The following tables present selected historical financial information of James River Group Holdings, Ltd. derived from our consolidated balance sheets as of December 31, 2018, 2017, 2016, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the five years in the period ended December 31, 2018, which have been audited by Ernst & Young LLP.
The Casualty Reinsurance segment provides proportional and working layer casualty reinsurance to third parties and to our U.S.-based insurance subsidiaries. Typically, we structure our reinsurance contracts (also known as treaties) as quota share arrangements, with loss mitigating features, such as commissions that adjust based on underwriting results. We frequently include risk mitigating features in our working layer excess of loss treaties, such as paid reinstatements, which allow the ceding company to capture a greater percentage of the profits should the business prove more profitable than expected, or alternatively, with additional premiums should the business incur higher than expected losses. We believe these structures best align our interests with the interests of our cedents. On a premium volume basis, treaties with loss mitigation features including sliding scale ceding commissions represented 81.7% of the gross premiums written by our Casualty Reinsurance segment during 2018. We typically do not assume large individual risks in our Casualty Reinsurance segment, nor do we write property catastrophe reinsurance. Most of the policies assumed by our Casualty Reinsurance segment have a $1.0 million per occurrence limit, and we typically assume only a portion of that exposure. We believe this structure reduces volatility in our underwriting results. We do not assume stand-alone third-party property business at our Casualty Reinsurance segment, but we do have a small amount
The A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent). This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors.
The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do not discount this reserve. We estimate the reserve using individual case-basis valuations of reported claims and statistical analysis. We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business we write and the limited operating experience of the Casualty Reinsurance segment and of the fronting and program business in the Specialty Admitted Insurance segment and the commercial auto business in our Excess and Surplus lines segment. In applying this judgment, we frequently establish reserves that differ from our internal actuaries’ estimate. We seek to establish reserves that will ultimately prove to be adequate. If we have indications that claims frequency or severity exceeds our initial expectations, we generally increase our reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends are more favorable than initially anticipated, we generally reduce our reserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends.
The Company’s gross reserve for losses and loss adjustment expenses at December 31, 2018 was $1,661.5 million. Of this amount, 62.4% relates to IBNR. The Company’s gross reserve for losses and loss adjustment expenses by segment are summarized as follows:
The table below quantifies the impact of extreme reserve deviations from our expected value at December 31, 2018. The total carried net reserve for losses and loss adjustment expenses is displayed alongside 5th, 50th and 95th percentiles of likely
The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $143.4 million, reduce after-tax net income by $133.0 million, reduce shareholders’ equity by $133.0 million and reduce shareholders’ tangible equity by $133.0 million, in each case at or for the period ended December 31, 2018.
The impact of recording the net reserve for losses and loss adjustment expenses at the lowest value from the sensitivity analysis above would be to reduce losses and loss adjustment expenses incurred by $132.8 million, increase after-tax net income by $123.2 million, increase shareholders’ equity by $123.2 million, and increase tangible equity by $123.2 million, in each case at or for the year ended December 31, 2018. Such changes in the net reserve for losses and loss adjustment expenses would not have an immediate impact on our liquidity, but would affect cash flow and investment income in future periods as the incremental or reduced amount of losses are paid and investment assets adjusted to reflect the level of paid claims.
$17.7 million of adverse development was experienced in 2018 on the reserve for losses and loss adjustment expenses held at December 31, 2017. This adverse reserve development included $15.0 million of adverse development in the Excess and Surplus Lines segment, including $20.7 million of adverse development in the commercial auto line of business that was primarily related to the 2016 contract year with one insured. The adverse development for commercial auto was partially offset by $5.7 million of favorable development in other Excess and Surplus Lines underwriting divisions primarily from favorable development in the Excess Property underwriting division related to the 2017 hurricanes. Favorable reserve development in the Specialty Admitted Insurance segment was $5.6 million and primarily came from accident years 2014 through 2016, as loss emergence on our workers’ compensation business written prior to 2016 continued to develop more favorably than we had anticipated. In addition, $8.2 million of adverse development occurred in the Casualty Reinsurance segment, with a majority of this adverse development coming primarily from accident years at least four years old and in treaties the Company has since non-renewed.
A $23.7 million redundancy developed in 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This favorable reserve development included $24.1 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $10.0 million of favorable development from the 2015 accident year, $10.7 million of favorable development from the 2014 accident year and $4.5 million from the 2013 accident year. This favorable development occurred because our actuarial studies at December 31, 2016 showed that the experience on our casualty business continued to be below our initial expected ultimate loss ratios driven by favorable calendar year emergence. Favorable reserve development in the Specialty Admitted Insurance segment was $3.8 million, and primarily came from accident years 2010 through 2014, as losses on our workers’ compensation business written prior to 2015 continued to develop more favorably than we had anticipated. The Specialty Admitted Insurance segment’s favorable development from accident years 2010 - 2014 was partially offset by unfavorable development for the 2015 accident year. In addition, $4.2 million of adverse development occurred in the Casualty Reinsurance segment, with the majority of this adverse development coming from two contracts from the 2012 and 2013 underwriting years that experienced higher loss development in 2016 than expected.
At December 31, 2017, management concluded that one equity security, based on the severity and duration of the impairment, had experienced an other-than-temporary impairment. Accordingly, the Company recorded an impairment loss of $1.5 million in 2017. Management concluded that none of the other equity securities with an unrealized loss at December 31, 2017 and 2016 experienced an other-than-temporary impairment. Management evaluated the near-term prospects of these other equity securities in relation to the severity and duration of the impairment, and management had the ability and intent to hold the securities until a recovery of their fair value.
At December 31, 2017 and 2016, the Company held a participation in a loan issued by a company that produces and supplies power to Puerto Rico through a power purchase agreement with Puerto Rico Electric Power Authority (“PREPA”), a public corporation and governmental agency of the Commonwealth of Puerto Rico. Management concluded that the loan was impaired and established credit allowances on the loan of $759,000 and $177,000 at December 31, 2017 and 2016, respectively. At December 31, 2017, the loan had a carrying value of zero and unpaid principal of $807,000. In the first quarter of 2018, the full outstanding principal on the loan was repaid and the Company recognized a realized gain of $807,000 on the repayment.
In the determination of the fair value for bank loan participations and certain high yield bonds, the Company’s investment manager endeavors to obtain data from multiple external pricing sources. External pricing sources may include brokers,
Investments for which external sources are not available or are determined by the investment manager not to be representative of fair value are recorded at fair value as determined by the investment manager. In determining the fair value of such investments, the investment manager considers one or more of the following factors: type of security held, convertibility or exchangeability of the security, redeemability of the security (including the timing of redemptions), application of industry accepted valuation models, recent trading activity, liquidity, estimates of liquidation value, purchase cost and prices received for securities with similar terms of the same issuer or similar issuers. At December 31, 2017, there was a bank loan participation with an unpaid principal balance of $807,000 and a carrying value of $0 for which external sources were unavailable to determine fair value. There were no bank loan participations for which external sources were unavailable to determine fair value at December 31, 2018.
Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. Under this guidance, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Judgments required in adopting this update included identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The adoption of ASU 2014-09 had no impact on reported fee income and there was no cumulative effect of initially applying the update.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other things, this ASU requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under current guidance for lessees, leases are only included on the balance sheet if they are designated as capital leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. In the third quarter of 2018, the FASB issued ASU 2018-10 to clarify certain aspects of the guidance and ASU 2018-11, which provides an optional alternative transition method to initially apply the new leases standard at the adoption date (collectively, with ASU 2016-02, Topic 842). Topic 842 now allows for the use of either the modified retrospective adoption method or the alternative transition method. The Company has completed its evaluation and will adopt the new standard on January 1, 2019 using a modified retrospective transition method, applying the transition provisions at the beginning of the period of adoption. The Company will elect the package of practical expedients permitted under the transition guidance within the new standard and will not elect to use hindsight in determining the lease term. The new standard will not be applied to leases with an initial term of 12 months or less. Upon adoption of the new standard, the Company will derecognize assets of $22.6 million and liabilities of $30.9 million associated with a lease that was designated as build-to-suit under the previous guidance, and record a cumulative-effect adjustment to retained earnings of $8.3 million. The lease will be classified as an operating lease under the new standard. The Company will record right-of-use assets of $17.2 million and lease liabilities of $17.8 million at adoption of the new standard. The new standard will not materially impact the Company's results of operations or cash flows, and will not impact compliance under the covenants of our current credit agreements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require financial assets measured at amortized cost, such as bank loan participations held for investment, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Upon adoption, this ASU 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. The Company has not yet completed the analysis of how adopting this ASU will affect the Company’s financial statements.
Underwriting profit is a non-GAAP measure. See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.
Underwriting profit includes gross fee income of $28.7 million and $28.3 million for the years ended December 31, 2018 and 2017, respectively.
We had an underwriting profit of $28.0 million for the year ended December 31, 2018. This compares to an underwriting profit of $5.8 million for the prior year. On a consolidated basis, the Company recognized $17.7 million and $21.5 million of net adverse reserve development for the years ended December 31, 2018 and 2017, respectively.
Net realized and unrealized investment losses of $5.5 million and $2.0 million for the years ended December 31, 2018 and 2017, respectively. See “- Investing Results" for more information on these realized and unrealized investment losses.
We define adjusted net operating income as net income excluding certain non-operating expenses such as net realized and unrealized investment gains and losses on investments, expenses related to due diligence costs for various merger and
Our expense ratio was 23.0% and 24.3% for the years ended December 31, 2018 and 2017, respectively. The improvement is due to a 19.9% increase in the net earned premiums of the Excess and Surplus Lines segment including in lines of business which carry relatively low expenses or that have meaningful ceding commissions. Our Excess and Surplus Lines segment has
The following table summarizes the change in premium volume by component and business segment:
Gross written premiums for the Excess and Surplus Lines segment (which represents 56.3% of our consolidated gross written premiums in 2018) increased 23.8% over the prior year. Excluding commercial auto policies, gross written premiums for the Excess and Surplus Lines segment increased 18.5% over the prior year. Policy submissions excluding commercial auto policies were 9.3% higher and 11.2% more policies were bound in 2018 than in 2017. Rates for the Excess and Surplus Lines segment were up 6.5% compared to 2017. The change in gross written premiums was notable in several divisions as shown below:
The components of gross written premiums for the Specialty Admitted Insurance segment (which represents 32.1% of our 2018 consolidated gross written premiums) are as follows:
Gross written premiums for the Casualty Reinsurance segment (which represents 11.6% of our consolidated gross written premiums in 2018) decreased 42.3% from the the prior year. The reduction in gross written premium in this segment was in line with our expectations and is consistent with our planned reductions for the Casualty Reinsurance segment as we redeploy our capital to where we believe we can make the highest operating returns on tangible equity. The Casualty Reinsurance segment generally writes large casualty-focused treaties that are expected to have lower volatility relative to property and catastrophe treaties. We rarely write stand-alone property reinsurance. When treaties that include property exposure are written, we utilize property occurrence caps, inuring reinsurance protection and low individual risk limits to minimize exposure.
The loss ratio of 78.8% for the year ended December 31, 2018 includes $15.0 million, or 2.7 percentage points, of net adverse development in our loss estimates for prior accident years. The loss ratio of 80.2% for the year ended December 31, 2017 includes $20.0 million, or 4.3 percentage points, of net adverse development in our loss estimates for prior accident years. The adverse reserve development in this segment in 2017 and 2018 was almost entirely from one large commercial auto account in the 2016 accident year. The loss ratio for the year ended December 31, 2017 also includes $5.2 million of losses from Hurricanes Harvey, Irma, and Maria primarily related to property losses in Florida. The catastrophe losses represent 1.1 percentage points of loss ratio additions for the year.
Underwriting profit includes fee income of $14.8 million and $11.3 million for the years ended December 31, 2018 and 2017, respectively.
The loss ratio for the year ended December 31, 2018 of 59.2% included $5.6 million, or 10.1 percentage points, of net favorable development on prior accident years. The loss ratio for the year ended December 31, 2017 of 65.9% included $2.7 million, or 4.0 percentage points, of net favorable development on prior accident years. The favorable development in both 2018 and 2017 reflects the fact that actual loss emergence of the workers’ compensation book for prior accident years has been better than expected.
The expense ratio of the Specialty Admitted Insurance segment was 28.2% for the year ended December 31, 2018 compared to the prior year ratio of 29.5%. The expense ratio declined in 2018 for this segment due to gross fee income from the fronting business which increased 31.0% for the year ended December 31, 2018 compared to the prior year and to ceding commissions received on the 50% third-party quota share reinsurance coverage purchased on individual risk workers' compensation business effective October 1, 2017.
The loss ratio of 63.4% for the year ended December 31, 2018 includes $8.2 million, or 4.0 percentage points, of net adverse development in our loss estimates for prior accident years. The 2018 adverse reserve development was primarily related to losses from risk profiles and treaty structures that we no longer underwrite. The loss ratio of 66.3% for the year ended December 31, 2017 includes $4.2 million, or 2.0 percentage points, of net adverse development in our loss estimates for prior accident years. The 2017 adverse reserve development was primarily from two contracts from 2010 through 2013 that had higher than expected reported losses in 2017.
corporation under Section 953(d) of the Code effective January 1, 2018. See “Income Tax Expense” for additional discussions regarding this newly formed 953(d) reinsurer.
Net investment income was $61.3 million for the year ended December 31, 2018 compared to $61.1 million in the prior year. The change in our net investment income is as follows:
The $261.0 million of bank loan participations in our investment portfolio are classified as held-for-investment and reported at amortized cost, net of any allowance for credit losses. Changes in this credit allowance are included in realized gains or losses. At December 31, 2018, there was no allowance for credit losses, as none of the loans in the Company's portfolio were considered impaired. These bank loan participations are primarily senior, secured floating-rate debt rated “BB”, “B”, or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization,
and are therefore below investment grade. Bank loans include assignments of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and similar loans and investments. At December 31, 2018 and 2017, the fair value of these securities was $250.7 million and $236.5 million, respectively.
The Company invests selectively in private debt and equity opportunities. These investments comprise the Company’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bank holding companies. Equity interests in various renewable energy LLCs generated investment income of $3.0 million and $10.6 million for the years ended December 31, 2018 and 2017, respectively. The LLCs are managed by an entity for which two of our directors serve as officers, and the Company’s Non-Executive Chairman has invested in certain of these LLCs. These investments had a carrying value of $29.8 million at December 31, 2018. Investments in loans for renewable energy projects had investment income $1.3 million and $526,000 for the years ended December 31, 2018 and 2017, respectively. Two of our directors are officers of the entities that issued the loans. The Company has invested in several limited partnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Income from these partnerships was $566,000 in 2018 compared to $2.6 million in 2017. Together, these limited partnerships had a carrying value of $29.3 million at December 31, 2018. Income from the Company’s investments in renewable energy LLCs and limited partnerships is recognized under the equity method of accounting. The Company also holds $4.5 million of subordinated notes issued by a bank holding company. Interest income from the notes was $343,000 in both years ended December 31, 2018 and 2017. The Company’s Non-Executive Chairman was previously the Lead Independent Director of the bank holding company and an investor in the bank holding company.
For the year ended December 31, 2018, the Company recognized net realized and unrealized investment losses of $5.5 million, including $6.0 million of losses for the change in the fair value of equity securities, $554,000 of net realized investment losses on the sale of fixed maturity securities, $2.0 million of net realized investment gains on the sale of bank loan securities (including an $807,000 realized gain on the repayment of the loan to the producer and supplier of power in Puerto Rico described below), and $858,000 of net realized investment losses from an increase in our bank loan credit allowance.
For the year ended December 31, 2017, the Company recognized net realized investment losses of $2.0 million. This net loss was made up of an increase in our bank loan credit allowance and an other than temporary impairment on an equity security, offset by net realized gains of $1.3 million from bank loan securities, $368,000 from equity securities, and $328,000 from fixed maturity securities.
At December 31, 2017, management concluded that one equity security, based on the severity and duration of the impairment, had experienced an other-than-temporary impairment. Accordingly, the Company recorded an impairment loss of $1.5 million in 2017. Management concluded that none of the other equity securities with an unrealized loss at December 31, 2017 experienced an other-than-temporary impairment. Management evaluated the near-term prospects of these other equity securities in relation to the severity and duration of the impairment, and management had the ability and intent to hold these securities until a recovery of their fair value.
At December 31, 2018, our available-for-sale fixed maturity securities had net unrealized losses of $15.2 million representing 1.3% of the amortized cost of the portfolio. Additionally, at December 31, 2018, 100.0% of our fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization. The average duration of our investment portfolio was 3.4 years at December 31, 2018.
At December 31, 2018, our portfolio of available-for-sale fixed maturity securities contained corporate fixed maturity securities with a fair value of $524.8 million. A summary of these securities by industry segment is shown below as of December 31, 2018:
connection with this merger, Falls Lake General surrendered its licenses to the various state insurance departments and reduced the carrying value of its intangible asset for "State Licenses" to $0. This caused a $200,000 impairment in 2018. No impairment was present for the year ended December 31, 2017.
The results for the years ended December 31, 2017 and 2016 included certain non-operating items that are significant to the Company. These items (on a pre-tax basis) include:
Our combined ratio for the year ended December 31, 2016 was 94.3%. It included $23.7 million, or 4.6 percentage points, of net favorable reserve development on direct and assumed business underwritten by the Company on prior accident years, including $24.1 million of favorable reserve development from the Excess and Surplus Lines segment and $3.8 million of favorable development from the Specialty Admitted Insurance segment, partially offset by $4.2 million of adverse reserve development from the Casualty Reinsurance segment.
Our expense ratio was 24.3% and 31.2% for the years ended December 31, 2017 and 2016, respectively. The reduced expense ratio for 2017 reflects the 53.8% increase in the Excess and Surplus segment’s net earned premiums and an increase in fee income for the Company as a whole. Our Excess and Surplus Lines segment (our largest segment with 62.5% of consolidated net earned premiums for the year ended December 31, 2017) has significant scale and produces a lower expense ratio than our other operating segments. Fee income for the Company increased year over year from $14.2 million to $28.3 million, as we grew our fee business in both the Excess and Surplus Lines segment and the Specialty Admitted Insurance segment.
For the Excess and Surplus Lines segment (which represents 49.0% of our 2017 consolidated gross written premiums), gross written premiums for the year ended December 31, 2017 increased 42.9% over the prior year. Excess and Surplus Lines segment policy submissions, excluding commercial auto, were 8.5% higher and bound policies were 3.0% higher, which was partially offset by a 2.2% decrease in the average premium from $19,682 to $19,253. The gross written premiums increase was most notable in the following divisions within the Excess and Surplus Lines segment:
Underwriting results include fee income of $17.0 million and $10.1 million for the years ended December 31, 2017 and 2016, respectively.
Expense Ratio. The expense ratio of 29.5% for the year ended December 31, 2017 decreased from 35.4% in the prior year. The expense ratio declined in 2017 for this segment primarily due to a 30.3% increase in net earned premiums as the fronting and program business continued to achieve scale. Additionally, fee income reduced the Specialty Admitted Insurance segment's overall expense ratio 16.5 and 8.0 percentage points for the years ended December 31, 2017 and 2016, respectively.
Of our total cash and invested assets of $1,611.1 million at December 31, 2017, $163.5 million represents the cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $1,098.6 million, is comprised of fixed maturity and equity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of accumulated comprehensive income or loss. Also included in our investments are $238.2 million of bank loan participations, $70.2 million of other invested assets, $36.8 million of short-term investments, and $3.8 million of fixed maturity securities classified as trading and held at the U.S. holding company. Our trading portfolio is carried at fair value with changes to the value reported as net investment income in our consolidated income statement.
The $238.2 million of bank loan participations are classified as held-for-investment and reported at amortized cost, net of an allowance for credit losses. Changes in this credit allowance are included in realized gains or losses. These bank loan participations are primarily senior, secured floating-rate debt which are generally rated “BB,” “B,” or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below
The Company invests selectively in private debt and equity opportunities. These investments comprise the Company’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bank holding companies. Equity interests in various renewable energy LLCs managed by affiliates of D. E. Shaw, generated investment income of $10.6 million and $3.5 million for the years ended December 31, 2017 and 2016, respectively. These investments had a carrying value of $32.1 million at December 31, 2017. Investments in loans for renewable energy projects, primarily with affiliates of D. E. Shaw, had investment income $526,000 and $450,000 for the years ended December 31, 2017 and 2016, respectively. In 2016, the Company received a $6.5 million repayment on one note. During 2015, the Company invested a total of $36.3 million in these notes and received repayments totaling $30.8 million. The Company has invested in several limited partnerships that invest in concentrated portfolios of publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Income from these partnerships was $2.6 million in 2017 compared to $5.3 million in 2016. Together, these limited partnerships had a carrying value of $26.4 million at December 31, 2017. Income from the Company’s investments in renewable energy LLCs and limited partnerships is recognized under the equity method of accounting. The Company also holds $4.5 million of subordinated notes issued by a bank holding company affiliated with the Non-Executive Chairman of the Company. Interest income from the notes was $343,000 for the years ended December 31, 2017 and 2016.
Management concluded that based on the severity and duration of the impairment associated with an equity security, the security had experienced an other-than-temporary impairment. Accordingly, the Company recorded an impairment loss of $1.5 million in 2017. Management concluded that none of the other equity securities with an unrealized loss at December 31, 2017 and 2016 experienced an other-than-temporary impairment. Management has evaluated the near-term prospects of these other equity securities in relation to the severity and duration of the impairment, and management has the ability and intent to hold these securities until a recovery of their fair value.
The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (both available-for-sale and trading) by rating as of December 31, 2017:
At December 31, 2017, our portfolio of available-for-sale fixed maturity securities contained corporate fixed maturity securities with a fair value of $413.7 million. A summary of these securities by industry segment is shown below as of December 31, 2017:
Corporate available-for-sale fixed maturity securities include public traded securities and privately placed bonds is shown below as of December 31, 2017:
At December 31, 2017, the Company had no investments in securitizations of alternative-A mortgages or sub-prime mortgages.
The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws and regulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or other distributions that they may declare or pay within any 12-month period without advance regulatory approval. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10.0% of statutory surplus at the end of the preceding year. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula. See Item 1 - “U.S. Insurance Regulation-State Regulation” for additional information. The Bermuda Insurance Act of 1978 prohibits an insurer from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach. An insurer can declare or pay dividends without prior regulatory approval up to 25% of the total statutory capital and surplus. At December 31, 2018, the maximum combined amount of dividends that can be paid without prior regulatory approval was approximately $109.8 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations. Additionally, the maximum amount of dividends available to the U.S. holding company from our U.S. insurance subsidiaries during 2019 without regulatory approval is $24.2 million.
Our net written premiums to surplus ratio (defined as net written premiums to regulatory capital and surplus) is reviewed by management as well as our rating agency as a component of leverage and efficiency of deployed capital. Our net written premiums to surplus ratio was 1.1x, 1.2x, and 0.9x for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company has a $215.0 million senior revolving credit facility (as amended or amended and restated, the “2013 Facility”). The 2013 Facility is comprised of the following at December 31, 2018:
The 2013 Facility has been amended from time to time since its inception in 2013. On December 7, 2016, the Company entered into an Amended and Restated Credit Agreement for the 2013 Facility which, among other things, extended the maturity date of the Facility until December 7, 2021 and modified other terms including reducing the rate of interest and reducing the number of financial covenants. On June 8, 2017, the Company entered into a First Amendment to the amended and restated 2013 Facility, which among other things, modified the financial covenants and increased the amount of additional debt the Company may incur under new financings, subject to compliance with certain conditions.
The 2013 Facility contains certain financial and other covenants (including risk-based capital, minimum shareholders’ equity levels, maximum ratios of total debt outstanding to total capitalization and minimum fixed charge coverage ratios) with which the Company was in compliance at December 31, 2018.
For policies with an occurrence limit up to $10.0 million, the excess casualty treaty is set such that our retention is no more than $1.0 million.
We use catastrophe modeling software to analyze the risk of severe losses from hurricanes and earthquakes on our exposure. We utilize the model in our risk selection, pricing, and to manage our overall PML accumulations. A PML is an estimate of the amount we would expect to pay in any one catastrophe event within a given annual probability of occurrence (i.e. a return period or loss exceedance probability). Based upon the modeling of our Excess and Surplus Lines segment, a $45.0 million gross catastrophe loss would exceed our 1 in 1,000 year PML. In the event of a $45.0 million gross property catastrophe loss to the Excess and Surplus Lines segment, we estimate our pre-tax cost at approximately $7.1 million, including reinstatement premiums and net retentions. In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits.
Our Specialty Admitted Insurance segment purchases reinsurance for at least 50% of the exposed limits on specialty admitted property-casualty business. The segment enters into reinsurance contracts for the individual risk workers’ compensation business as well as fronting and program business. While the segment focuses on casualty business, incidental property risk is incurred in the fronting and program business. The segment is covered for $44.0 million in excess of $1.0 million per occurrence to manage its property exposure to an approximate 1 in 1,000 year PML.
The Company is a party to a set of insurance contracts with an insured group of companies under which the Company pays losses and loss adjustment expenses on the contract. The Company has indemnity agreements with this group of insured parties (non-insurance entities) and is contractually entitled to receive reimbursement for a significant portion of the losses and loss adjustment expenses paid on behalf of the insured parties and other expenses incurred by the Company. The insured parties are required to collateralize all amounts currently due to the Company and to provide additional collateral sufficient to cover the amounts that may be recoverable under the indemnity agreements, including among other things case loss and loss adjustment expense reserves, IBNR loss and loss adjustment expense reserves, extra contractual obligations and excess of policy limits liabilities. This collateral is currently provided through a collateral trust arrangement established in favor of the Company by a captive insurance company affiliate of the insured group. At December 31, 2018, the cash equivalent collateral held in the collateral trust arrangement was approximately $1,099.2 million, which exceeds the amount of claims receivable and unpaid reported losses and loss adjustment expenses outstanding. The Company has ongoing exposure to estimated losses and expenses on these contracts growing at a faster pace than growth in our collateral balances. In addition, we have credit exposure if our estimates of future losses and loss adjustment expenses and other amounts recoverable, which are the basis for establishing collateral balances, are lower than actual amounts paid or payable. The amount of our credit exposure in any of these instances could be material. To mitigate these risks, we closely and frequently monitor our exposure compared to our collateral held, and we request additional collateral when our analysis indicates that we have uncollateralized exposure.
Cash provided by operating activities reflects our growth and the fact that we are collecting premiums receivable at a quicker rate than we are paying loss and loss adjustment expenses. The growth in reserves for losses and loss adjustment expenses exceeded the growth in premiums receivable and reinsurance balances by $226.6 million in 2018, $147.7 million in 2017, and $1.4 million in 2016.
Cash used in financing activities is primarily due to dividends to shareholders of $36.1 million in 2018, $50.8 million in 2017, and $66.0 million in 2016. In addition, we drew down $20.0 million and $10.0 million on our 2017 Facility in 2018 and 2017, respectively.
Share activity in 2017 and 2018 includes issuances from stock option exercises and RSU vesting, increasing the number of common shares outstanding from 29,257,566 at December 31, 2016 to 29,696,682 at December 31, 2017 and 29,988,460 at December 31, 2018.
All of the outstanding options vest over two to four years and have a contractual life of seven years from the original date of grant.
The reserve for losses and loss adjustment expenses represent management’s estimate of the ultimate cost of settling losses. As more fully discussed in “-Critical Accounting Policies-Reserves for Losses and Loss Adjustment Expenses” above, the estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our consolidated financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above.
The amounts in the above table represent our gross estimates of known liabilities as of December 31, 2018 and do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly likely that the total amounts paid out in the time periods shown will be greater than those indicated in the table.
Interest on debt obligations was calculated using the LIBOR rate as of December 31, 2018 with the assumption that interest rates would remain flat over the remainder of the period that the debt was outstanding.
Our income before taxes and net income for the years ended December 31, 2018, 2017 and 2016 reconcile to our adjusted net operating income as follows:
The report of our independent registered public accounting firm and our Consolidated Financial Statements and required Financial Statement Schedules are filed pursuant to this Item 8 and are included later in this report. See Index to Financial Statements and Schedules on page.