior notes that will mature on May 30, 2047. The net proceeds of the issuance, after the deduction of the underwriting discount and expenses payable by the Company, totaled approximately $689 million. Interest on the senior notes is payable semi-annually in arrears on May 30 and November 30. Prior to November 30, 2046, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest to November 30, 2046 on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current Treasury rate (as defined in the senior notes), plus 15 basis points. On or after November 30, 2046, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

On June 2, 2017, the Company redeemed the remaining $107 million aggregate principal amount of its 6.25% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 at a price per debenture of 100% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. On December 15, 2017, the Company’s $450 million, 5.75% senior notes matured and were fully paid.

On May 11, 2016, the Company issued $500 million aggregate principal amount of 3.75% senior notes that will mature on May 15, 2046. The net proceeds of the issuance, after the deduction of underwriting and other expenses, totaled approximately $491 million. Interest on the senior notes is payable semi-annually in arrears on May 15 and November 15. Prior to November 15, 2045, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to the greater of (a) 100% of the principal amount of any senior notes to be redeemed or (b) the sum of the present values of the remaining scheduled payments of principal and interest on any senior notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the then current Treasury Rate (as defined in the senior notes), plus 20 basis points. On or after November 15, 2045, the senior notes may be redeemed, in whole or in part, at the Company’s option, at any time or from time to time, at a redemption price equal to 100% of the principal amount of any senior notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

On June 20, 2016, the Company’s $400 million, 6.25% senior notes matured and were fully paid.

Dividends. Dividends paid to shareholders were $814 million, $785 million and $757 million in 2018, 2017 and 2016, respectively. The declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the Company’s Board of Directors and will depend upon many factors, including the Company’s financial position, earnings, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints and other factors as the Board of Directors deems relevant. Dividends will be paid by the Company only if declared by its Board of Directors out of funds legally available, subject to any other restrictions that may be applicable to the Company. On January 22, 2019, the Company announced that its Board of Directors declared a regular quarterly dividend of $0.77 per share, payable March 29, 2019, to shareholders of record on March 11, 2019.

Share Repurchases. The Company’s Board of Directors has approved common share repurchase authorizations under which repurchases may be made from time to time in the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, in private transactions or otherwise. The authorizations do not have a stated expiration date. The timing and actual number of shares to be repurchased in the future will depend on a variety of factors, including the Company’s financial position, earnings, share price, catastrophe losses, maintaining capital levels commensurate with the Company’s desired ratings from independent rating agencies, funding of the Company’s qualified pension plan, capital requirements of the Company’s operating subsidiaries, legal requirements, regulatory constraints, other investment opportunities (including mergers and acquisitions and related financings), market conditions and other factors. In April 2017, the Board of Directors approved a share repurchase authorization that added an additional $5.0 billion of repurchase capacity. The following table summarizes repurchase activity in 2018 and the remaining repurchase capacity at December 31, 2018.



(in millions, except per share amounts) Quarterly Period Ending	Number of shares repurchased	Cost of shares repurchased		Average price paid per share		Remaining capacity under share repurchase authorization
March 31, 2018	2.5	$	350	$	141.84	$	4,206
June 30, 2018	2.7	350		129.66		3,856
September 30, 2018	3.0	400		130.22		3,456
December 31, 2018	1.4	170		125.09		3,286
Total	9.6	$	1,270	132.33		3,286

From the inception of the first authorization on May 2, 2006 through December 31, 2018, the Company has repurchased a cumulative total of 497.3 million shares for a total cost of $32.71 billion, or an average of $65.79 per share.

In 2018, 2017 and 2016, the Company acquired 0.4 million, 0.5 million and 0.6 million shares, respectively, of common stock from employees as treasury stock primarily to cover payroll withholding taxes in connection with the vesting of restricted stock unit awards and performance share awards, and shares used by employees to cover the price of certain stock options that were exercised.

Capital Resources

Capital resources reflect the overall financial strength of the Company and its ability to borrow funds at competitive rates and raise new capital to meet its needs. The following table summarizes the components of the Company’s capital structure at December 31, 2018 and 2017.



(at December 31, in millions)	2018			2017
Debt:
Short-term	$	600		$	600
Long-term	6,004			6,004
Net unamortized fair value adjustments and debt issuance costs	(40		)	(33		)
Total debt	6,564			6,571
Shareholders’ equity:
Common stock and retained earnings, less treasury stock	24,753			24,074
Accumulated other comprehensive loss	(1,859		)	(343		)
Total shareholders’ equity	22,894			23,731
Total capitalization	$	29,458		$	30,302

Total capitalization at December 31, 2018 was $29.46 billion, $844 million lower than at December 31, 2017, primarily reflecting the impacts of (i) an increase in accumulated other comprehensive loss of $1.52 billion, primarily due to changes in unrealized appreciation on investments and unrealized foreign currency translation, (ii) common share repurchases totaling $1.27 billion under the Company’s share repurchase authorization and (iii) shareholder dividends of $818 million, partially offset by (iv) net income of $2.52 billion and (v) proceeds from the exercise of employee share options of $132 million.

The following table provides a reconciliation of total capitalization to total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity:



(at December 31, dollars in millions)	2018			2017
Total capitalization	$	29,458		$	30,302
Less: net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity	(113		)	1,112
Total capitalization excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity	$	29,571		$	29,190
Debt-to-total capital ratio	22.3		%	21.7		%
Debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders' equity	22.2		%	22.5		%

The debt-to-total capital ratio excluding net unrealized gains (losses) on investments, net of taxes, included in shareholders’ equity, is calculated by dividing (a) debt by (b) total capitalization excluding net unrealized gains and losses on investments, net of taxes, included in shareholders’ equity. Net unrealized gains and losses on investments can be significantly impacted by both interest rate movements and other economic factors. Accordingly, in the opinion of the Company’s management, the debt-to-total capital ratio calculated on this basis provides another useful metric for investors to understand the Company’s financial leverage position. The Company’s ratio of debt-to-total capital excluding after-tax net unrealized investment losses included in shareholders’ equity of 22.2% at December 31, 2018 was within the Company’s target range of 15% to 25%.

Credit Agreement. The Company is a party to a five-year, $1.0 billion revolving credit agreement with a syndicate of financial institutions that expires on June 4, 2023. Terms of the credit agreement are discussed in more detail in note 8 of notes to the consolidated financial statements.

Shelf Registration. The Company has filed a universal shelf registration statement with the Securities and Exchange Commission that expires on June 17, 2019 for the potential offering and sale of securities. The Company may offer these securities from time to time at prices and on other terms to be determined at the time of offering.

Share Repurchase Authorization. At December 31, 2018, the Company had $3.29 billion of capacity remaining under its share repurchase authorization approved by the Board of Directors.

Contractual Obligations

The following table summarizes, as of December 31, 2018, the Company’s future payments under contractual obligations and estimated claims and claim-related payments. The table excludes short-term obligations and includes only liabilities at December 31, 2018 that are expected to be settled in cash.

The table below includes the amount and estimated future timing of claims and claim-related payments. The amounts do not represent the exact liability, but instead represent estimates, generally utilizing actuarial projection techniques, at a given accounting date. These estimates include expectations of what the ultimate settlement and administration of claims will cost based on the Company’s assessment of facts and circumstances known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation or deflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the policyholder event and the time it is actually reported to the insurer. The future cash flows related to the items contained in the table below required estimation of both amount (including severity considerations) and timing. Amount and timing are frequently estimated separately. An estimation of both amount and timing of future cash flows related to claims and claim-related payments has unavoidable estimation uncertainty.

The contractual obligations at December 31, 2018 were as follows:



Payments Due by Period (in millions)	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Debt
Senior notes	$	6,250	$	500	$	500	$	—	$	5,250
Junior subordinated debentures	254		—		—		—		254
Total debt principal	6,504		500		500		—		5,504
Interest	6,247		326		604		584		4,733
Total long-term debt obligations (1)	12,751		826		1,104		584		10,237
Real estate and other operating leases (2)	500		127		194		102		77
Purchase obligations
Information systems administration and maintenance commitments (3)	198		130		62		6		—
Other purchase commitments (4)	110		44		53		2		11
Total purchase obligations	308		174		115		8		11
Long-term unfunded investment commitments (5)	1,612		348		505		514		245
Estimated claims and claim-related payments
Claims and claim adjustment expenses (6)	48,836		10,759		12,004		5,618		20,455
Claims from large deductible policies (7)	—		—		—		—		—
Loss-based assessments (8)	154		28		42		17		67
Reinsurance contracts accounted for as deposits (9)	1		—		1		—		—
Payout from ceded funds withheld (10)	105		42		12		13		38
Total estimated claims and claim-related payments	49,096		10,829		12,059		5,648		20,560
Liabilities related to unrecognized tax benefits (11)	67		—		67		—		—
Total	$	64,334	$	12,304	$	14,044	$	6,856	$	31,130


(1)	See note 8 of notes to the consolidated financial statements for a further discussion of outstanding indebtedness. Because the amounts reported in the foregoing table include principal and interest, the total long-term debt obligations will not agree with the amounts reported in note 8.


(2)	Represents agreements entered into in the ordinary course of business to lease office space, equipment and furniture. Future sublease rental income aggregating approximately $1 million will partially offset these commitments.


(3)	Includes agreements with vendors to purchase system software administration and maintenance services.


(4)	Includes commitments to vendors entered into in the ordinary course of business for goods and services including property, plant and equipment, office supplies, archival services, etc.


(5)	Represents estimated timing for fulfilling unfunded commitments for private equity limited partnerships and real estate partnerships, as well as a put/call option entered into by the Company in connection with a business acquisition.


(6)	The amounts in “Claims and claim adjustment expenses” in the table above represent the estimated timing of future payments for both reported and unreported claims incurred and related claim adjustment expenses, gross of reinsurance recoverables, excluding structured settlements expected to be paid by annuity companies.

The Company has entered into reinsurance agreements to manage its exposure to losses and protect its capital as described in note 5 of notes to the consolidated financial statements.

In order to qualify for reinsurance accounting, a reinsurance agreement must indemnify the insurer from insurance risk, i.e., the agreement must transfer amount and timing risk. Since the timing and amount of cash inflows from such reinsurance agreements are directly related to the underlying payment of claims and claim adjustment expenses by the insurer, reinsurance recoverables are recognized in a manner consistent with the liabilities (the estimated liability for claims and claim adjustment expenses) relating to the underlying reinsured contracts. The presence of any feature that can delay timely reimbursement of claims by a reinsurer results in the reinsurance contract being accounted for as a deposit rather than reinsurance. The assumptions used in estimating the amount and timing of the reinsurance recoverables are consistent with those used in estimating the amount and timing of the related liabilities.

The estimated future cash inflows from the Company’s reinsurance contracts that qualify for reinsurance accounting are as follows:



(in millions)	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Reinsurance recoverables	$	5,277	$	897	$	975	$	536	$	2,869

The Company manages its business and evaluates its liabilities for claims and claim adjustment expenses on a net of reinsurance basis. The estimated cash flows on a net of reinsurance basis are as follows:



(in millions)	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Claims and claim adjustment expenses, net	$	43,559	$	9,862	$	11,029	$	5,082	$	17,586

For business underwritten by non-U.S. operations, future cash flows related to reported and unreported claims incurred and related claim adjustment expenses were translated at the spot rate on December 31, 2018.

The amounts reported in the table above and in the table of reinsurance recoverables above are presented on a nominal basis and have not been adjusted to reflect the time value of money. Accordingly, the amounts above will differ from the Company’s balance sheet to the extent that the liability for claims and claim adjustment expenses and the related reinsurance recoverables have been discounted in the balance sheet. See note 1 of notes to the consolidated financial statements.

(7)

Workers’ compensation large deductible policies provide third-party coverage in which the Company typically is responsible for paying the entire loss under such policies and then seeks reimbursement from the insured for the deductible amount. “Claims from large deductible policies” represent the estimated future payment for claims and claim related expenses below the deductible amount, net of the estimated recovery of the deductible. The liability and the related deductible receivable for unpaid claims are presented in the consolidated balance sheet as “contractholder payables” and “contractholder receivables,” respectively. Most deductibles for such policies are paid directly from the policyholder’s escrow, which is periodically replenished by the policyholder. The payment of the loss amounts above the deductible are reported within “Claims and claim adjustment expenses” in the above table. Because the timing of the collection of the deductible (contractholder receivables) occurs shortly after the payment of the deductible to a claimant (contractholder payables), these cash flows offset each other in the table.

The estimated timing of the payment of the contractholder payables and the collection of contractholder receivables for workers’ compensation policies is presented below:



(in millions)	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Contractholder payables/receivables	$	4,785	$	1,305	$	1,381	$	719	$	1,380

(8)

The amounts in “Loss-based assessments” relate to estimated future payments of second-injury fund assessments which would result from payment of current claim liabilities. Second injury funds cover the cost of any additional benefits for aggravation of a pre-existing condition. For loss-based assessments, the cost is shared by the insurance industry and self-insureds, funded through assessments to insurance companies and self-insureds based on losses. Amounts relating to second-injury fund assessments are included in “other liabilities” in the consolidated balance sheet.


(9)	The amounts in “Reinsurance contracts accounted for as deposits” represent estimated future nominal payments for reinsurance agreements that are accounted for as deposits. Amounts payable under deposit agreements are included in “other liabilities” in the consolidated balance sheet.


(10)	The amounts in “Payout from ceded funds withheld” represent estimated payments for losses and return of funds held related to certain reinsurance arrangements whereby the Company holds a portion of the premium due to the reinsurer and is allowed to pay claims from the amounts held.


(11)	The Company's current liabilities related to unrecognized tax benefits from uncertain tax positions are $67 million. Offsetting these liabilities are deferred tax assets of $27 million associated with the temporary differences that would exist if these positions become realized.

The above table does not include an analysis of liabilities reported for structured settlements for which the Company has purchased annuities and remains contingently liable in the event of default by the company issuing the annuity. The Company is not reasonably likely to incur material future payment obligations under such agreements. In addition, the Company is not currently subject to any minimum funding requirements for its qualified pension plan. Accordingly, future contributions are not included in the foregoing table.

Dividend Availability

The Company’s principal insurance subsidiaries are domiciled in the State of Connecticut. The insurance holding company laws of Connecticut applicable to the Company’s subsidiaries requires notice to, and approval by, the state insurance commissioner for the declaration or payment of any dividend that, together with other distributions made within the preceding twelve months, exceeds the greater of 10% of the insurer’s statutory capital and surplus as of the preceding December 31, or the insurer’s net income for the twelve-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices and by state regulation. This declaration or payment is further limited by adjusted unassigned surplus, as determined in accordance with statutory accounting practices. The insurance holding company laws of other states in which the Company’s subsidiaries are domiciled generally contain similar, although in some instances somewhat more restrictive, limitations on the payment of dividends. A maximum of $2.52 billion is available by the end of 2019 for such dividends to the holding company, TRV, without prior approval of the Connecticut Insurance Department. The Company may choose to accelerate the timing within 2019 and/or increase the amount of dividends from its insurance subsidiaries in 2019, which could result in certain dividends being subject to approval by the Connecticut Insurance Department.

In addition to the regulatory restrictions on the availability of dividends that can be paid by the Company’s U.S. insurance subsidiaries, the maximum amount of dividends that may be paid to the Company’s shareholders is limited, to a lesser degree, by certain covenants contained in its line of credit agreement with a syndicate of financial institutions that require the Company to maintain a minimum consolidated net worth as described in note 8 of notes to the consolidated financial statements.

TRV and its two non-insurance holding company subsidiaries received dividends of $2.30 billion, $2.33 billion and $3.05 billion from their U.S. insurance subsidiaries in 2018, 2017 and 2016, respectively.

Pension and Other Postretirement Benefit Plans

The Company sponsors a qualified non-contributory defined benefit pension plan (the Qualified Plan), which covers substantially all U.S. domestic employees and provides benefits primarily under a cash balance 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, and a postretirement health and life insurance benefit plan for employees satisfying certain age and service requirements and for certain retirees.

The Qualified Plan is subject to regulations under the Employee Retirement Income Security Act of 1974 as amended (ERISA), which requires plans to meet minimum standards of funding and requires such plans to subscribe to plan termination insurance through the Pension Benefit Guaranty Corporation (PBGC). The Company does not have a minimum funding requirement for the Qualified Plan for 2019 and does not anticipate having a minimum funding requirement in 2020. The Company has significant discretion in making contributions above those necessary to satisfy the minimum funding requirements. In 2018, 2017 and 2016, there was no minimum funding requirement for the Qualified Plan. In 2018, 2017 and 2016, the Company voluntarily made contributions totaling $200 million, $300 million and $200 million, respectively, to the Qualified Plan. Based on its funded status at December 31, 2018, the Company does not currently anticipate making a voluntary contribution to the Qualified Plan in 2019. In determining future contributions, the Company will consider the performance of the plan’s investment portfolio, the effects of interest rates on the projected benefit obligation of the plan and the Company’s other capital requirements.

The Qualified Plan assets are managed to maximize long-term total return while maintaining an appropriate level of risk. The Company’s overall strategy is to achieve a mix of approximately 85% to 90% of investments for long-term growth and 10% to 15% for near-term benefit payments with a diversification of asset types, fund strategies and fund managers. The current target allocations for plan assets are 55% to 65% equity securities and 20% to 40% fixed income securities, with the remainder allocated to short-term securities. For 2019, the Company plans to apply an expected long-term rate of return on plan assets of 7.00%, the same rate that was applied in 2018. The expected rate of return reflects the Company’s current expectations with regard to long-term returns in the capital markets, taking into account the pension plan’s asset allocation targets, the historical performance and current valuation of U.S. and international equities, and the level of long term interest rate and inflation expectations. The Company’s expected long-term rate of return on plan assets also contemplates a return to more normal levels of long-term interest rates in the future.

For further discussion of the pension and other postretirement benefit plans, see note 14 of notes to the consolidated financial statements.

Risk-Based Capital

The NAIC has an RBC requirement for most property and casualty insurance companies, which determines minimum capital requirements and is intended to raise the level of protection for policyholder obligations. The Company’s U.S. insurance subsidiaries are subject to these NAIC RBC requirements based on laws that have been adopted by individual states. These requirements subject insurers having policyholders’ surplus less than that required by the RBC calculation to varying degrees of regulatory action, depending on the level of capital inadequacy. Each of the Company’s U.S. insurance subsidiaries had policyholders’ surplus at December 31, 2018 significantly above the level at which any RBC regulatory action would occur. Regulators in the jurisdictions in which the Company’s foreign insurance subsidiaries are located require insurance companies to maintain certain levels of capital depending on, among other things, the type and amount of insurance policies written. Each of the Company’s foreign insurance subsidiaries had capital significantly above their respective regulatory requirements at December 31, 2018.

Off-Balance Sheet Arrangements

The Company has entered into certain contingent obligations for guarantees related to selling businesses to third parties, certain investments, third-party loans related to certain investments, certain insurance policy obligations of former insurance subsidiaries and various other indemnifications. See note 16 of notes to the consolidated financial statements. The Company does not expect these arrangements will have a material effect on the Company’s financial position, changes in financial position, revenues and expenses, results of operations, liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING ESTIMATES

The Company considers its most significant accounting estimates to be those applied to claims and claim adjustment expense reserves and related reinsurance recoverables, investment valuation and impairments, and goodwill and other intangible assets impairments.

Claims and Claim Adjustment Expense Reserves

Gross claims and claim adjustment expense reserves by product line were as follows:



	December 31, 2018						December 31, 2017
(in millions)	Case		IBNR		Total		Case		IBNR		Total
General liability	$	4,780	$	7,092	$	11,872	$	4,878	$	6,823	$	11,701
Commercial property	1,157		297		1,454		1,039		401		1,440
Commercial multi-peril	2,089		1,886		3,975		1,954		1,916		3,870
Commercial automobile	2,339		1,661		4,000		2,237		1,271		3,508
Workers’ compensation	10,299		9,216		19,515		10,379		9,092		19,471
Fidelity and surety	280		288		568		274		300		574
Personal automobile	2,038		1,400		3,438		1,946		1,329		3,275
Homeowners and personal—other	942		884		1,826		795		710		1,505
International and other	2,574		1,431		4,005		2,728		1,561		4,289
Property-casualty	26,498		24,155		50,653		26,230		23,403		49,633
Accident and health	15		—		15		17		—		17
Claims and claim adjustment expense reserves	$	26,513	$	24,155	$	50,668	$	26,247	$	23,403	$	49,650

The $1.02 billion increase in gross claims and claim adjustment expense reserves since December 31, 2017 primarily reflected the impacts of (i) higher volumes of insured exposures and loss cost trends for the current accident year and (ii) catastrophe losses incurred in 2018, partially offset by the impacts of (iii) payments related to catastrophe losses incurred in 2017 and (iv) favorable prior year reserve development.

Asbestos and environmental reserves are included in the General liability, Commercial multi-peril and International and other lines in the foregoing summary table. Asbestos and environmental reserves are discussed separately; see “Asbestos Claims and Litigation”, “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of Asbestos and Environmental Reserves.”

Claims and claim adjustment expense reserves represent management’s estimate of the ultimate liability for unpaid losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported (IBNR) as of the balance sheet date. Claims and claim adjustment expense reserves do not represent an exact calculation of liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods. These estimates are expectations of what the ultimate settlement and administration of claims will cost upon final resolution in the future, based on the Company’s assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, expected interpretations of legal theories of liability and other factors. In establishing gross claims and claim adjustment expense reserves, the Company also considers salvage and subrogation. Estimated recoveries from reinsurance are included in “Reinsurance Recoverables” as an asset on the Company’s consolidated balance sheet. The claims and claim adjustment expense reserves are reviewed regularly by qualified actuaries employed by the Company.

The process of estimating claims and claim adjustment expense reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, changes in individuals involved in the reserve estimation process, economic inflation, legal trends and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. The Company continually refines its estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. The Company rigorously attempts to consider all significant facts and circumstances known at the time claims and claim adjustment expense reserves are established. Due to the inherent uncertainty underlying these estimates including, but not limited to, the future settlement environment, final resolution of the estimated liability for claims and claim adjustment expenses may be higher or lower than the related claims and claim adjustment expense reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially different than the amount currently recorded-favorable or unfavorable.

Because establishment of claims and claim adjustment expense reserves is an inherently uncertain process involving estimates and the application of judgment, currently established claims and claim adjustment expense reserves may change. The Company reflects adjustments to the reserves in the results of operations in the period the estimates are changed.

There are also additional risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes, tornadoes, wildfires and other catastrophic events can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties, including the interpretation of policy terms and conditions, and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; estimating the impact of demand surge, infrastructure disruption, fraud, the effect of mold damage and business interruption costs; and reinsurance collectibility. The timing of a catastrophe, such as at or near the end of a reporting period, can also affect the information available to the Company in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.

A portion of the Company’s gross claims and claim adjustment expense reserves (totaling $1.97 billion at December 31, 2018) are for asbestos and environmental claims and related litigation. While the ongoing review of asbestos and environmental claims and associated liabilities considers the inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability and the risks inherent in complex litigation and other uncertainties, in the opinion of the Company’s management, it is possible that the outcome of the continued uncertainties regarding these claims could result in liability in future periods that differs from current insurance reserves by an amount that could be material to the Company’s future operating results. See the preceding discussion of “Asbestos Claims and Litigation” and “Environmental Claims and Litigation.”

General Discussion

The process for estimating the liabilities for claims and claim adjustment expenses begins with the collection and analysis of claim data. Data on individual reported claims, both current and historical, including paid amounts and individual claim adjuster estimates, are grouped by common characteristics (components) and evaluated by actuaries in their analyses of ultimate claim liabilities. Such data is occasionally supplemented with external data as available and when appropriate. The process of analyzing reserves for a component is undertaken on a regular basis, generally quarterly, in light of continually updated information.

Multiple estimation methods are available for the analysis of ultimate claim liabilities. Each estimation method has its own set of assumption variables and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all product line components. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time. Therefore, the actual choice of estimation method(s) can change with each evaluation. The estimation method(s) chosen are those that are believed to produce the most reliable indication at that particular evaluation date for the claim liabilities being evaluated.

In most cases, multiple estimation methods will be valid for the particular facts and circumstances of the claim liabilities being evaluated. This will result in a range of reasonable estimates for any particular claim liability. The Company uses such range analyses to back test whether previously established estimates for reserves by reporting segments are reasonable, given available information. Reported values found to be closer to the endpoints of a range of reasonable estimates are subject to further detailed reviews. These reviews may substantiate the validity of management’s recorded estimate or lead to a change in the reported estimate.

The exact boundary points of these ranges are more qualitative than quantitative in nature, as no clear line of demarcation exists to determine when the set of underlying assumptions for an estimation method switches from being reasonable to unreasonable. As a result, the Company does not believe that the endpoints of these ranges are or would be comparable across companies. In addition, potential interactions among the different estimation assumptions for different product lines make the aggregation of individual ranges a highly judgmental and inexact process.

Property-casualty insurance policies are either written on a “claims-made” or on an “occurrence” basis. Claims-made policies generally cover, subject to requirements in individual policies, claims reported during the policy period. Policies that are written on an occurrence basis require that the insured demonstrate that a loss occurred in the policy period, even if the insured reports the loss many years later.

Most general liability policies are written on an occurrence basis. These policies are subject to substantial loss development over time as facts and circumstances change in the years following the policy issuance. The occurrence form, which accounts for much of the reserve development in asbestos and environmental exposures, is also used to provide coverage for construction general

liability, including construction defect. Occurrence-based forms of insurance for general liability exposures require substantial projection of loss trends, which can be influenced by a number of factors, including future inflation, judicial interpretations and societal litigation trends (e.g., size of jury awards and propensity of individuals to pursue litigation), among others.

A basic premise in most actuarial analyses is that past patterns demonstrated in the data will repeat themselves in the future, absent a material change in the associated risk factors discussed below. To the extent a material change affecting the ultimate claim liability is known, such change is estimated to the extent possible through an analysis of internal company data and, if available and when appropriate, external data. Such a measurement is specific to the facts and circumstances of the particular claim portfolio and the known change being evaluated. Significant structural changes to the available data, product mix or organization can materially impact the reserve estimation process. In addition, the introduction of new products creates a unique risk as historical company data would typically not be available.

Informed judgment is applied throughout the reserving process. This includes the application of various individual experiences and expertise to multiple sets of data and analyses. In addition to actuaries, experts involved with the reserving process also include underwriting and claims personnel and lawyers, as well as other company management. Therefore, management may have to consider varying individual viewpoints as part of its estimation of claims and claim adjustment expense reserves. It is also likely that during periods of significant change, such as a merger, consistent application of informed judgment becomes even more complicated and difficult.

The variables discussed above in this general discussion have different impacts on reserve estimation uncertainty for a given product line, depending on the length of the claim tail, the reporting lag, the impact of individual claims and the complexity of the claim process for a given product line.

Product lines are generally classifiable as either long tail or short tail, based on the average length of time between the event triggering claims under a policy and the final resolution of those claims. Short tail claims are reported and settled quickly, resulting in less estimation variability. The longer the time to final claim resolution, the greater the exposure to estimation risks and hence the greater the estimation uncertainty.

A major component of the claim tail is the reporting lag. The reporting lag, which is the time between the event triggering a claim and the reporting of the claim to the insurer, makes estimating IBNR inherently more uncertain. In addition, the greater the reporting lag, the greater the proportion of IBNR to the total claim liability for the product line. Writing new products with material reporting lags can result in adding several years’ worth of IBNR claim exposure before the reporting lag exposure becomes clearly observable, thereby increasing the risk associated with estimating the liabilities for claims and claim adjustment expenses for such products. The most extreme example of claim liabilities with long reporting lags are asbestos claims.

For some lines, the impact of large individual claims can be material to the analysis. These lines are generally referred to as being “low frequency/high severity,” while lines without this “large claim” sensitivity are referred to as “high frequency/low severity.” Estimates of claim liabilities for low frequency/high severity lines can be sensitive to the impact of a small number of potentially large claims. As a result, the role of judgment is much greater for these reserve estimates. In contrast, for high frequency/low severity lines the impact of individual claims is relatively minor and the range of reasonable reserve estimates is likely narrower and more stable.

Claim complexity can also greatly affect the estimation process by impacting the number of assumptions needed to produce the estimate, the potential stability of the underlying data and claim process, and the ability to gain an understanding of the data. Product lines with greater claim complexity, such as for certain surety and construction exposures, have inherently greater estimation uncertainty.

Actuaries have to exercise a considerable degree of judgment in the evaluation of all these factors in their analysis of reserves. The human element in the application of actuarial judgment is unavoidable when faced with material uncertainty. Different actuaries may choose different assumptions when faced with such uncertainty, based on their individual backgrounds, professional experiences and areas of focus. Hence, the estimates selected by the various actuaries may differ materially from each other.

Lastly, significant structural changes to the available data, product mix or organization can also materially impact the reserve estimation process. Events such as mergers increase the inherent uncertainty of reserve estimates for a period of time, until stable trends re-establish themselves within the new organization.

Risk Factors

The major causes of material uncertainty (“risk factors”) generally will vary for each product line, as well as for each separately analyzed component of the product line. In a few cases, such risk factors are explicit assumptions of the estimation method, but in most cases, they are implicit. For example, a method may explicitly assume that a certain percentage of claims will close each year, but will implicitly assume that the legal interpretation of existing contract language will remain unchanged. Actual results will likely vary from expectations for each of these assumptions, causing actual paid losses, as claims are settled in the future, to be different in amount than the reserves being estimated currently.

Some risk factors will affect more than one product line. Examples include changes in claim department practices, changes in settlement patterns, regulatory and legislative actions, court actions, timeliness of claim reporting, state mix of claimants and degree of claimant fraud. The extent of the impact of a risk factor will also vary by components within a product line. Individual risk factors are also subject to interactions with other risk factors within product line components.

The effect of a particular risk factor on estimates of claim liabilities cannot be isolated in most cases. For example, estimates of potential claim settlements may be impacted by the risk associated with potential court rulings, but the final settlement agreement typically does not delineate how much of the settled amount is due to this and other factors.

The evaluation of data is also subject to distortion from extreme events or structural shifts, sometimes in unanticipated ways. For example, the timing of claims payments in one geographic region may be impacted if claim adjusters are temporarily reassigned from that region to help settle catastrophe claims in another region.

While some changes in the claim environment are sudden in nature (such as a new court ruling affecting the interpretation of all contracts in that jurisdiction), others are more evolutionary. Evolutionary changes can occur when multiple factors affect final claim values, with the uncertainty surrounding each factor being resolved separately, in stepwise fashion. The final impact is not known until all steps have occurred.

Sudden changes generally cause a one-time shift in claim liability estimates, although there may be some lag in reliable quantification of their impact. Evolutionary changes generally cause a series of shifts in claim liability estimates, as each component of the evolutionary change becomes evident and estimable.

Actuarial Methods for Analyzing and Estimating Claims and Claim Adjustment Expense Reserves

The principal estimation and analysis methods utilized by the Company’s actuaries to evaluate management’s existing estimates for prior accident periods are the paid loss development method, the case incurred development method, the Bornhuetter-Ferguson (BF) method, and average value analysis combined with the reported claim development method. The BF method is usually utilized for more recent accident periods, with a transition to other methods as the underlying claim data becomes more voluminous and therefore more credible. These estimation and analysis methods are typically referred to as conventional actuarial methods. (See note 7 of notes to the consolidated financial statements for an explanation of these methods).

While the Company utilizes these conventional actuarial methods to estimate the claims liability for its various businesses, Company actuaries evaluating a particular component for a product line may select from the full range of methods developed within the casualty actuarial profession. The Company’s actuaries are also continually monitoring developments within the profession for advances in existing techniques or the creation of new techniques that might improve current and future estimates.

Some components of a product line may be susceptible to infrequent large claims or not be subject to conventional methods. In such cases, the Company’s actuarial analysis will isolate such components for review. The reserves excluding such large claims are generally analyzed using the conventional methods described above. The reserves associated with large claims are then analyzed utilizing various methods, such as:


•	Estimating the number of large claims and their average values based on historical trends from prior accident periods, adjusted for the current environment and supplemented with actual data for the accident year analyzed to the extent available.


•	Utilizing individual claim adjuster estimates of the large claims, combined with continual monitoring of the aggregate accuracy of such claim adjuster estimates. (This monitoring may lead to supplemental adjustments to the aggregate of such claim estimates).


•	Utilizing historic longer-term average ratios of large claims to small claims, and applying such ratios to the estimated ultimate small claims from conventional analysis.


•	Ground-up analysis of the underlying exposure (typically used for asbestos and environmental).

The results of such methodologies are subjected to various reasonability and diagnostic tests, including implied incurred-loss-to-earned-premium ratios, non-zero claim severity trends and paid-to-incurred loss ratios. An actual versus expected analysis is also performed comparing actual loss development to expected development embedded within management’s estimate. Additional analyses may be performed based on the results of these diagnostics, including the investigation of other actuarial methods.

The methods described above are generally utilized to evaluate management’s estimate for prior accident periods. For the initial estimate of the current accident year, however, the available claim data is typically insufficient to produce a reliable indication. As a result, the initial estimate for an accident year is generally based on an exposure-based method using either the loss ratio projection method or the expected loss method. The loss ratio projection method, which is typically used for guaranteed-cost business, develops an initial estimate for an accident year by multiplying earned premiums for the accident year by a projected loss ratio. The projected loss ratio is determined by analyzing prior period experience, and adjusting for loss cost trends, rate level differences, mix of business changes and other known or observed factors influencing the current accident year relative to prior accident years. The exact number of prior accident years utilized varies by product line component, based on the stability and consistency of the individual accident year estimates. The expected loss method, which is typically used for loss sensitive business, develops an initial estimate of ultimate claims and claim adjustment expenses for an accident year by analyzing exposures by account.

Management’s Estimates

At least once per quarter, certain members of Company management meet with the Company’s actuaries to review the latest claims and claim adjustment expense reserve analyses. Based on these analyses, management determines whether its ultimate claim liability estimates should be changed. In doing so, it must evaluate whether the new data provided represents credible actionable information or an anomaly that will have no effect on estimated ultimate claim liability. For example, as described above, payments may have decreased in one geographic region due to fewer claim adjusters being available to process claims. The resulting claim payment patterns would be analyzed to determine whether or not the change in payment pattern represents a change in ultimate claim liability.

Such an assessment requires considerable judgment. It is frequently not possible to determine whether a change in the data is an anomaly until sometime after the event. Even if a change is determined to be permanent, it is not always possible to reliably determine the extent of the change until sometime later. The overall detailed analyses supporting such an effort can take several months to perform as the underlying causes of the trends observed need to be evaluated, which may require the gathering or assembling of data not previously available. It may also include interviews with experts involved with the underlying processes. As a result, there can be a time lag between the emergence of a change and a determination that the change should be reflected in the Company’s estimated claim liabilities. The final estimate selected by management in a reporting period is based on these various detailed analyses of past data, adjusted to reflect any new actionable information.

The Audit Committee of the Board of Directors reviews the process by which the Company establishes reserves for the purpose of the Company’s financial statements.

Discussion of Product Lines

The following section details reserving considerations and common risk factors by product line. There are many additional risk factors that may impact ultimate claim costs. Each risk factor presented will have a different impact on required reserves. Also, risk factors can have offsetting or compounding effects on required reserves. For example, in workers’ compensation, the use of expensive medical procedures that result in medical cost inflation may enable workers to return to work faster, thereby lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely measure the effect of a single risk factor and construct a meaningful sensitivity expectation.

In order to provide information on reasonably possible reserving changes by product line, the historical changes in year-end claims and claim adjustment expense reserves over a one-year period are provided for the U.S. product lines. This information is provided for both the Company and the industry for the nine most recent years, and is based on the most recent publicly available data for the reported line(s) that most closely match the individual product line being discussed. These changes were calculated, net of reinsurance, from statutory annual statement data found in Schedule P of those statements, and represent the reported reserve development on the beginning-of-the-year claim liabilities divided by the beginning claim liabilities, all accident years combined, excluding non-defense related claim adjustment expense. Data presented for the Company includes history for the entire Travelers group (U.S. companies only), as required by the statutory reporting instructions promulgated by state regulatory authorities for Schedule P. Comparable data for non-U.S. companies is not available.

General Liability

General liability is generally considered a long tail line, as it takes a relatively long period of time to finalize and settle claims from a given accident year. The speed of claim reporting and claim settlement is a function of the characteristics of claims, including specific coverage provided, the jurisdiction and specific policy provisions such as self-insured retentions, among others. There are numerous components underlying the general liability product line. Some of these have relatively moderate payment patterns (with most of the claims for a given accident year closed within five to seven years), while others can have extreme lags in both reporting and payment of claims (e.g., a reporting lag of a decade or more for “construction defect” claims).

While the majority of general liability coverages are written on an “occurrence” basis, certain general liability coverages (such as those covering management and professional liability, including cyber coverages) are typically insured on a “claims-made” basis.

General liability reserves are generally analyzed as two components: primary and excess/umbrella, with the primary component generally analyzed separately for bodily injury and property damage. Bodily injury liability payments reimburse the claimant for damages pertaining to physical injury as a result of the policyholder’s legal obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In some cases the damages can include future wage loss (which is a function of future earnings power and wage inflation) and future medical treatment costs. Property damage liability payments result from damages to the claimant’s private property arising from the policyholder’s legal obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the loss date, or soon thereafter.

In addition, sizable or unique exposures are reviewed separately. These exposures include asbestos, environmental, other mass torts, construction defect and large unique accounts that would otherwise distort the analysis. These unique categories often require a very high degree of judgment and require reserve analyses that do not rely on conventional actuarial methods.

Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims. For some products this risk is mitigated by policy language such that the insured portion of defense costs is included in the policy limit available to pay the claim. Such “defense within the limits” policies are most common for “claims-made” products. When defense costs are outside of the policy limits, the full amount of the policy limit is available to pay claims and the amounts paid for defense costs have no contractual limit.

This line is typically the largest source of reserve estimate uncertainty in the United States (excluding assumed reinsurance contracts covering the same risk). Major contributors to this reserve estimate uncertainty include the reporting lag (i.e., the length of time between the event triggering coverage and the actual reporting of the claim), the number of parties involved in the underlying tort action, whether the “event” triggering coverage is confined to only one time period or is spread over multiple time periods, the potential dollars involved (in the individual claim actions), whether such claims were reasonably foreseeable and intended to be covered at the time the contracts were written (i.e., coverage dispute potential), and the potential for mass claim actions. Claims with longer reporting lags result in greater estimation uncertainty. This is especially true for alleged claims with a latency feature, particularly where courts have ruled that coverage is spread over multiple policy years, hence involving multiple defendants (and their insurers and reinsurers) and multiple policies (thereby increasing the potential dollars involved and the underlying settlement complexity). Claims with long latencies also increase the potential recognition lag (i.e., the lag between writing a type of policy in a certain market and the recognition that such policies have potential mass tort and/or latent claim exposure).

The amount of reserve estimate uncertainty also varies significantly by component for the general liability product line. The components in this product line with the longest latency, longest reporting lags, largest potential dollars involved and greatest claim settlement complexity are asbestos and environmental. Components that include latency, reporting lag and/or complexity issues, but to a materially lesser extent than asbestos and environmental, include construction defect and other mass tort actions. Many components of general liability are not subject to material latency or claim complexity risks and hence have materially less uncertainty than the previously mentioned components. In general, components with shorter reporting lags, fewer parties involved in settlement negotiations, only one policy potentially triggered per claim, fewer potential settlement dollars, reasonably foreseeable (and stable) potential hazards/claims and no mass tort potential result in much less reserve estimate uncertainty than components without those characteristics.

In addition to the conventional actuarial methods mentioned in the general discussion section, the company utilizes various report year development methods for the construction defect components of this product line. The Construction Defect report year development analysis is supplemented with projected claim counts and average values for IBNR claim counts. For components with greater lags in claim reporting, such as excess and umbrella components of this product line, the Company relies more heavily on the BF method than on the paid and case incurred development methods.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required general liability reserves (beyond those included in the general discussion section) include:

General liability risk factors


•	Changes in claim handling philosophies


•	Changes in policy provisions or court interpretation of such provisions


•	New or expanded theories of liability


•	Trends in jury awards


•	Changes in the propensity to sue, in general with specificity to particular issues


•	Changes in the propensity to litigate rather than settle a claim


•	Increases in attorney involvement in, or impact on, claims


•	Changes in statutes of limitations


•	Changes in the underlying court system


•	Distortions from losses resulting from large single accounts or single issues


•	Changes in tort law


•	Shifts in lawsuit mix between federal and state courts


•	Changes in claim adjuster processes or reporting which may cause distortions in the data being analyzed


•	The potential impact of inflation on loss costs


•	Changes in settlement patterns

General liability book of business risk factors


•	Changes in policy provisions (e.g., deductibles, policy limits, endorsements)


•	Changes in underwriting standards


•	Product mix (e.g., size of account, industries insured, jurisdiction mix)

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for general liability (excluding asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.5% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line, excluding estimated asbestos and environmental amounts, over the last nine years has varied from -8% to -1% (averaging -4%) for the Company, and from -4% to 0% (averaging -2%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. General liability reserves (excluding asbestos and environmental) represent approximately 20% of the Company’s total claims and claim adjustment expense reserves.

The Company’s change in reserve estimate for this product line, excluding estimated asbestos and environmental amounts, was -1% for 2018, -4% for 2017 and -4% for 2016. The 2018 change primarily reflected better than expected loss experience for management liability coverages in Bond & Specialty Insurance for accident years 2013 through 2015, partially offset by higher than expected loss experience for both primary and excess coverages in Business Insurance for accident years 2012 through 2017. The 2017 change primarily reflected better than expected loss experience for both primary and excess coverages for accident years 2009 through 2016. The 2016 change primarily reflected better than expected loss experience for both primary and excess coverages for accident years 2015 and prior.

Commercial Property

Commercial property is generally considered a short tail line with a simpler and faster claim reporting and adjustment process than liability coverages, and less uncertainty in the reserve setting process (except for more complex business interruption claims). It is generally viewed as a moderate frequency, low to moderate severity line, except for catastrophes and coverage related to large properties. The claim reporting and settlement process for property coverage claim reserves is generally restricted to the insured and the insurer. Overall, the claim liabilities for this line create a low estimation risk, except possibly for catastrophes and business interruption claims.

Commercial property reserves are typically analyzed in two components, one for catastrophic or other large single events, and another for all other events. Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required property reserves (beyond those included in the general discussion section) include:

Commercial property risk factors


•	Physical concentration of policyholders


•	Availability and cost of local contractors


•	For the more severe catastrophic events, “demand surge” inflation, which refers to significant short-term increases in building material and labor costs due to a sharp increase in demand for those materials and services


•	Local building codes


•	Amount of time to return property to full usage (for business interruption claims)


•	Frequency of claim re-openings on claims previously closed


•	Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)


•	Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake, hail damage to roofs and/or equipment on roofs)


•	Court or legislative changes to the statute of limitations

Commercial property book of business risk factors


•	Policy provisions mix (e.g., deductibles, policy limits, endorsements)


•	Changes in underwriting standards

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for property, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -25% to -5% (averaging -15%) for the Company, and from -14% to -5% (averaging -8%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Commercial property reserves represent approximately 3% of the Company’s total claims and claim adjustment expense reserves.

Since commercial property is considered a short tail coverage, the one year change for commercial property can be more volatile than that for the longer tail product lines. This is due to the fact that the majority of the reserve for commercial property relates to the most recent accident year, which is subject to the most uncertainty for all product lines. This recent accident year uncertainty is relevant to commercial property because of weather-related events which tend to be concentrated in the second half of the year, and generally are not completely resolved until the following year. Reserve estimates associated with major catastrophes may take even longer to resolve. The reserve estimates for this product line are also potentially subject to material changes due to uncertainty in measuring ultimate losses for significant catastrophes such as Storm Sandy and wildfires.

The Company’s change in reserve estimate for this product line was -11% for 2018, -9% for 2017 and -9% for 2016. The 2018 change primarily reflected better than expected loss experience related to both catastrophe and non-catastrophe losses for accident years 2015 through 2017. The 2017 change primarily reflected better than expected loss experience related to non-catastrophe losses for accident years 2015 and 2016. The 2016 change primarily reflected better than expected loss experience related to non-catastrophe losses for accident years 2014 and 2015.

Commercial Multi-Peril

Commercial multi-peril provides a combination of property and liability coverage typically for small businesses and, therefore, includes both short and long tail coverages. For property coverage, it generally takes a relatively short period of time to close claims, while for the other coverages, generally for the liability coverages, it takes a longer period of time to close claims.

The reserving risk for this line is dominated by the liability coverage portion of this product, except occasionally in the event of catastrophic or other large single loss events. The reserving risk for this line differs from that of the general liability product line and the property product line due to the nature of the customer. Commercial multi-peril is generally sold to small- to mid-sized accounts, while the customer profile for general liability and commercial property includes larger customers.

See “Commercial property risk factors” and “General liability risk factors,” discussed above, with regard to reserving risk for commercial multi-peril.

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for commercial multi-peril (excluding asbestos and environmental), a 1% increase (decrease) in

incremental paid loss development for each future calendar year could result in a 1.2% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line, excluding estimated asbestos and environmental amounts, over the last nine years has varied from -5% to 5% (averaging 1%) for the Company, and from -4% to 1% (averaging -2%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Commercial multi-peril reserves (excluding asbestos and environmental reserves) represent approximately 8% of the Company’s total claims and claim adjustment expense reserves.

As discussed above, this line combines general liability and commercial property coverages and it has been impacted in the past by many of the same events as those two lines.

The Company’s change in reserve estimate for this product line was 1% for 2018, -5% for 2017 and 1% for 2016. The 2018 change primarily reflected higher than expected loss experience for liability coverages for accident year 2017. The 2017 change primarily reflected better than expected loss experience for liability coverages for accident years 2016 and prior. The 2016 change primarily reflected higher than expected loss experience for property coverages related to non-catastrophe losses for accident year 2015.

Commercial Automobile

The commercial automobile product line is a mix of property and liability coverages and, therefore, includes both short and long tail coverages. The payments that are made quickly typically pertain to auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. In general, claim reporting lags are generally short, claim complexity is not a major issue, and the line is viewed as high frequency, low to moderate severity. Overall, the claim liabilities for this line create a moderate estimation risk. Recently, the Company has seen more of an increase in the rate of attorney involvement than it had anticipated and a lengthening of the claim development pattern. As a consequence, the Company has experienced a higher level of bodily injury severity than it had anticipated.

Commercial automobile reserves are typically analyzed in four components: bodily injury liability; property damage liability; collision claims; and comprehensive claims. These last two components have minimum reserve risk and fast payouts and, accordingly, separate risk factors are not presented.

The Company utilizes the conventional actuarial methods mentioned in the general discussion above in estimating claim liabilities for this line. This is supplemented with detailed custom analyses where needed.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required commercial automobile reserves (beyond those included in the general discussion section) include:

Bodily injury and property damage liability risk factors


•	Trends in jury awards


•	Changes in the underlying court system


•	Changes in case law


•	Litigation trends


•	Increases in attorney involvement in, or impact on, claims


•	Frequency of claims with payment capped by policy limits


•	Change in average severity of accidents, or proportion of severe accidents


•	Changes in auto safety technology


•	Subrogation opportunities


•	Changes in claim handling philosophies


•	Frequency of visits to health providers


•	Number of medical procedures given during visits to health providers


•	Types of health providers used


•	Types of medical treatments received


•	Changes in cost of medical treatments


•	Degree of patient responsiveness to treatment

Commercial automobile book of business risk factors


•	Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.)


•	Changes in mix of insured vehicles (e.g., long haul trucks versus local and smaller vehicles, fleet risks versus non-fleets)


•	Changes in underwriting standards

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for commercial automobile, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -2% to 11% (averaging 3%) for the Company, and from -3% to 7% (averaging 2%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Commercial automobile reserves represent approximately 8% of the Company’s total claims and claim adjustment expense reserves.

The Company’s change in reserve estimate for this product line was 11% for 2018, 4% for 2017 and -1% for 2016. The 2018 change primarily reflected higher than expected loss experience for liability coverages for accident years 2014 through 2017. The 2017 change primarily reflected higher than expected loss experience for liability coverages for accident years 2013 through 2016. The 2016 change primarily reflected better than expected loss experience for accident years 2011 and prior.

Workers’ Compensation

Workers’ compensation is generally considered a long tail coverage, as it takes a relatively long period of time to finalize claims from a given accident year. While certain payments such as initial medical treatment or temporary wage replacement for the injured worker are made quickly, some other payments are made over the course of several years, such as awards for permanent partial injuries. In addition, some payments can run as long as the injured worker’s life, such as permanent disability benefits and on-going medical care. Despite the possibility of long payment tails, the reporting lags are generally short, payment obligations are generally not complex, and most of the liability can be considered high frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims providing lifetime coverage for medical expense arising from a worker’s injury, as such claims are subject to greater inflation risk. Overall, the claim liabilities for this line create a somewhat greater than moderate estimation risk.

Workers’ compensation reserves are typically analyzed in three components: indemnity losses, medical losses and claim adjustment expenses.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required workers’ compensation reserves (beyond those included in the general discussion section) include:

Indemnity risk factors


•	Time required to recover from the injury


•	Degree of available transitional jobs


•	Degree of legal involvement


•	Changes in the interpretations and processes of the administrative bodies that oversee workers’ compensation claims


•	Future wage inflation for states that index benefits


•	Changes in the administrative policies of second injury funds

Medical risk factors


•	Changes in the cost of medical treatments (including prescription drugs) and underlying fee schedules (“inflation”)


•	Frequency of visits to health providers


•	Number of medical procedures given during visits to health providers


•	Types of health providers used


•	Type of medical treatments received


•	Use of preferred provider networks and other medical cost containment practices


•	Availability of new medical processes and equipment


•	Changes in the use of pharmaceutical drugs, including drugs for pain management


•	Degree of patient responsiveness to treatment

General workers’ compensation risk factors


•	Frequency of reopening claims previously closed


•	Mortality trends of injured workers with lifetime benefits and medical treatment


•	Changes in statutory benefits


•	The impact, if any, of potential future changes to the Affordable Care Act

Workers’ compensation book of business risk factors


•	Product mix


•	Injury type mix


•	Changes in underwriting standards

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for workers’ compensation, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -4% to 0% (averaging -2%) for the Company, and from -4% to 1% (averaging -1%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Workers’ compensation reserves represent approximately 38% of the Company’s total claims and claim adjustment expense reserves.

The Company’s change in reserve estimate for this product line was -4% for 2018, -3% for 2017 and -2% for 2016. The 2018 change primarily reflected better than expected loss experience for accident years 2017 and prior. The 2017 change primarily reflected better than expected loss experience for accident years 2016 and prior. The 2016 change primarily reflected better than expected loss experience for accident years 2006 and prior as well as accident years 2009, 2013 and 2015.

Fidelity and Surety

Fidelity is generally considered a short tail coverage. It takes a relatively short period of time to finalize and settle most fidelity claims. The volatility of fidelity reserves is generally related to the type of business of the insured, the size and complexity of the insured’s business operations, amount of policy limit and attachment point of coverage. The uncertainty surrounding reserves for small, commercial insureds is typically less than the uncertainty for large commercial or financial institutions. The high frequency, low severity nature of small commercial fidelity losses provides for stability in loss estimates, whereas the low frequency, high severity nature of losses for large insureds results in a wider range of ultimate loss outcomes. Actuarial techniques that rely on a stable pattern of loss development are generally not applicable to low frequency, high severity claims.

Surety has certain components that are generally considered short tail coverages with short reporting lags, although large individual construction and commercial surety contracts can result in a long settlement tail, based on the length and complexity of the construction project(s) or commercial transaction being insured. The frequency of losses in surety generally correlates with economic cycles as the primary cause of surety loss is the inability of an insured to fulfill its contractual obligations. The Company actively seeks to mitigate this exposure to loss through disciplined risk selection, adherence to underwriting standards and ongoing monitoring of contractor progress in significant construction projects. The volatility of surety losses is generally related to the type of business performed by the insured, the type of bonded obligation, the amount of limit exposed to loss and the amount of assets available to the insurer to mitigate losses, such as unbilled contract funds, collateral, first and third party indemnity, and other security positions of an insured’s assets. Certain classes of surety claims are very high severity, low frequency in nature. These can include large construction contractors involved with one or multiple large, complex projects as well as certain large commercial surety exposures. Other claim factors affecting reserve variability of surety include litigation related to amounts owed by and due the insured (e.g., salvage and subrogation efforts) and the results of financial restructuring of an insured.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required fidelity and surety reserves (beyond those included in the general discussion section) include:

Fidelity risk factors


•	Type of business of insured


•	Policy limit and attachment points


•	Third-party claims


•	Coverage litigation


•	Complexity of claims


•	Growth in insureds’ operations

Surety risk factors


•	Economic trends, including the general level of construction activity


•	Concentration of reserves in a relatively few large claims


•	Type of business insured


•	Type of obligation insured


•	Cumulative limits of liability for insured


•	Assets available to mitigate loss


•	Defective workmanship/latent defects


•	Financial strategy of insured


•	Changes in statutory obligations


•	Geographic spread of business

Fidelity and Surety book of business risk factors


•	Changes in policy provisions (e.g., deductibles, limits, endorsements)


•	Changes in underwriting standards

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for fidelity and surety, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -36% to -6% (averaging -19%) for the Company, and from -17% to -2% (averaging -10%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Fidelity and surety reserves represent approximately 1% of the Company’s total claims and claim adjustment expense reserves.

In general, developments on single large claims (both adverse and favorable) are a primary source of changes in reserve estimates for this product line.

The Company’s change in reserve estimate for this product line was -10% for 2018, -10% for 2017 and -36% for 2016. The 2018 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2015 and 2016. The 2017 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2014 and 2015. The 2016 change primarily reflected better than expected loss experience in the fidelity and surety product line for accident years 2009 through 2015.

Personal Automobile

Personal automobile includes both short and long tail coverages. The payments that are made quickly typically pertain to auto physical damage (property) claims and property damage (liability) claims. The payments that take longer to finalize and are more difficult to estimate relate to bodily injury claims. Reporting lags are relatively short and the claim settlement process for personal automobile liability generally is the least complex of the liability products. It is generally viewed as a high frequency, low to moderate severity product line. Overall, the claim liabilities for this line create a moderate estimation risk.

Personal automobile reserves are typically analyzed in five components: bodily injury liability, property damage liability, no-fault losses, collision claims and comprehensive claims. These last two components have minimum reserve risk and fast payouts and, accordingly, separate factors are not presented.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required personal automobile reserves (beyond those included in the general reserve discussion section) include:

Bodily injury, property damage liability and no-fault risk factors


•	Trends in jury awards


•	Changes in the underlying court system and its philosophy


•	Changes in case law


•	Litigation trends


•	Increases in attorney involvement in, or impact on, claims


•	Frequency of claims with payment capped by policy limits


•	Change in average severity of accidents, or proportion of severe accidents


•	Changes in auto safety technology


•	Frequency and severity of claims involving distracted drivers and pedestrians


•	Subrogation opportunities


•	Frequency of visits to health providers


•	Number of medical procedures given during visits to health providers


•	Types of health providers used


•	Types of medical treatments received


•	Changes in cost of medical treatments


•	Effectiveness of no-fault laws


•	Degree of patient responsiveness to treatment


•	Changes in claim handling philosophies

Personal automobile book of business risk factors


•	Changes in policy provisions (e.g., deductibles, policy limits, endorsements, etc.)


•	Changes in underwriting standards


•	Changes in the use of credit data for rating and underwriting

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for personal automobile, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line over the last nine years has varied from -4% to 3% (averaging 0%) for the Company, and from -3% to 2% (averaging -1%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Personal automobile reserves represent approximately 7% of the Company’s total claims and claim adjustment expense reserves.

The Company’s change in reserve estimate for this product line was -2% for 2018, 0% for 2017 and 3% for 2016. The 2018 change primarily reflected better than expected loss experience for liability coverages for accident years 2015 through 2017. The 2016 change primarily reflected higher than expected loss experience for liability coverages for accident year 2015.

Homeowners and Personal Lines Other

Homeowners is generally considered a short tail coverage. Most payments are related to the property portion of the policy, where the claim reporting and settlement process is generally restricted to the insured and the insurer. Claims on property coverage are typically reported soon after the actual damage occurs, although delays of several months are not unusual. The resulting settlement process is typically fairly short term, although exceptions do exist.

The liability portion of the homeowners policy generates claims which take longer to pay due to the involvement of litigation and negotiation, but with generally small reporting lags. Personal Lines Other products include personal umbrella policies, among others. See “general liability reserving risk factors,” discussed above, for reserving risk factors related to umbrella coverages.

Overall, the line is generally high frequency, low to moderate severity (except for catastrophes), with simple to moderate claim complexity.

Homeowners reserves are typically analyzed in two components: non-catastrophe related losses and catastrophe loss payments.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required homeowners reserves (beyond those included in the general discussion section) include:

Non-catastrophe risk factors


•	Salvage opportunities


•	Amount of time to return property to residential use


•	Changes in weather patterns


•	Local building codes


•	Construction and building material costs


•	Litigation trends


•	Trends in jury awards


•	Court interpretation of policy provisions (such as occurrence definition, or wind versus flooding)


•	Lags in reporting claims (e.g., winter damage to summer homes, hidden damage after an earthquake, hail damage to roofs and/or equipment on roofs)


•	Court or legislative changes to the statute of limitations

Catastrophe risk factors


•	Physical concentration of policyholders


•	Availability and cost of local contractors


•	Local building codes


•	Quality of construction of damaged homes


•	Amount of time to return property to residential use


•	For the more severe catastrophic events, “demand surge” inflation, which refers to significant short-term increases in building material and labor costs due to a sharp increase in demand for those materials and services

Homeowners book of business risk factors


•	Policy provisions mix (e.g., deductibles, policy limits, endorsements, etc.)


•	Degree of concentration of policyholders


•	Changes in underwriting standards


•	Changes in the use of credit data for rating and underwriting

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for homeowners and personal lines other, a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.1% increase (decrease) in claims and claim adjustment expense reserves.

Historically, the one-year change in the reserve estimate for this product line (excluding the umbrella line of business, which for statutory reporting purposes is included with the general liability line of business) over the last nine years has varied from -17% to 3% (averaging -7%) for the Company, and from -7% to -1% (averaging -4%) for the industry overall. The Company’s year-to-year changes are driven by, and are based on, observed events during the year. The Company believes that its range of historical outcomes is illustrative of reasonably possible one-year changes in reserve estimates for this product line. Homeowners and personal lines other reserves represent approximately 4% of the Company’s total claims and claim adjustment expense reserves.

This line combines both liability and property coverages; however, the majority of the reserves relate to property. While property is considered a short tail coverage, the one year change for property can be more volatile than that for the longer tail product lines. This is due to the fact that the majority of the reserve for property relates to the most recent accident year, which is subject to the most uncertainty for all product lines. This recent accident year uncertainty is relevant to property because of weather related events which tend to be concentrated in the second half of the year, and generally are not completely resolved until the following year. Reserve estimates associated with major catastrophes, including California wildfires in recent years, may take even longer to resolve.

The Company’s change in reserve estimate for this product line (excluding the umbrella line of business) was -2% for 2018, 1% for 2017 and 3% for 2016. The 2018 change primarily reflected better than expected loss experience for liability coverages for accident years 2014 through 2016, largely offset by higher than expected loss experience for catastrophe losses for accident year 2017. The 2017 change primarily reflected modestly higher than expected loss experience for liability coverages for accident years 2014 and 2015. The 2016 change primarily reflected modestly higher than expected loss experience for liability coverages for accident years 2012 through 2014.

International and Other

International and other includes products written by the Company’s international operations, as well as all other products not explicitly discussed above. The principal component of “other” claim reserves is assumed reinsurance written on an excess-of-loss basis, which may include reinsurance of non-U.S. exposures, and is runoff business.

International and other claim liabilities result from a mix of coverages, currencies and jurisdictions/countries. The common characteristic is the need to customize the analysis to the individual component, and the inability to rely on data characterizations and reporting requirements in the U.S. statutory reporting framework.

Due to changes in the business mix for this product line over time, the recently incurred claim liabilities are relatively shorter tail (due to both the products and the jurisdictions involved, e.g., Canada, the Republic of Ireland and the United Kingdom), while the older liabilities include some from runoff operations that are extremely long tail (e.g., U.S. excess liabilities reinsured through the

London market, and several underwriting pools in runoff). The speed of claim reporting and claim settlement is a function of the specific coverage provided, the jurisdiction, the distribution system (e.g., underwriting pool versus direct) and the proximity of the insurance sale to the insured hazard (e.g., insured and insurer located in different countries). In particular, liabilities arising from the underwriting pools in runoff may result in significant reporting lags, settlement lags and claim complexity, due to the need to coordinate with other pool members or co-insurers through a broker or lead-insurer for claim settlement purposes.

International reserves are generally analyzed by country and general coverage category (e.g., General Liability in Canada, Commercial Property in the United Kingdom, etc.). The business is also generally split by direct versus assumed reinsurance for a given coverage. Where the underlying insured hazard is outside the United States, the underlying coverages are generally similar to those described under the Homeowners, Personal Automobile, Commercial Automobile, General Liability, Commercial Property and Surety discussions above, taking into account differences in the legal environment and differences in terms and conditions. However, statutory coverage differences exist amongst various jurisdictions. For example, in some jurisdictions there are no aggregate policy limits on certain liability coverages.

Other reserves, primarily assumed reinsurance in runoff, are generally analyzed by program/pool, treaty type, and general coverage category (e.g., General Liability — excess of loss reinsurance). Excess exposure requires the insured to “prove” not only claims under the policy, but also the prior payment of claims reaching up to the excess policy’s attachment point.

Examples of common risk factors, or perceptions thereof, that could change and, thus, affect the required International and other reserves (beyond those included in the general discussion section, and in the Personal Automobile, Homeowners, General Liability, Commercial Property, Commercial Automobile and Surety discussions above) include:

International and other risk factors


•	Changes in claim handling procedures, including those of the primary carriers


•	Changes in policy provisions or court interpretation of such provision


•	Economic trends


•	New theories of liability


•	Trends in jury awards


•	Changes in the propensity to sue


•	Changes in statutes of limitations


•	Changes in the underlying court system


•	Distortions from losses resulting from large single accounts or single issues


•	Changes in tort law


•	Changes in claim adjuster office structure (causing distortions in the data)


•	Changes in foreign currency exchange rates

International and other book of business risk factors


•	Changes in policy provisions (e.g., deductibles, policy limits, endorsements, “claims-made” language)


•	Changes in underwriting standards


•	Product mix (e.g., size of account, industries insured, jurisdiction mix)

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a change in one or more risk factors could have on reserves for International and other (excluding asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each future calendar year could result in a 1.3% increase (decrease) in claims and claim adjustment expense reserves. International and other reserves (excluding asbestos and environmental) represent approximately 7% of the Company’s total claims and claim adjustment expense reserves.

International and other represents a combination of different product lines, some of which are in runoff. Comparative historical information is not available for international product lines as insurers domiciled outside of the United States do not file U.S. statutory reports. Comparative historical information on runoff business is not indicative of reasonably possible one-year changes in the reserve estimate for this mix of runoff business. Accordingly, the Company has not included comparative analyses for International and other.

Reinsurance Recoverables

Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In addition, in the ordinary course of business, the Company becomes involved

in coverage disputes with its reinsurers. Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the Company’s rights and obligations under the various reinsurance agreements. The Company employs dedicated specialists and comprehensive strategies to manage reinsurance collections and disputes.

The Company has entered into a reinsurance contract in connection with a catastrophe bond issued by Long Point Re III. This contract meets the requirements to be accounted for as reinsurance in accordance with guidance for accounting for reinsurance contracts. The catastrophe bond is described in more detail in “Item 1-Business-Catastrophe Reinsurance.”

The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables. The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, disputes, applicable coverage defenses and other relevant factors. Accordingly, the establishment of reinsurance recoverables and the related allowance for uncollectible reinsurance recoverables is also an inherently uncertain process involving estimates. From time to time, as a result of the long-tailed nature of the underlying liabilities, coverage complexities and potential for disputes, the Company considers the commutation of reinsurance contracts. Changes in estimated reinsurance recoverables and commutation activity could result in additional income statement charges.

Recoverables attributable to structured settlements relate primarily to personal injury claims, of which workers’ compensation claims comprise a significant portion, for which the Company has purchased annuities and remains contingently liable in the event of a default by the companies issuing the annuities. Recoverables attributable to mandatory pools and associations relate primarily to workers’ compensation service business. These recoverables are supported by the participating insurance companies’ obligation to pay a pro rata share based on each company’s voluntary market share of written premium in each state in which it is a pool participant. In the event a member of a mandatory pool or association defaults on its share of the pool’s or association’s obligations, the other members’ share of such obligation increases proportionally.

Investment Valuation and Impairments

Valuation of Investments Reported at Fair Value in Financial Statements

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.

The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated, willing parties, i.e., not in a forced transaction. The estimated fair value of a financial instrument may differ from the amount that could be realized if the security was sold in an immediate sale, e.g., a forced transaction. Additionally, the valuation of investments is more subjective when markets are less liquid due to the lack of market based inputs, which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur.

See note 4 of notes to the consolidated financial statements for a further discussion of the determination of fair value of investments.

Investment Impairments

See note 1 of notes to the consolidated financial statements for a discussion of investment impairments.

Due to the subjective nature of the Company’s analysis and estimates of future cash flows, along with the judgment that must be applied in the analysis, it is possible that the Company could reach a different conclusion whether or not to impair a security if it had access to additional information about the issuer. Additionally, it is possible that the issuer's actual ability to meet contractual obligations may be different than what the Company determined during its analysis, which may lead to a different impairment conclusion in future periods.

Goodwill and Other Intangible Assets Impairments

See note 1 of notes to the consolidated financial statements for a discussion of impairments of goodwill and other intangible assets.

OTHER UNCERTAINTIES

For a discussion of other risks and uncertainties that could impact the Company’s results of operations or financial position, see note 16 of notes to the consolidated financial statements and “Item 1A—Risk Factors.”

FORWARD-LOOKING STATEMENTS

This report contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates” and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:

•

the Company’s outlook and its future results of operations and financial condition (including, among other things, anticipated premium volume, premium rates, renewal premium changes, underwriting margins and underlying underwriting margins, net and core income, investment income and performance, loss costs, return on equity, core return on equity and expected current returns, and combined ratios and underlying combined ratios);


•	share repurchase plans;


•	future pension plan contributions;


•	the sufficiency of the Company’s asbestos and other reserves;


•	the impact of emerging claims issues as well as other insurance and non-insurance litigation;


•	the cost and availability of reinsurance coverage;


•	catastrophe losses;


•	the impact of investment (including changes in interest rates), economic (including inflation, recent changes in tax law, rapid changes in commodity prices and fluctuations in foreign currency exchange rates) and underwriting market conditions;


•	strategic and operational initiatives to improve profitability and competitiveness;


•	the Company's competitive advantages;


•	new product offerings;


•	the impact of new or potential regulations imposed or to be imposed by the United States or other nations, including tariffs or other barriers to international trade; and


•	the impact of a government shutdown.

The Company cautions investors that such statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond the Company’s control, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

For a discussion of some of the factors that could cause actual results to differ, see “Item 1A-Risk Factors” and “Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations.”

The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made, and the Company undertakes no obligation to update its forward-looking statements.

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