Our corporate headquarters are located in offices owned by the Company in Switzerland. In addition, we lease space in Australia, Bermuda, Canada, England, Hong Kong, Ireland, Labuan, Singapore and the United States for the operation of our North American Insurance, Global Markets Insurance and Reinsurance segments. Our leases have remaining terms ranging from approximately ten months to approximately sixteen years in length. We renew and enter into new leases in the ordinary course of business as needed. While we believe that the office space from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please see Note 16 of the notes to the consolidated financial statements in this Form 10-K.
The following table sets forth our summary historical statement of operations data and summary balance sheet data as of and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011. Statement of operations data and balance sheet data are derived from our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. These historical results are not necessarily indicative of results to be expected from any future period. For further discussion of this risk see Item 1A. “Risk Factors” in this Form 10-K. You should read the following selected financial data in conjunction with the other information contained in this Form 10-K, including
We are a Swiss-based global provider of a diversified portfolio of property and casualty insurance and reinsurance products with operations in Australia, Bermuda, Canada, Europe, Hong Kong, Labuan, Singapore and the United States as well as our Lloyd’s Syndicate 2232. We manage our business through three operating segments: North American Insurance, Global Markets Insurance and Reinsurance. As of December 31, 2015, we had approximately $13.5 billion of total assets, $3.5 billion of total shareholders’ equity and $4.8 billion of total capital, which includes shareholders’ equity, senior notes and other long-term debt. Total capital includes our $500 million senior notes we issued in October 2015 that we intend to use to refinance our $500 million senior notes due to mature in August 2016.
In presenting the company’s results, management has included and discussed certain non-GAAP financial measures, as such term is defined in Item 10(e) of Regulation S-K promulgated by the SEC. Management believes that these non-GAAP measures, which may be defined differently by other companies, better explain the Company’s results of operations in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.
Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net foreign exchange gain or loss and other
Annualized return on average shareholders’ equity (“ROAE”) is calculated using average shareholders’ equity, excluding the average after tax unrealized gains or losses on investments or currency translation adjustments. We present ROAE as a measure that is commonly recognized as a standard of performance by investors, analysts, rating agencies and other users of our financial information.
We measure segment income or loss as underwriting income or loss plus other insurance-related income and expenses, which may include the net earnings from our claims administration services operation and other income or expense that is not directly related to our underwriting operations. We also measure the results for each segment's underwriting income or loss on the basis of the “loss and loss expense ratio,” “acquisition cost ratio,” “general and administrative expense ratio,” “expense ratio” and the “combined ratio.” Because we do not manage our assets by segment, investment income, interest expense and total assets are not allocated to individual reportable segments. General and administrative expenses are allocated to segments based on various factors, including staff count and each segment’s proportional share of gross premiums written. The loss and loss expense ratio is derived by dividing net losses and loss expenses by net premiums earned. The acquisition cost ratio is derived by dividing acquisition costs by net premiums earned. The general and administrative expense ratio is derived by dividing general and administrative expenses by net premiums earned. The expense ratio is the sum of the acquisition cost ratio and the general and administrative expense ratio. The combined ratio is the sum of the loss and loss expense ratio, the acquisition cost ratio and the general and administrative expense ratio.
The reserve for IBNR is estimated by management for each line of business based on various factors, including underwriters’ expectations about loss experience, actuarial analysis, comparisons with the results of industry benchmarks and loss experience to date. We implicitly factor into IBNR inflation by assuming an inflation rate consistent with historical trends. The reserve for IBNR is calculated as the ultimate amount of losses and loss expenses less cumulative paid losses and loss expenses and case reserves. Our actuaries employ generally accepted actuarial methodologies to determine estimated ultimate loss reserves.
While management believes that our case reserves and IBNR reserves are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., unfavorable reserve development), and to the extent actual reported losses are less than estimated losses, the carried estimate of ultimate losses will be reduced (i.e., favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverables in the periods in which they are determined. Determining whether our estimated losses are sufficient to cover all reported and non-reported claims involves a high degree of judgment. It is our practice to address unfavorable loss emergence early in our long-tail lines of business while we tend to recognize favorable loss emergence more slowly in our long-tail lines once actual loss emergence and data provides greater confidence around the adequacy of ultimate estimates.
property, crop, aviation, marine, motor, personal accident and workers compensation catastrophe (re)insurance relies primarily on traditional loss reserving methodologies, utilizing selected paid and reported loss development factors.
The expected loss ratios that we assign to each treaty are based upon analysis and modeling performed by a team of pricing actuaries. The historical data reviewed by the team of pricing actuaries is considered in setting the reserves for each cedent. The historical data in the submissions is matched against our carried reserves for our historical treaty years.
Loss reserves do not represent an exact calculation of liability. Rather, loss reserves are estimates of what we expect the ultimate resolution and administration of claims will cost. These estimates are based on actuarial and statistical projections and on our assessment of currently available data, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors. Loss reserve estimates are refined as experience develops and as claims are reported and resolved. In addition, the relatively long periods between when a loss occurs and when it may be reported to our claims department for our casualty insurance and casualty reinsurance lines of business increase the uncertainties of our reserve estimates in such lines.
Reported Loss Development Method. We estimate ultimate losses by calculating past reported loss development factors and applying them to exposure periods with further expected reported loss development. Since reported losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than the paid loss development method. Thus, reported loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are reported relatively early and have case loss reserve estimates established. This method assumes that reserves have been established using consistent practices over the historical period that is reviewed. Changes in claims handling procedures, large claims or significant numbers of claims of an unusual nature may cause results to be too varied for accurate forecasting. Also, choosing an appropriate “tail factor” to determine the change in reported loss from the latest development period to the ultimate development period may require considerable judgment. When necessary, we have had to supplement our reported loss development patterns with appropriate benchmarks.
During 2015, 2014 and 2013, we adjusted our reliance on actuarial methods utilized for certain casualty lines of business and loss years within each of our operating segments shifting from the expected loss ratio method to the Bornhuetter-Ferguson reported loss method to varying degrees depending on the class of business, for example excess casualty versus primary casualty, and how old the loss year is. Placing greater reliance on more responsive actuarial methods for certain casualty lines of business and loss years within each of our operating segments is a natural progression that allows us to further refine our estimate of the reserve for losses and loss expenses. We believe utilizing only the Bornhuetter-Ferguson reported loss method for certain older loss years will more accurately reflect the reported loss activity we have had thus far in our ultimate loss ratio selections, and will better reflect how the ultimate losses will develop over time. We will continue to utilize the expected loss
The selection of the expected loss ratios for the long-tail lines is our most significant assumption. Due to the lengthy reporting pattern of long-tail lines, we supplement our own experience with industry benchmarks of expected loss ratios and reporting patterns. For our older loss years that are long-tail lines, the primary assumption that changed during both 2015 as compared to 2014 and 2014 as compared to 2013 as it relates to prior year losses was using the Bornhuetter-Ferguson loss development method for certain casualty lines of business and loss years as discussed previously. This method calculated a lower projected loss ratio based on loss emergence patterns to date. As a result of the change in the expected loss ratio, we recognized net favorable prior year reserve development in 2015, 2014 and 2013. For the years ended December 31, 2015, and 2014, we recorded a decrease in losses and loss expenses of $92.6 million and $159.7 million, respectively, as a result of shifting from the expected loss ratio method to the Bornhuetter-Ferguson method for older loss years. Also during 2015, actual paid and reported loss emergence for our casualty and healthcare lines of business was more severe than estimated in our North American Insurance segment for the 2012 through 2014 loss years. The additions to the 2012 through 2014 loss years are consistent with our practice of addressing unfavorable loss emergence early in our long-tail lines of business. We believe that recognition of the reserve changes in the period they were recorded was appropriate since a pattern of reported losses had not emerged and the loss years were previously too immature to deviate from the expected loss ratio method in prior periods.
There is potential for significant variation in the development of loss reserves, particularly for the casualty lines of business due to their long-tail nature and high attachment points. The maturing of our casualty insurance and reinsurance loss reserves have caused us to reduce what we believe is the reasonably possible variance in the expected loss ratios for older loss
The change in the reasonably possible variance for the 2007 through 2011 loss years in 2015 compared to 2014 is due to giving greater weight to the Bornhuetter-Ferguson loss development method for additional lines of business during 2015 and additional development of losses. As we gain more information and experience about our losses we are able to refine our estimate of the ultimate loss and as a result the reasonably possible variance in our losses is reduced. We believe the reasonably possible change in our loss reserves for the recent years is appropriate as we are relying on less information and experience about how the losses will ultimately develop compared to the older loss years. The total reasonably possible variance of our expected loss ratio for all loss years for our casualty insurance and casualty reinsurance lines of business was five percentage points as of December 31, 2015. Because we expect a small volume of large claims, it is more difficult to estimate the ultimate loss ratios, so we believe the variance of our loss ratio selection could be relatively wide.
Our selection of the actual carried reserves has typically been above the midpoint of the range. As of December 31, 2015, we were 3.6% above the midpoint of the consolidated net loss reserve range. We believe that we should be prudent in our reserving practices due to the lengthy reporting patterns and relatively large limits of net liability for any one risk of our direct excess casualty business and of our casualty reinsurance business. Thus, due to this uncertainty regarding estimates for reserve for losses and loss expenses, we have carried our consolidated reserve for losses and loss expenses, net of reinsurance recoverable, above the midpoint of the low and high estimates for the consolidated net losses and loss expenses. We believe that relying on the more prudent actuarial indications is appropriate for these lines of business.
We cede insurance to external reinsurers in order to limit our maximum loss, to protect against concentration of risk within our portfolio and to manage our exposure to catastrophic events. Because the ceding of insurance does not discharge us from our primary obligation to the insureds, we remain liable to the extent that our reinsurers do not meet their obligations under the reinsurance agreements. Therefore, we regularly evaluate the financial condition of our reinsurers and monitor concentration of credit risk. No material provision has been made for unrecoverable reinsurance as of December 31, 2015 and 2014 as we believe that all reinsurance balances will be recovered.
We had net cash outflows relating to ceded reinsurance activities (premiums paid less losses recovered and net ceding commissions received) of approximately $214.1 million, $261.8 million and $294.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. The net cash outflows in all years are reflective of fewer losses that were recoverable under our reinsurance coverages than we paid in premiums.
General Casualty: We have purchased quota share reinsurance for our general casualty business in our North American Insurance and Global Markets Insurance segments. At year-end 2015, the percentage ceded varied by location of writing office, with a larger cession being effective for policies written in our Global Markets Insurance segment.
The following table illustrates our reinsurance recoverable as of December 31, 2015 and 2014:
As noted above, we remain obligated for amounts ceded in the event our reinsurers do not meet their obligations. Accordingly, we have evaluated the reinsurers that are providing reinsurance protection to us and will continue to monitor their credit ratings and financial stability. We generally have the right to terminate our treaty reinsurance contracts at any time, upon
prior written notice to the reinsurer, under specified circumstances, including the assignment to the reinsurer by A.M. Best of a financial strength rating of less than “A-.”
Our reinsurance recoverables are subject to the same uncertainties as the estimate of case reserves and IBNR reserves. The reasonably possible variance of our expected ceded loss ratio for all loss years for our casualty insurance and casualty reinsurance lines of business was six percentage points as of December 31, 2015.
If our final casualty insurance ceded loss ratios vary by six percentage points from the expected loss ratios in aggregate, our required reinsurance recoverable would increase or decrease by approximately $243.0 million. Excluding the impact of income taxes, this would result in either an increase or decrease to net income and shareholders’ equity of approximately $243.0 million. As of December 31, 2015, this amount represented approximately 7% of total shareholders’ equity.
In accordance with U.S. GAAP, we are required to recognize certain assets at their fair value in our consolidated balance sheets. This includes our fixed maturity investments and “other invested assets”. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon whether the inputs to the valuation of an asset or liability are observable or unobservable in the market at the measurement date, with quoted market prices being the highest level (Level 1) and unobservable inputs being the lowest level (Level 3). A fair value measurement will fall within the level of the hierarchy based on the input that is significant to determining such measurement. The three levels are defined as follows:
At each measurement date, we estimate the fair value of the financial instruments using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our financial instruments. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of financial instruments. The following describes the valuation techniques we used to determine the fair value of financial assets held as of December 31, 2015 and what level within the U.S. GAAP fair value hierarchy the valuation technique resides.
Equity securities: Comprised of U.S. and foreign common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Foreign mutual funds where the net asset value (“NAV”) is not provided on a daily basis are included in the Level 3 fair value hierarchy.
Derivative instruments: The fair values of foreign exchange contracts and interest rate futures and swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair values of derivatives are included in the Level 2 fair value hierarchy.
Barclays indices: We use Barclays indices to price our U.S. and non-U.S. government, U.S. and non-U.S. government agencies, corporate debt, agency and non-agency mortgage-backed and asset-backed securities. There are several observable inputs that the Barclays indices use in determining its prices which include among others, treasury yields, new issuance and secondary trades, information provided by broker-dealers, security cash flows and structures, sector and issuer level spreads, credit rating, underlying collateral and prepayment speeds. For U.S. government securities, traders that act as market makers are the primary source of pricing; as such, for U.S. government securities we believe the Barclays indices reflect quoted prices (unadjusted) for identical securities in active markets.
Interactive Data Pricing: We use Interactive Data Pricing to price our U.S. government agencies, municipalities, agency and non-agency mortgage-backed and asset-backed securities. There are several observable inputs that Interactive Data Pricing uses in determining its prices which include among others, benchmark yields, reported trades and issuer spreads.
Related to the acquisition of Allied World Underwriters, Inc. (“AW Underwriters”) (f/k/a Darwin Professional Underwriters, Inc.).
Industry and market considerations such as a deterioration in the environment in which we operate, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for our products or services, or a regulatory or political development;
significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and
For indefinite lived intangible assets we do not amortize the intangible asset but test these intangible assets for impairment by comparing the fair value of the assets to their carrying values on an annual basis or more frequently if circumstances warrant. We assessed whether any of the significant inputs used to determine the fair value of the indefinite lived intangible assets are impaired considering the factors noted above. As a result of our evaluation, we determined that there was no impairment to the carrying value of our indefinite lived intangible assets for the year ended December 31, 2015.
During 2015, we elected to bypass the qualitative assessment and performed the first step of the goodwill impairment test.
The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Such projections are inherently uncertain and, accordingly, actual future cash flows may differ materially from projected cash flows. In evaluating the recoverability of goodwill, we perform a discounted cash flow analysis. The discounted cash value may be different from the fair value that would result from an actual transaction between a willing buyer and a willing seller. Such analyses are particularly sensitive to changes in discount rates, growth rates, projected losses, mix of business and investment rates. Changes to these assumptions might result in material
changes in the valuation and determination of the recoverability of goodwill. For example, an increase in the rate used to discount cash flows will decrease the discounted cash flow value.
During the fourth quarter of 2015, we changed our annual impairment test date from September 30th to October 1st. We believe the change in impairment test date is preferable as it aligns to the quarter in which we perform the impairment test, which is during the fourth quarter of each year. This change does not result in any delay, acceleration or avoidance of impairment.
Based on our analysis, the point estimate fair value of the U.S. insurance operations reporting unit, using both a discounted cash flow model and market multiple model, was in excess of its carrying value by approximately 16% as of the October 1, 2015 measurement date. As a result of this analysis, we concluded there was no implied goodwill impairment, and therefore, no step two goodwill impairment testing was required.
Global Markets Insurance: Gross premiums written in our Global Markets Insurance segment increased by $195.8 million, or 69.8%, for the year ended December 31, 2015 compared to 2014. The increase was primarily due to gross premiums written of $182.1 million from the acquired Asian operations partially offset by the impact of foreign currency movements during the year; and
Reinsurance: Gross premiums written in our Reinsurance segment decreased by $137.2 million, or 14.6%, for the year ended December 31, 2015 compared to 2014. The decrease was primarily due to lower premiums written across each line of business. The decrease for each line of business was driven by non-renewal of business due to poor terms and conditions, cedents retaining more of their own business, and lower premiums on renewed treaties mainly due to year-over-year rate decreases and our assuming a lower percentage of the premiums than in the prior period. These reductions were partially offset by new business written for each line of business.
Net premiums written increased by $126.0 million, or 5.4%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in net premiums written was consistent with the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 20.9% of gross premiums written for both the years ended December 31, 2015 and 2014. The ceded premiums written for the year ended December 31, 2015 included a higher cost for our property catastrophe reinsurance coverage offset by retaining more of our gross premiums written in both of our North American Insurance and Global Markets Insurance segments in the current period than in the prior period. The cost of our current property catastrophe reinsurance coverage, which was effective May 1, 2015, was higher than our prior coverage as we purchased additional coverage, for both world-wide and North American perils, and also purchased dual-trigger ILWs which we did not purchase in the prior year.
We recorded net favorable reserve development related to prior years of $81.6 million during the year ended December 31, 2015 compared to net favorable reserve development of $212.6 million for the year ended December 31, 2014, as shown in the tables below.
The net unfavorable prior year reserve development in our North American Insurance segment for the 2011 through 2013 loss years was primarily related to our healthcare line of business. The net favorable reserve development in our Reinsurance segment primarily related to our property line of business for the 2013 loss year.
Corporate income tax expense or benefit is generated through our operations in Australia, Canada, Europe, Hong Kong, Singapore, Labuan and the United States. Our income tax expense or benefit may fluctuate significantly from period to period depending on the geographic distribution of pre-tax net income or loss in any given period between different jurisdictions with different tax rates. The geographic distribution of pre-tax net income or loss can vary significantly between periods principally due to the geographic location of the business written, the mix of business and the profitability of such business; the geographic location of investment income; the geographic location of net losses and loss expenses incurred; and the amount of inter-company reinsurance utilized for rating agency purposes.
Gross premiums written increased by $196.7 million, or 7.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The overall increase in gross premiums written was primarily the result of the following:
North American Insurance: Gross premiums written in our North American Insurance segment increased by $143.9 million, or 9.2%, for the year ended December 31, 2014 compared to 2013. The increase in gross premiums written was primarily due to new business, both from existing lines and new lines, combined with premium rate increases across all lines of business except for our property line of business. We experienced rate decreases in our
general property line of business due to the low level of reported loss activity during the year and increased competition. This growth was partially offset by the non-renewal of business, particularly in our healthcare line of business, that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition;
Reinsurance: Gross premiums written in our Reinsurance segment increased by $4.8 million, or 0.5%, for the year ended December 31, 2014 compared to 2013. The increase in gross premiums written was driven primarily by new business and increased renewals across several major lines of business partially offset by non-renewals of certain treaties, particularly in our casualty reinsurance line of business, either due to poor terms and conditions or the cedents retaining more of their own business.
Net premiums written increased by $201.6 million, or 9.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums written was due to the increase in gross premiums written and a decrease in ceded premiums written related to various reinsurance protections. We ceded 20.9% of gross premiums written for the year ended December 31, 2014 compared to 22.6% in 2013. The decrease was primarily due to the lower ceded premiums written for our property catastrophe reinsurance protection, and retaining more of our gross premiums written in both of our North American Insurance and Global Markets Insurance segments in the current period than in the prior period.
Net investment income increased by $19.3 million, or 12.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily due to higher income from our fixed maturity investments. As of December 31, 2014, we held 11.2% of our total investments and cash equivalents in "other invested assets" compared to 10.9%
as of December 31, 2013. The book yield of the investment portfolio for the years ended December 31, 2014 and 2013 was 2.1% and 1.9%, respectively. Our average duration decreased from 2.4 years as of December 31, 2013 to 2.0 years as of December 31, 2014.
During the year ended December 31, 2014, we incurred $65.0 million in catastrophe-related losses compared to $13.5 million of catastrophe-related losses during the year ended December 31, 2013. The catastrophe related losses during 2014 were related to Hurricane Odile ($18.0 million), hailstorm in Brisbane, Australia ($12.5 million), PCS storm #45 ($12.5 million), Windstorm Ela ($12.0 million) and Typhoon Rammasun ($10.0 million). Of the $65.0 million of catastrophe-related losses incurred during the year ended December 31, 2014, $4.0 million, $11.0 million and $50.0 million was incurred in our North American Insurance, Global Markets Insurance and Reinsurance segments, respectively. The catastrophe-related losses during 2013 were related to Typhoon Fitow in China, which was incurred in our Reinsurance segment.
We recorded net favorable reserve development related to prior years of $212.6 million during the year ended December 31, 2014 compared to net favorable reserve development of $180.3 million for the year ended December 31, 2013, as shown in the tables below.
The net unfavorable reserve development for the 2011 and 2012 loss years for our North American Insurance segment was due to higher than expected loss emergence, primarily in our private/not for profit directors and officers ("D&O"), healthcare and errors and omissions ("E&O") products. The healthcare emergence was largely driven by several claims, as well as higher than expected loss emergence on reported claims. The emergence in the E&O and private/not for profit D&O was due to higher than expected loss frequency.
General and administrative expenses increased by $13.4 million, or 3.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in general and administrative expenses was primarily due to increased salary and related costs as average headcount increased to support our continued growth, particularly in our direct insurance operations, as well as higher building-related costs driven by the increased head count. Our general and administrative expense ratio was 16.8% for the year ended December 31, 2014 compared to 17.6% for the year ended December 31, 2013.
The amortization of intangible assets remained the same for 2014 and 2013.
Global Markets Insurance Segment. The Global Markets Insurance segment includes our direct specialty insurance operations in Europe and Asia Pacific, which includes offices in Dublin, Hong Kong, London, Singapore and Sydney, and a Lloyd's coverholder operation in Miami, which services business for Latin America and the Caribbean. This segment provides both property and casualty insurance primarily to non-North American domiciled accounts.
Net premiums earned increased by $190.3 million, or 17.1%, for the year ended December 31, 2015 compared to 2014. The increase was due to the continued growth of our U.S. insurance operations and the impact of retaining more of our premiums in the current period than in the prior period.
During the year ended December 31, 2015, we incurred $2.5 million of property catastrophe losses related to explosions in the port of Tianjin, China. During the year ended December 31, 2014, we incurred $4.0 million of catastrophe-related losses from Hurricane Odile.
Net unfavorable prior year reserve development for the casualty line of business for the 2012 and 2013 loss years was primarily due to higher than expected frequency of losses.
The net unfavorable prior year reserve development for the 2011 through 2013 loss years was primarily related to our healthcare line of business primarily due to higher than expected loss frequency and severity. The net favorable development in our professional liability line of business was primarily related to our public D&O class of business due to favorable development on reported claims in the 2006 through 2009 loss years partially offset by adverse development on reported claims in the 2005 loss year.
Acquisition costs. Acquisition costs increased by $33.6 million, or 31.7%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was driven by the growth in net premiums earned, an increase in
other acquisition-related costs, an increase in average broker commissions and lower ceding commission income due to restructuring some of our underlying reinsurance programs. The acquisition cost ratio increased to 10.7% for the year ended December 31, 2015 from 9.5% for 2014 due to the increase in other acquisition-related costs, higher commissions charged by brokers and lower ceding commission income.
Net premiums written increased by $148.4 million, or 13.7%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums written was primarily due to higher gross premiums written and lower
premiums ceded. We ceded 28.3% of gross premiums written for the year ended December 31, 2014 compared to 31.2% for 2013. The decrease in the ceded written percentage was primarily due to retaining more of our gross premiums written in several lines of business in the current period than in the prior period.
Net premiums earned increased by $88.2 million, or 8.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was due to the continued growth of the U.S. direct insurance operations of the North American Insurance segment and lower ceded premiums earned due to the lower premiums ceded.
The increase in the current year non-catastrophe losses and loss expenses was primarily due to the growth of the U.S. insurance operations. The decrease in the current year non-catastrophe losses and loss expenses ratio was primarily due to the change in mix of business with more premiums written in our casualty lines of business in the current year compared to the prior period.
During the year ended December 31, 2014, we incurred $4.0 million of catastrophe-related losses from Hurricane Odile. We did not incur any significant catastrophe losses during the year ended December 31, 2013.
The net unfavorable prior year reserve development for the 2011 through 2013 loss years primarily related to our healthcare line of business primarily due to higher than expected loss frequency and severity. The net favorable development in our professional liability line of business was primarily related to our public D&O class of business due to favorable development on reported claims in the 2006 through 2009 loss years partially offset by adverse development on reported claims in the 2005 loss year.
Acquisition costs. Acquisition costs increased by $11.0 million, or 11.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily caused by increased net premiums earned, higher commission and brokerage rates charged by brokers and lower ceding commission income due to the reduction in our ceded reinsurance purchases in the current year. The acquisition cost ratio increased to 9.5% for the year ended December 31, 2014 from 9.3% for 2013 due to the factors noted above.
General and administrative expenses. General and administrative expenses increased by $10.7 million, or 5.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, due to the continued growth of our U.S. direct insurance operations, which drove an increase in salary and related costs, as well as increased costs related to expanding and improving our office space to support this growth. The general and administrative expense ratio decreased to 19.8% for the year ended December 31, 2014 from 20.4% in 2013, due to the increase in net premiums earned outpacing the growth in expenses.
The following table summarizes the underwriting results and associated ratios for the Global Markets Insurance segment for the years ended December 31, 2015, 2014 and 2013.
(1) Includes our accident and health, trade credit, aviation, marine and onshore construction lines of business.
Net premiums earned increased by $204.2 million, or 125.6%, primarily due to higher net premiums earned from the acquired Asian operations and the growth of our historical operations.
Acquisition costs. Acquisition costs increased by $52.7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in acquisition costs was due to higher acquisition costs from the acquired Asian operations and the additional amortization of the insurance-related intangible asset recorded from the acquisitions of the RSA
operations. The acquisition cost ratio was 19.3% for the year ended December 31, 2015 and 11.2% for the year ended December 31, 2014. The increase in the acquisition cost ratio was due to the factors noted above.
General and administrative expenses. General and administrative expenses increased by $40.3 million, or 59.2%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in general and administrative expenses was due to the acquired Asian operations partially offset by lower stock-based compensation expense. The general and administrative expense ratios for the years ended December 31, 2015 and 2014 were 29.5% and 41.9%, respectively. The decrease in the general and administrative expense ratio was the result of the increase in net premiums earned outpacing the growth in expenses.
Net losses and loss expenses. Net losses and loss expenses increased by $10.7 million, or 21.2%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. Overall, the increase in net losses and loss expenses was primarily due to overall growth of the Global Markets Insurance operations and higher property catastrophe related losses during 2014 compared to 2013. This was partially offset by higher net favorable prior year development during 2014 compared to 2013.
The current year non-catastrophe losses and loss expenses increased primarily due to the growth of the Global Markets Insurance operations partially offset by lower large reported property losses in 2014 compared to 2013. The improvement in the non-catastrophe losses and loss expenses ratio was primarily due to lower reported large property losses as discussed above.
Acquisition costs. Acquisition costs increased by $8.2 million, or 82.0%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in acquisition costs was due to the mix of business as we wrote more business from managing general agents, which carry higher acquisition costs than broker-placed business, during the current year, higher other acquisition-related costs and lower ceding commission income due to the reduction in ceded premiums. The acquisition cost ratio was 11.2% for the year ended December 31, 2014 and 8.0% for the year ended December 31, 2013. The increase in the acquisition cost ratio was due to factors noted above.
Other insurance-related income and expense. The other insurance-related expenses incurred for the year ended December 31, 2014 represent the transaction-related costs incurred for our acquisitions of RSA's Hong Kong and Singapore operations that closed on April 1, 2015.
Net premiums written decreased by $137.4 million, or 15.2%, for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily due to the decrease in gross premiums written. There was a $0.2 million increase in ceded premiums written due to an increase in the cost of our outward property catastrophe reinsurance protection offset by lower premiums ceded due to a non-renewal of a property reinsurance treaty that had a fronting component.
Overall, our Reinsurance segment recorded net favorable reserve development of $58.5 million during the year ended December 31, 2015 compared to net favorable reserve development of $90.6 million for the year ended December 31, 2014, as shown in the tables below.
Net premiums written increased by $10.2 million, or 1.1%, for the year ended December 31, 2014 compared to the same period in 2013. The increase in net premiums written was primarily due to the increase in gross premiums written and not renewing the prior year's collateralized retrocessional catastrophe cover partially offset by ceded premiums written for the current year's collateralized property catastrophe reinsurance protection.
General and administrative expenses. General and administrative expenses decreased by $2.1 million, or 2.6%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease was primarily due to lower compensation related costs. The general and administrative expense ratios for the years ended December 31, 2014 and 2013 were 8.6% and 9.3%, respectively, reflecting higher net premiums earned and lower general and administrative expenses in 2014.
Our operating subsidiaries depend upon cash inflows from premium receipts, net of commissions, investment income and proceeds from sales and redemptions of investments. Cash outflows for our operating subsidiaries are in the form of claims payments, net of reinsurance recoveries, reinsurance premium payments, purchase of investments, operating expenses and income tax payments as well as dividend payments to the holding company.
Our total investments and cash totaled $9.2 billion as of December 31, 2015, the main components of which were investment grade fixed income securities and cash and cash equivalents. As of December 31, 2015, we held $608.0 million of cash and cash equivalents and $710.9 million of fixed income securities with a maturity of less than one year to meet short-term liquidity needs. Our remaining fixed income securities, equity securities and "other invested assets" are available to meet our long-term liquidity needs.
The primary sources of cash inflows from operating activities are premiums received, loss payments from reinsurers, return of funds held balances related to our assumed collateralized property catastrophe reinsurance program through Aeolus Re and investment income. The primary sources of cash outflows from operating activities are ceded premiums paid to reinsurers, claims paid, contributions of funds held balances related to Aeolus Re, commissions paid, operating expenses, interest expense and income taxes. The primary factor in our ability to generate positive operating cash flow is underwriting profitability. We have generated positive operating cash flow for more than 10 consecutive years.
The $95.9 million increase in cash flows from operations was primarily due to a decrease in our funds held balance during 2015 compared to 2014. During 2015, we contributed $225.0 million to Aeolus for the upcoming underwriting year compared to $350.0 million during 2014. This was partially offset by higher net paid losses during 2015 compared to 2014.
Cash flows used in investing activities consist primarily of payments for investments acquired, proceeds on the sale of investments and changes in restricted cash. Cash flows used in investing activities increased $508.7 million from $127.0 million for the year ended December 31, 2014 to $635.6 million for the year ended December 31, 2015. The increase was primarily due to the net cash paid for the RSA and LAU acquisitions of $124.4 million and higher net purchases of fixed maturity investments.
Cash flows used in or provided by financing activities consist primarily of capital raising activities, which include the issuance of common shares or debt, the repurchase of our shares, the payment of dividends and the repayment of debt. The change in cash flows provided by financing activities was primarily due to the net proceeds of $496.7 million received from the 2025 Senior Notes issued during 2015 partially offset by higher dividends paid to shareholders and share repurchases.
Our funds are primarily invested in liquid, high-grade fixed income securities. As of December 31, 2015 and 2014, 90.1% and 88.5%, respectively, of our fixed income portfolio consisted of investment grade securities. The maturity distribution of our fixed income portfolio (on a fair value basis) as of December 31, 2015 and 2014 was as follows:
In addition, as of December 31, 2015 and 2014, a further $579.3 million and $571.8 million, respectively, of cash and cash equivalents and investments were pledged as collateral for our credit facilities.
material impact on our ability to carry out our normal business activities, including interest and dividend payments, respectively, on our senior notes (described below) and common shares.
The table below sets forth the capital structure of the company as of December 31, 2015 and 2014:
This increase in the ratio of debt to total capitalization in 2015 compared to 2014 was due to the $500 milllion senior notes we issued on October 29, 2015 that will be used to refinance the $500 million senior notes that mature on August 1, 2016.
On May 1, 2014, our shareholders approved a share repurchase program (the “2014 share repurchase program”) in order for us to repurchase up to $500.0 million of our common shares. Under the terms of this share repurchase program, the first three million of common shares repurchased will remain in treasury and will be used by us to satisfy share delivery obligations under our equity-based compensation plans. Any additional common shares will be designated for cancellation at acquisition and will be canceled upon shareholder approval. As of December 31, 2015, approximately $173.1 million remained under this share repurchase authorization.
During the year ended December 31, 2015, our share repurchases were as follows:
On May 6, 2015, the Company repurchased 4,053,537 shares from Exor S.A. at a repurchase price of $40.546 per share, for an aggregate purchase price of $164.4 million. The repurchase was executed under the 2014 share repurchase program. We did not repurchase any shares during the three months ended December 31, 2015, but restarted the repurchase program in 2016.
On June 7, 2012, Allied World Bermuda amended its existing secured credit facility. The amended $450 million four-year secured credit facility (the “Amended Secured Credit Facility”) is with a syndication of lenders and is primarily for the issuance of standby letters of credit to support obligations in connection with the insurance and reinsurance business of Allied World Bermuda and its subsidiaries. The facility may also be used for revolving loans for general corporate and working capital purposes, up to a maximum of $150 million. Allied World Bermuda may request that existing lenders under the Amended Secured Credit Facility make additional commitments from time to time, up to $150 million, subject to approval by the lenders.
As of December 31, 2015, we also have access to a $1 billion uncommitted letter of credit facility with Citibank Europe plc. The letters of credit issued under the credit facility with Citibank Europe plc are deemed to be automatically extended without amendment for twelve months from the expiry date, or any future expiration date unless at least 30 days prior to any expiration date Citibank Europe plc notifies us that they elect not to consider the letters of credit renewed for any such additional period.
As of December 31, 2015, we had a combined unused letters of credit capacity of $642.5 million from the Amended Secured Credit Facility and Citibank Europe plc. We believe that this remaining capacity is sufficient to meet our future letter of credit needs.
Our unpaid losses and loss expenses represent our best estimate of the cost to settle the ultimate liabilities based on information available as of December 31, 2015, and are not fixed amounts payable pursuant to contractual commitments. The timing and amounts of actual loss payments related to these reserves might vary significantly from our current estimate of the expected timing and amounts of loss payments based on many factors, including large individual losses as well as general market conditions.
The amounts included for reserve for losses and loss expenses reflect the estimated timing of expected loss payments on known claims and anticipated future claims as of December 31, 2015 and do not take reinsurance recoverables into account. Both the amount and timing of cash flows are uncertain and do not have contractual payout terms. For a discussion of these uncertainties, refer to “- Critical Accounting Policies - Reserve for Losses and Loss Expenses.” Due to the inherent uncertainty in the process of estimating the timing of these payments, there is a risk that the amounts paid in any period will differ significantly from those disclosed. Total estimated obligations will be funded by existing cash and investments.
As of December 31, 2015, we did not have any off-balance sheet arrangements.