Higher Net Investment Income - Total net investment income increased by $23.3 million in 2017, compared to 2016. The increase was primarily attributable to an increase in average invested assets and an increase in the book yield we obtained on our assets. The increase in average invested assets was primarily due to the RSA and QBE transactions which were completed in 2017. The increase in the book yield was primarily due to asset allocation strategies and in an increase in the duration of our fixed maturity portfolio;
Change in Net Realized and Unrealized Gains (Losses) - In 2017, net realized and unrealized gains were $190.3 million, compared to $77.8 million in 2016. The net realized and unrealized gains in 2017 were primarily attributable to an increase in the valuation of our funds withheld - directly managed and unrealized gains on our other investments;
Higher Net Investment Income - Total net investment income increased by $62.9 million in 2016, compared to 2015. The increase was primarily attributable to an increase in average invested assets and an increase in the book yield we obtained on our assets. The increase in average invested assets was primarily due to the transactions that were completed in 2016. The increase in the book yield was primarily due to our asset allocation and an increase in the treasury yields;
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the years ended December 31, 2017, 2016 and 2015:
2017 versus 2016: Corporate expenses for the Atrium segment were $12.1 million in 2017, a $1.2 million increase over $10.9 million in 2016.
2017 versus 2016: Fees and commission income was $0.6 million in 2017, compared to $5.1 million in 2016, a decrease of $4.5 million. Fees and commission income for the years ended December 31, 2017 and 2016 primarily represents income related to the KaylaRe cession, as described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
2016 versus 2015: Fee and commission expense was $1.4 million in 2016, compared to an expense of $11.3 million in 2015, a change of $9.9 million, primarily due to 2015 including the impact of the elimination of certain transactions between reportable segments that did not reoccur in 2016.
Accounting Standards Update (“ASU”) 2017-12, Targeted Improvements to Accounting for Hedging Activities
In February 2017, the FASB issued ASU 2017-05 to clarify the scope of the Board’s guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended). The ASU clarifies that ASC 610-20 applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. The ASU also requires an entity to derecognize the nonfinancial asset or in-substance nonfinancial asset in a partial sale transaction when (1) the entity ceases to have a controlling financial interest in a subsidiary pursuant to ASC 810, and (2) control of the asset is transferred in accordance with ASC 606. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We expect to adopt this guidance on January 1, 2018 using the modified retrospective approach. We do not expect this adoption to have a material impact on our consolidated financial statements and disclosures.
ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments
The following table summarizes the fair values of the assets acquired and liabilities assumed in the Alpha transaction at the acquisition date, allocated between our Non-life Run-off segment and our other activities.
Following the completion of the sale of Pavonia which closed on December 29, 2017, we reclassified into earnings, the cumulative losses of $1.1 million related to the CAD foreign currency forward contract that we had set up to hedge our CAD dominated net investment in Pavonia, and which had previously been deferred in the CTA.
We also borrowed €75.0 million (approximately $88.5 million) during 2016 that was designated as a non-derivative hedge of our net investment in certain subsidiaries whose functional currency is denominated in Euros, as described in Note 15 - "Debt Obligations". We repaid €25.0 million (approximately $29.5 million) of this outstanding loan balance during the year ended December 31, 2017 and reclassified the related foreign exchange losses of $1.1 million previously deferred in AOCI, into earnings.
The asbestos and environmental lines of business contain exposures which impact accident years older than those presented within the loss development tables disclosed below and have, therefore, not been included within those disclosures. These lines of business cumulatively comprised approximately 41% of our total net liabilities for losses and LAE, before reconciling items, within our Non-life Run-off segment, as at December 31, 2017;
As noted in the tables above, the significant lines of business within this segment include asbestos, general casualty, workers’ compensation and professional indemnity/Directors & Officers, which collectively comprised approximately 80% and 80% of total gross and net reserves, respectively, as at December 31, 2017 and 83% and 82% of total gross and net reserves, respectively, as at December 31, 2016. Separate loss development tables have been provided for the general casualty, workers’ compensation and professional indemnity/Directors & Officers lines of business as set forth below. The asbestos and the environmental lines of business are wholly comprised of losses with accident years before 2008 and therefore no accident year disclosures have been included within the loss development tables presented below for these lines of business. The exposures included within the marine, aviation and transit and construction defect lines of business, which each comprised approximately 3% of total gross and net reserves, were each not considered material for separate disclosure within the loss development tables presented below. Similarly, the exposures included within the other category includes losses with several different development patterns that are not individually sufficiently significant to be disclosed in separate loss development tables.
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented in the tables above for the year ended December 31, 2017 is set forth below:
Other assets - deferred charges relate to retroactive reinsurance policies providing indemnification of losses and LAE with respect to past loss events. For insurance and reinsurance contracts for which we do not elect the fair value option, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received at the inception of the contract. These amounts relate to the transactions with Voya Financial, Sun Life and Coca-Cola, described in Note 4 - "Significant New Business". Amortization of the deferred charges included $14.4 million and $130.2 million related to a reduction in the liability for losses and LAE for the years ended December 31, 2017 and December 31, 2016, respectively, and $nil and $38.6 million primarily related to a change in the expected return on the underlying assets for the years ended December 31, 2017 and 2016, respectively.
The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at December 31, 2017, 2016 and 2015:
We have a noncontributory defined benefit pension plan that was acquired in the Providence Washington transaction in 2010. Pension expense relating to this defined benefit plan was $1.9 million, $2.3 million and $0.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. The increase in pension expense during 2016 was due to the completion of a lump sum buyout offering during 2016 and was offset by a reduction in accumulated
In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone transactions in cash at fair market value within the 90 days following September 9, 2018 and April 1, 2019, respectively, and at any time following September 9, 2020 and April 1, 2021, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and StarStone transactions redeemed by us at fair market value (which we may satisfy in either cash or our ordinary shares) following September 9, 2020 and April 1, 2021. As of December 31, 2017, we have included $459.6 million (December 31, 2016: $435.6 million) as RNCI on our balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of the holding companies established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee.
We recorded the investment in Monument using the equity method basis of accounting, as we concluded that we are not required to consolidate based on the guidance in ASC 810 - Consolidation. Our investment in Monument was carried at $16.0 million and $0.2 million in other assets on our consolidated balance sheet as at December 31, 2017 and 2016, respectively.
On December 20, 2017, we entered into a reinsurance-to-close transaction with Neon's Syndicate 2468. On January 29, 2018, we entered into a reinsurance-to-close transaction with Novae's Syndicate 2007. On February 22, 2018, we entered into a reinsurance agreement with Zurich Insurance Group. These agreements are described in Note 4 - "Significant New Business".
We acquired Dana Companies, LLC ("Dana") on December 30, 2016, as described in Note 3 - "Acquisitions". Dana continues to process asbestos personal injury claims in the normal course of business and is separately managed.
Original cost of fixed maturity securities is reduced by repayments and adjusted for amortization of premiums or accretion of discounts.
These amounts are credited to net incurred losses and there is an offsetting debit within the same line, resulting in no impact on earnings.