On November 3, 2015, we completed the sale of RLI Indemnity Company (RIC) to Clear Blue Financial Holdings, LLC for net sale proceeds of $7.5 million, primarily generated from the transfer of insurance licenses. RIC was sold as a “shell,” with all business and cash flows from the company being retained by RLI Insurance Group. At the time of the sale, RIC had minimal assets and written premium and was transferring all premium and loss cash flows to RLI Ins. through a 100 percent quota share reinsurance agreement. RLI Ins. continues to reinsure all RIC bond and insurance liabilities that existed at the date of sale, adjust claims and service the remaining in-force polices and bonds until they terminate or are moved into RLI Ins.
Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate settlement values. Periodic adjustments to these estimates will likely occur as the actual loss emergence reveals itself over time. Our loss reserving processes reflect accepted actuarial practices and our methodologies result in a reasonable provision for reserves as of December 31, 2016.
Premium results also reflect our exits from crop reinsurance and facultative reinsurance, which modestly impacted top line performance for 2016. Excluding the impact of these product exits, gross premiums written were up 4 percent. These exits, which were each announced in prior SEC filings, had a greater impact on premium results in the prior year, as the bulk of the reduction in crop business related to 2015. While gross premiums declined 1 percent overall in 2015, exclusive of the impact of crop, premiums advanced 4 percent. Discontinuing these lines did not have a significant impact from an underwriting earnings standpoint. Growth achieved during 2016 came from both mature lines in our portfolio, such as transportation, umbrella and surety, and newer product initiatives, such as healthcare liability and energy liability. Newer product initiatives, while relatively small in size on an individual basis, have continued to have a positive impact on overall premium production.
Average amounts at beginning and end of year (inclusive of cash and short-term investments).
As of December 31, 2016, our investment portfolio had the following asset allocation breakdown:
When making investments in MBS/ABS/CMBS, we evaluate the quality of the underlying collateral, the structure of the transaction (which dictates how any losses in the underlying collateral will be distributed) and prepayment risks. All of our collateralized securities carry the highest credit rating by one or more major rating agencies and continue to pay according to contractual terms. We had $4.1 million in unrealized losses in these asset classes as of December 31, 2016.
For each accident year presented, the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses;
Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. We have not yet completed the analysis of how adopting this ASU will affect our financial statements.
Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting the components of comprehensive earnings, we used a 35 percent tax rate. Other comprehensive income (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $(0.6) million, $(25.3) million and $19.0 million for 2016, 2015 and 2014, respectively.
Our loss reserves are based on estimates and may be inadequate to cover our actual insured losses, which would negatively impact our profitability. As of December 31, 2016 we had $851 million of total net loss and LAE reserves. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. As part of the reserving process, we review historical data and consider the impact of various factors such as trends in claim frequency and severity, emerging economic and social trends, inflation and changes in the regulatory and litigation environments. If the actual amount of insured losses is greater than the amount we have reserved for these losses, our profitability could suffer.
applicable line of business to project ultimate incurred losses and settlement expenses as well as related incurred but not reported (IBNR) loss and settlement expense reserves.
Expected maturities may differ from contractual maturities due to call provisions on some existing securities. At December 31, 2016, the net unrealized appreciation of available-for-sale fixed income and equity securities totaled $190.6 million pretax. At December 31, 2015, the net unrealized appreciation of available-for-sale fixed maturities and equity securities totaled $192.9 million pretax.
As of December 31, 2016, municipal bonds totaled $627.3 million with gross unrealized losses of $6.6 million. Unrealized losses in the sector increased during the year due to the strong run-up in interest rates prior to the end of the year. As of December 31, 2016, approximately 45 percent of the municipal fixed income securities in the investment portfolio were general obligations of state and local governments and the remaining 55 percent were revenue based. Eighty-seven percent of our municipal fixed income securities were rated AA or better while 98 percent were rated A or better.
At December 31, 2016, we had prepaid reinsurance premiums and recoverables on paid and unpaid losses and settlement expenses totaling $333.4 million. More than 95 percent of our reinsurance recoverables are due from companies with financial strength ratings of “A” or better by A.M. Best and S&P rating services.
Our environmental, asbestos and mass tort exposure is limited, relative to other insurers, as a result of entering the affected liability lines after the insurance industry had already recognized environmental and asbestos exposure as a problem and adopted appropriate coverage exclusions. The majority of our reserves are associated with products that went into runoff at least two
prior approval of the IDOI. However, as of December 31, 2016, RLI Corp. had the approximate amount of unrestricted liquid net assets on hand that would be necessary to cover normal annual holding company expenditures.