The Company's consolidated statements of income and comprehensive income for the year ended December 31, 2015 include the results of operations of Montpelier for the period from August 1, 2015 through December 31, 2015. For additional information on the acquisition of Montpelier, see "Liquidity and Capital Resources, Impact of Montpelier Acquisition on Liquidity and Capital Resources" below.
The Company's results of operations are affected by the following business and accounting factors:
changes in the estimate or different estimates that could have been selected could have a material impact on the Company's consolidated results of operations or financial condition.
The Company's reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Losses occurring reinsurance contracts accounted for approximately 16%, 20%, and 21% of the Company's gross premiums written during the years ended December 31, 2015, 2014, and 2013, respectively. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period. Policies attaching reinsurance contracts accounted for approximately 21%, 21%, and 24% of the Company's gross premiums written during the years ended December 31, 2015, 2014, and 2013, respectively.
The following summarizes the Company's net proportional premium estimates within premiums receivable, net on the Company's Audited Consolidated Balance Sheets as of December 31, 2015 and 2014:
Includes only cash and cash equivalents and fixed income investments managed by the Company's investment managers.
Realized investment gains and losses, intangible asset impairment loss, net unrealized losses and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2015, 2014 and 2013 were as follows:
The Company's net income attributable to non-controlling interest was $11.0 million 2015 compared to nil in 2014 and 2013. As part of the acquisition of Montpelier, the Company acquired ownership of BCRH common shares and BCGR's ordinary shares. At December 31, 2015, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH's common shares and Endurance Bermuda owned 25.1% of BCGR's ordinary shares. Net income attributable to non-controlling interests relates to the share of the Company's net income attributable to the BCRH common shares and BCGR ordinary shares that are not owned by the Company.
The Company experienced higher favorable prior year loss reserve development in its Reinsurance segment in 2015 compared to 2014 and lower levels of favorable development compared to 2013. During 2015, 2014 and 2013, the Company's previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $161.5 million, $153.2 million and $188.5 million, respectively. The 2015 favorable prior year loss reserve development emerged across all lines of business in the Reinsurance segment. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company. During 2015, the favorable loss reserve development emanated from all lines of business in the Reinsurance segment.
General and Administrative Expenses. The general and administrative expense ratio in the Reinsurance segment increased for the year ended December 31, 2015 compared to 2014 and 2013. The increase in the ratio for 2015 compared to 2014 and 2013 was primarily due to an increase in personnel costs associated with the addition of new underwriting teams.
Under the jurisdiction of the United Kingdom's Prudential Regulatory Authority ("PRA") and the Financial Conduct Authority ("FCA"), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2015, Endurance U.K. did not have retained profits available for distributions.
As of December 31, 2015, BCRH had $13.0 million outstanding borrowings under the BCRH Credit Agreement. With respect to BCRH's outstanding borrowings at December 31, 2015, $4.0 million was repaid on February 2, 2016 and is subject to an annual interest rate of 1.33%, $5.0 million was repaid February 22, 2016 and was subject to an annual interest rate of
The Company establishes loss and loss expense reserves to provide for the estimated costs of paying claims under insurance policies and reinsurance contracts underwritten by the Company. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is an uncertain and complex process. This estimation process is based largely on the assumption that past developments are an appropriate predictor of future events and involves a variety of actuarial techniques and judgments that analyze experience, trends and other relevant factors.
Professional lines. The favorable loss emergence within this line of business during 2015 was primarily due to lower than expected claims emergence in prior accident years, particularly for accident years 2010 to 2013. The favorable loss emergence within this line of business during 2014 was primarily due to lower than expected claims emergence for accident years 2010-2011.
Selected quarterly activity in the reserve for losses and loss expenses for the years ended December 31, 2015 and 2014 is summarized as follows:
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Endurance Specialty Holdings Ltd.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 26, 2016 expressed an unqualified opinion thereon.
If the Company has the intent to sell a fixed maturity or short-term security classified as available for sale in an unrealized loss position or it is more likely than not that the Company will be required to sell the available for sale security, the Company deems the security to be other-than-temporarily impaired and writes down the carrying value of the security to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment ("OTTI") loss.
Assets and liabilities of foreign operations whose functional currency is not the United States dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive (loss) income, net of applicable deferred income taxes. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting net foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.
The Company may use various derivative instruments such as foreign exchange forward, future and option contracts; industry loss warranty swaps; interest rate futures, swaps, swaptions, and options; credit default swaps; LIBOR swaps; commodity futures and options; weather swaps and options; loss development covers; and to-be-announced mortgage-backed securities. These derivative instruments are used to manage exposure to interest rate and currency risk, to enhance the efficiency of the Company's investment portfolio, to economically hedge certain risks, and as part of its weather risk management business. Except for a cash flow hedge entered into in 2004 as disclosed in Note 9, Derivatives, these derivative instruments do not qualify, and are not designated, as hedges. Derivatives are recorded at fair value with changes in fair value and any gains or losses are recognized in net realized and unrealized gains, net foreign exchange losses, or other underwriting loss in the Consolidated Statements of Income and Comprehensive Income.
Asset management contracts - represents the value of the Blue Capital asset management contracts acquired.
As of December 31, 2015, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH's common shares. BCRH is considered a VIE under U.S. GAAP and the Company has determined that it is BCRH's primary beneficiary. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its Consolidated Financial Statements. The interests in BCRH and its subsidiaries that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Consolidated Financial Statements as non-controlling interests. BCRH's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determination with respect to BCRH on an ongoing basis.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2014:
Reserves for losses and loss expenses are based in part upon the estimation of losses resulting from catastrophic events. Estimation of these losses and loss expenses are based upon the Company's historical claims experience and is inherently difficult because of the Company's short operating history and the possible severity of catastrophe claims. Therefore, the Company uses both proprietary and commercially available models, as well as historical reinsurance industry catastrophe claims experience in addition to its own historical data for purposes of evaluating trends and providing an estimate of ultimate claims costs.
The Company’s share capital at December 31, 2015 and 2014 is comprised as follows:
Series C Preferred Shares sold were registered under the Securities Act of 1933, as amended. The Series A Preferred Shares and Series B Preferred Shares were issued at a price to the public of $25.00 per share. The Series C Preferred Shares were issued at a price to the public of $25,000.00 per share (equivalent to $25.00 per Depositary Share). Endurance Holdings received net proceeds of $193.5 million from its offering of Series A Preferred Shares and $224.0 million from its offering of Series B Preferred Shares, in each case after expenses and underwriting discounts. The proceeds from both offerings were used to provide additional capital to Endurance Holdings' subsidiaries and for other general corporate purposes. Endurance Holdings received net proceeds of $222.0 million from its offering of Series C Preferred Shares, after expenses and underwriting discounts. The proceeds of the offering of Series C Preferred Shares were used to redeem all of Endurance Holdings' outstanding Series A Preferred Shares and for general corporate purposes.
On February 25, 2016, the Company's Board of Directors authorized the repurchase of up to 5.0 million ordinary shares and share equivalents through February 28, 2018. This authorization superseded previous authorizations. No common shares were repurchased by the Company during 2015 or 2014. Common shares repurchased by the Company are not canceled and are classified as treasury shares. The Company's treasury shares are recorded at cost as a reduction in common shares and additional paid-in capital within shareholders' equity. There were 5.0 million shares authorized for repurchase remaining at December 31, 2015 (2014 - 5.0 million).
Under the terms of the 2007 Plan as amended, and after the consolidation of the Company's previous plans, a total of 2,100,000 ordinary shares were reserved for issuance. At a meeting on February 11, 2010, the Company's Board of Directors adopted a resolution to add 1,795,000 ordinary shares to the 2007 Plan, which was subsequently approved by the Company's shareholders at the Annual General Meeting of Shareholders held on May 13, 2010.
Restricted shares granted to non-employee directors vest twelve months following the date of grant and are forfeited upon departure of the non-employee director from the Company's Board of Directors for any reason prior to the applicable vesting date.
Bermuda statutory capital includes an investment in affiliate asset, which represents its interest in the remaining insurance and reinsurance operations of the Company included in the United States and U.K. columns above.