Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company's business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2016, there were no significant backlogs related to the processing of policy or contract information in the Company's Insurance or Reinsurance segments.
Gross premiums written in 2016 increased $881.3 million, or 26.5%, compared to 2015 and increased $1,308.1 million, or 45.2% compared to 2014. The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2016, 2015 and 2014:
The Company's general and administrative expense ratio for 2016 was lower than that of 2015 and 2014. The higher general and administrative expense ratio in 2015 and 2014 compared to 2016 was primarily due to $76.6 million of acquisition and integration costs associated with the Company's acquisition of Montpelier included in 2015 and $15.5 million of costs incurred in the Company's proposed acquisition of Aspen Insurance Holdings Limited ("Aspen") included in 2014, which are included in corporate expenses and no similar costs in 2016. This decrease was partially offset by increased personnel costs from added underwriting teams partially offset by increased ceding commission reimbursements as a result of additional purchases of reinsurance and growth in gross premiums written during 2016. At December 31, 2016, the Company had a total of 1,244 employees as compared to 1,154 employees at December 31, 2015 and 997 employees at December 31, 2014.
The following table summarizes the underwriting results and associated ratios for the Company's Reinsurance segment for the years ended December 31, 2016, 2015 and 2014:
Acquisition Expenses. The Company's acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2016 was lower than in 2015 and 2014. The decrease in the Company's acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2015 compared to 2014 was primarily due to the addition of earned premiums from the Company's acquisition of Montpelier, which had no associated acquisition costs as these were written off on purchase.
Endurance Bermuda was party to a multi-beneficiary Reinsurance Trust originally established by Montpelier Re (the "Montpelier Reinsurance Trust") domiciled in New York. The Montpelier Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re’s U.S. cedants. Endurance Bermuda was also party to a multi-beneficiary reinsurance trust originally established by Montpelier Re (the "FL Trust") in connection with a reduction in its Florida collateral requirements. With the consent of the New York Department of Financial Services, all assets in excess of the statutory minimum required amounts in the Montpelier Reinsurance Trust and the FL Trust were transferred to the Endurance Reinsurance Trust and the Reduced Collateral Trust, respectively, upon the merger of Montpelier Re with and into Endurance Bermuda, with Endurance Bermuda as the surviving entity, on December 29, 2015.
The Company's cash and cash equivalents decreased by $28.2 million to $1,149.5 million at December 31, 2016, compared to $1,177.8 million at December 31, 2015, and increased by $404.1 million compared to $745.5 million at December 31, 2014.
The Credit Facility also contains customary event of default provisions, including failure to pay any unpaid drawing under a letter of credit under the Credit Facility or interest thereon and failure to pay any fee under the Credit Facility, insolvency events of the Company or any of its subsidiaries (other than certain immaterial subsidiaries), a change in control of the Company, a breach of the representations or covenants in the Credit Facility or the security documents relating thereto and certain defaults by the Company or its subsidiaries under other indebtedness. In the case of an event of default that occurs as a result of an insolvency event of the Company or one of its designated subsidiary borrowers, the commitments of the lenders will automatically terminate and the repayment of outstanding obligations will be automatically accelerated. Upon the occurrence of any other event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding obligations under the Credit Facility, give notice of non-extension of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any collateral held by the lenders (or any agent on their behalf) under the Credit Facility.
Current and prior year incurred losses and loss expenses by segment and line of business for the year ended December 31, 2016 were as follows:
Agriculture. The favorable loss emergence within the agriculture insurance line of business during 2016 resulted from lower than anticipated agriculture claims settlements for the 2015 crop year, particularly for the multi-peril crop insurance product. During 2015, there was a modest amount of favorable loss emergence due to lower than anticipated agriculture claims settlements for the 2014 crop year.
The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company's income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company's operations has historically been minimal. In 2016, the Company generated income before income taxes in its subsidiaries, which generated a consolidated (0.1)% (2015 - 1.2%, 2014 - 0.1%) effective income tax rate.
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
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, 2016, 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 March 1, 2017 expressed an unqualified opinion thereon.
In May 2015, the FASB issued ASU 2015-09, "Disclosures about Short-Duration Contracts" ("ASU 2015-09"). The objective of ASU 2015-09 is to make targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts. The guidance requires additional disclosures of claims development tables, frequency of reported claims, and history of claims duration. This information is required to be disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail, or the aggregation of items that have significantly different characteristics. ASU 2015-09 was effective for public business entities in annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption was permitted. ASU 2015-09 should be applied retrospectively. The Company adopted this standard in the fourth quarter of 2016 and has included the appropriate annual disclosures within Note 6, Reserve for losses and loss expenses. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.
Prior to the closing of the acquisition, Montpelier was a publicly traded company listed on the New York Stock Exchange and headquartered in Bermuda. As of the close of trading on July 31, 2015, the common shares of Montpelier ceased trading.
(1) Outstanding Montpelier restricted share units were assumed by the Company and adjusted as of the Closing Date to represent the right to receive 0.472 Company ordinary shares for each outstanding Montpelier restricted share unit rounded down to the next whole number of Company ordinary shares. The fair value of the Montpelier restricted share units was determined based on the closing price of the Company's ordinary shares on the Closing Date. The resulting fair value of the restricted share units was apportioned as purchase consideration based on service provided to Montpelier as of the Closing Date with the remaining fair value of these restricted share units to be recognized prospectively over the restricted share units' remaining vesting period.
In addition to the Company's fixed maturity, short-term and equity investments, the Company invests in alternative funds. The Company's alternative funds are recorded on the Company's balance sheet as "other investments". At December 31, 2016 and 2015, the Company had invested, net of capital returned, a total of $470.3 million and $737.1 million, respectively, in other investments. At December 31, 2016 and 2015, the carrying value of other investments was $588.3 million and $872.6 million, respectively.
The decrease in gross unrealized losses on the Company's fixed income investments and equity securities at December 31, 2016 compared to December 31, 2015 was primarily due to tightening of credit spreads and strong equity markets during the year, partially offset by an increase in interest rates, rather than any actual credit losses on these securities. As of December 31, 2016, the Company did not have the intent to sell any of the remaining fixed income investments in an unrealized loss position and determined that it was unlikely that the Company would be required to sell those securities in an unrealized loss position.
The following is unaudited supplementary information about historical average claims duration by line of business.
Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and The Bank of New York Mellon, as trustee, entered into a Fourth Supplemental Indenture, dated as of July 31, 2015 (the "Fourth Supplemental Indenture"). The Fourth Supplemental Indenture amended the Indenture, dated as of July 15, 2003 (as amended and supplemented from time to time (collectively, the "Senior Notes Supplemental Indentures")) applicable to the 4.7% Senior Unsecured Notes Due 2022 (the "4.7% Senior Notes") originally issued by Montpelier on October 2, 2012 in an aggregate principal amount of $300.0 million. The Senior Notes Supplemental Indentures provided for the unconditional assumption of the due and punctual payment of the principal of, any premium and interest on and any additional amounts with respect to the 4.7% Senior Notes and the performance of every obligation in the Senior Notes Indenture and the 4.7% Senior Notes to be performed or observed. The 4.7% Senior Notes bear a rate of interest equal to 4.7% per annum, payable semi-annually in arrears on April 15 and October 15 each year. The 4.7% Senior Notes mature on October 15, 2022. The 4.7% Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere but do contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the 4.7% Senior Notes as of December 31, 2016 and 2015.
Industry Loss Warranty ("ILW") Swaps - to manage underwriting risk. The Company has entered into ILW swap contracts which provide reinsurance-like protection to the Company for specific loss events associated with certain lines of its business. The Company has also sold ILW protection, which provides reinsurance-like protection to third parties for specific loss events.
During 2015, Endurance Bermuda established a multi-beneficiary reinsurance trust (the "Endurance Reinsurance Trust") domiciled in Delaware. The Endurance Reinsurance Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants. As of December 31, 2016, the fair value of the assets held in the Endurance Reinsurance Trust exceeded $783.9 million (2015 - $94.1 million), the minimum value required on that date.
The Company's insurance and reinsurance operations are subject to insurance and/or reinsurance laws and regulations in the jurisdictions in which they operate, the most significant of which are Bermuda, the United States, the United Kingdom and Singapore. These regulations include certain restrictions on the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.