Deferred policy acquisition costs. Deferred acquisition costs include commissions, premium taxes, payments to affinity partners, promotional fees, and other direct sales costs that vary and are directly related to the successful acquisition of insurance policies. These costs are deferred and amortized to the extent recoverable over the policy period in which the related premiums are earned. We consider anticipated investment income in determining the recoverability of these costs. Management believes that these costs are recoverable in the near term. If management determined that these costs were not recoverable, then we could not continue to record deferred acquisition costs as an asset and would be required to establish a liability for a premium deficiency reserve.
During 2015, we acquired our lender-placed insurance business (“LPI Business”) and certain A&H lines and assets from Assurant Health (the “Assurant Transaction”).
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $90.3 million, or 22.2%, from $406.7 million for the year ended December 31, 2015 to $497.0 million for the year ended December 31, 2016, primarily as a result of the Direct General ($1.9 million) and Century-National ($12.0 million) acquisitions, additional costs from the LPI Business ($33.3 million), ARS ($7.3 million) and the Assurant Transaction ($23.9 million), and organic growth and other ($25.6 million), partially offset by lower costs on the Reciprocal Exchanges ($12.7 million).
Excluding the Reciprocal Exchanges, income tax expense was $43.8 million and $22.1 million for the years ended December 31, 2016 and 2015, respectively, reflecting effective tax rates of 21.5% and 14.2%, respectively. The Reciprocal Exchanges had pre-tax income of $10.8 million and $7.9 million for the years ended December 31, 2016 and 2015, respectively. A full valuation allowance was recorded on the Reciprocal Exchanges at December 31, 2015. For the year ended December 31, 2016, the valuation allowance for two of the four Reciprocal Exchanges was released in full. The remaining two exchanges maintained their full valuation allowance. The valuation allowance across all exchanges was $7.1 million and $17.3 million for the years ended December 31, 2016 and 2015, respectively.
As of July 1, 2017, a reinsurance property catastrophe excess of loss program went into effect protecting the Reciprocal Exchanges against accumulations of losses resulting from a catastrophic event. The property catastrophe program provides a total of $375.0 million in coverage in excess of a $20.0 million retention, with one reinstatement.
We have $100.0 million aggregate principal amount outstanding of our 7.625% subordinated notes due 2055 (the “7.625% Notes”). The 7.625% Notes bear interest at a rate equal to 7.625% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The 7.625% Notes are our subordinated unsecured obligations and are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. The 7.625% Notes mature on September 15, 2055, unless earlier redeemed or purchased by us. Interest expense on the 7.625% Notes for the years ended December 31, 2017, 2016 and 2015 was $7.5 million, $7.6 million and $3.0 million, respectively. For more information on the 7.625% notes including ranking and restrictive covenants, see Note 15, “Debt” in the notes to our consolidated financial statements.