The increase in gross premiums written in 2014 from 2013 primarily reflects increases in premiums written for the general liability, auto liability and guaranty lines of business, partially offset by decreases in the directors’ and officers’ liability, errors and omission liability and accident and health lines of business. These changes in premiums include the impact of new or expanded treaties, tempered by the impact of an increasingly competitive casualty reinsurance market and a decreasing amount of risk premium being ceded by insurers. Net premiums earned in 2014 approximated net premiums earned from 2013, primarily reflecting a decrease in gross premiums written in the latter half of 2013 and an increase in ceded premiums earned, offset by the increase in gross premiums written in 2014.
RSUI. The slight increase in net loss and LAE in 2015 from 2014 primarily reflects less favorable prior accident year development on loss reserves and a higher current accident year loss ratio for the casualty lines of business, partially offset by lower catastrophe losses and the impact of lower net premiums earned. The increase in net loss and LAE in 2014 from 2013 primarily reflects the impact of higher net premiums earned, partially offset by more favorable prior accident year development on loss reserves and a decrease in catastrophe losses.
Approximate yields of the reinsurance and insurance segments’ debt securities for 2015, 2014 and 2013 are as follows:
OTTI losses in 2014 reflect $36.3 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $36.3 million of OTTI losses incurred during 2014, $28.7 million relate to equity securities, primarily in the mining sector, and $7.6 million relate to debt securities, primarily in the energy sector. The determination that unrealized losses on such securities were other than temporary was primarily based on the severity of the decline in the fair value of equity securities relative to their cost as of the balance sheet date, and the fact that we lacked the intent to hold debt securities for a period of time sufficient to allow for an anticipated recovery.
We believe that the reserves for unpaid loss and LAE established by our reinsurance and insurance subsidiaries are adequate as of December 31, 2015; however, additional reserves, which could have a material impact upon our financial condition, results of operations and cash flows, may be necessary in the future.
Prior Year Development. Our reinsurance and insurance subsidiaries continually evaluate the potential for changes, both favorable and unfavorable, in their estimates of their loss and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria. With respect to liabilities for unpaid loss and LAE established in prior years, these liabilities are periodically analyzed and their expected ultimate cost adjusted, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year reserve development. We adjusted our prior year loss and LAE reserve estimates during 2015, 2014 and 2013 based on current information that differed from previous assumptions made at the time such loss and LAE reserves were previously estimated. The (favorable) unfavorable prior accident year development on loss reserves for 2015, 2014 and 2013 is summarized as follows:
Dividends from Subsidiaries. As of December 31, 2015, approximately $6.2 billion of our total equity of $7.6 billion was unavailable for dividends or advances to us from our subsidiaries. The remaining $1.4 billion was available for dividends or advances to us from our subsidiaries, or was retained at the Alleghany parent level, and as such, was available to pay dividends to Alleghany’s stockholders as of December 31, 2015.
(1) “Senior Notes” refers to: (i) the Alleghany Senior Notes, consisting of the 2020 Senior Notes, the 2022 Senior Notes and the 2044 Senior Notes; and (ii) the TransRe Senior Notes consisting of the 2015 Senior Notes and TransRe’s 8.00% senior notes due on November 30, 2039. See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for further details on the Senior Notes.
Alleghany files a consolidated federal income tax return with its subsidiaries. Alleghany’s consolidated federal income tax return includes as part of its taxable income all items of income of non-U.S. subsidiaries that are subject to current U.S. income tax, currently pursuant to Subpart F income rules of the Internal Revenue Code. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Current tax liabilities or assets are recognized for the estimated taxes payable or refundable on tax returns for the current year.
The economic useful lives of significant intangible assets are as follows: agency relationships - 15 years; state and foreign insurance licenses - indefinite; trade names - indefinite; brokerage and reinsurance relationships - 15 years; renewal rights - between five and 14 years; loss and LAE reserves - 15 years; leases - 10 years; and internally developed software - 2.5 years.
Alleghany may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology. Alleghany’s methodology for assessing other than temporary declines in value contain inherent risks and uncertainties which could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.
Information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of December 31, 2015 is as follows:
Income before income taxes from domestic operations was $376.7 million, $633.8 million and $616.0 million in 2015, 2014 and 2013, respectfully. Income before income taxes from foreign operations was $380.7 million, $298.1 million and $239.2 million in 2015, 2014 and 2013, respectfully. Foreign tax expense was primarily attributable to the United Kingdom.
Three large international brokers accounted for approximately 26 percent, 20 percent and 10 percent in 2015, approximately 29 percent, 22 percent and 11 percent in 2014 and approximately 27 percent, 22 percent and 11 percent in 2013, of gross premiums written in the reinsurance segment.
TransRe has a Book Value Unit Plan and a Mid-Term Incentive Plan (collectively, the “TransRe Plans”) for the purpose of providing incentives to key employees of TransRe. Under the TransRe Plans, book value units (“BVUs”) and mid-term incentive plan (“MTIP”) awards are issued. BVUs and MTIP awards may only be settled in cash. The fair value of each BVU is calculated as stockholder’s equity of TransRe, adjusted for certain capital transactions, divided by the adjusted number of BVUs outstanding. Pursuant to the terms of the merger with TransRe, certain restricted stock units granted by TransRe prior to the merger and held by current or former employees were converted into BVUs. BVUs have vesting dates of up to approximately the fourth anniversary of the date of grant, with converted restricted stock units retaining their pre-conversion vesting dates. The fair value of MTIP awards is calculated based on underwriting results compared to specified targets. MTIP awards have vesting dates of approximately the second anniversary of the date of grant. The BVUs and MTIP awards contain
RSUI has a Restricted Stock Unit Plan (the “RSUI Plan”) for the purpose of providing equity-like incentives to key employees of RSUI. Under the RSUI Plan, restricted stock units (“units”) are issued. Additional units, defined as the “Deferred Equity Pool,” were issued in 2015, 2014 and 2013 and may be created in the future if certain financial performance measures are met. Units may only be settled in cash. The fair value of each unit is calculated as stockholder’s equity of RSUI, adjusted for certain capital transactions and accumulated compensation expense recognized under the RSUI Plan, divided by the sum of RSUI common stock outstanding and the original units available under the RSUI Plan. The units vest on the fourth anniversary of the date of grant and contain certain restrictions, relating to, among other things, forfeiture in the event of termination of employment and transferability. In 2015, 2014 and 2013, RSUI recorded $22.7 million, $28.2 million and $27.9 million, respectively, in compensation expense related to the RSUI Plan. During the same periods, a deferred tax benefit of $7.9 million, $9.9 million and $9.8 million, respectively, related to the compensation expense was recorded.
The projected benefit obligations of the defined benefit pension plans as of December 31, 2015 and 2014 was $28.2 million and $28.0 million, respectively, and the related fair value of plan assets was $2.5 million and $2.5 million, respectively.
In our opinion, Alleghany Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.