The Company leases office space in Pembroke, Bermuda where the Company's principal executive office is located. Additionally, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Switzerland and Singapore sufficient for the operation of its business. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2016, please see Note 12, "Commitments and Contingencies" to our Audited Consolidated Financial Statements.
The following table sets forth our selected consolidated financial information for the years ended and as of the dates indicated. As described in Note 1 to our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, our Audited Consolidated Financial Statements include the accounts of Endurance Holdings, Endurance Bermuda, BCML, Endurance U.K., Syndicate 5151, Endurance Assurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech, BCRH and BCGR Cell, as well as all of the other direct or indirect wholly-owned subsidiaries of Endurance Holdings.
We derived the following selected consolidated financial information for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.
You should read the following selected consolidated financial information along with the information contained in this Form 10-K, including Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Audited Consolidated Financial Statements and related notes included elsewhere in this Form 10-K.
The combined ratio is the sum of the net loss ratio, the acquisition expense ratio and the general and administrative expense ratio. Our historical combined ratio may not be indicative of future underwriting performance.
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and related notes included in this Form 10-K.
Blue Capital Management Ltd. ("BCML"), domiciled in Bermuda, manager of Blue Water Re Ltd. ("Blue Water Re") and Blue Water Re II Ltd. ("Blue Water Re II"), domiciled in Bermuda;
On March 31, 2015, the Company announced the signing of a definitive agreement and plan of merger (the "Merger Agreement") with Montpelier Re Holdings Ltd. ("Montpelier") and Millhill Holdings Ltd., a direct, wholly-owned subsidiary of the Company ("Merger Sub"), under which Endurance Holdings, through Merger Sub, acquired all of the outstanding common shares of Montpelier. The acquisition of Montpelier was completed on July 31, 2015 and Merger Sub was merged into Endurance Holdings on July 31, 2015.
Endurance Holdings and Endurance Bermuda together hold a 33.3% interest in Blue Capital Reinsurance Holdings Ltd. ("BCRH"). BCRH is a Bermuda-based exempted limited liability holding company managed by BCML that provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through BCRH's wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. ("Blue Capital Re") and Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"). Blue Capital Re is a Class 3A insurer licensed under the Bermuda Insurance Act. BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.
Endurance Bermuda holds a 25.2% interest in Blue Capital Global Reinsurance Fund Limited ( "BCGR") is a closed-ended mutual fund incorporated in Bermuda and managed by BCML that serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell ("BCGR Cell"). BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
Expenses. The Company's expenses consist primarily of losses and loss expenses, acquisition expenses, interest expense, amortization of intangibles, general and administrative expenses and corporate expenses. Losses and loss expenses are estimated by management and reflect management's best estimate of ultimate losses and loss adjustment costs arising during the current reporting period and revisions of prior period estimates. The Company records losses and loss expenses based on an actuarial analysis of the estimated losses the Company expects to be reported on policies and contracts written. The ultimate losses and loss expenses will depend on the actual costs to settle claims. Acquisition expenses consist of commissions and brokerage expenses that are typically a percentage of the premiums on insurance policies or reinsurance contracts successfully written. General and administrative expenses consist primarily of personnel expenses and general operating expenses directly attributable to the Company's insurance and reinsurance operations. Corporate expenses are expenses not allocated directly to the insurance and reinsurance operations.
Marketplace Conditions and Trends. In general, management believes operating conditions continued to be competitive in both the insurance and reinsurance markets in which the Company operated in 2016. In most classes of property and casualty business, the Company experienced competitive pricing pressure due to the relatively high levels of underwriting capacity and recent favorable loss trends, particularly in catastrophe exposed property insurance and reinsurance, where rates have declined. In the Company's agriculture insurance business, pricing was relatively stable across the portfolio, although the underlying exposure base has varied with commodity price movements. The Company continued to adhere to its underwriting standards by declining business when pricing, terms and conditions did not meet the Company's underwriting criteria.
Premiums and Related Expenses. The Company's insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company's insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium that is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will generally only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable. For the Company's agriculture insurance line, premiums are determined based on estimated acreage planted combined with the base commodity price for the insured crops. Adjustments are made to the agriculture premium estimates as acreage reporting and claims adjusting occurs. Insurance premiums written accounted for 61%, 63%, and 59% of the Company's gross premiums written during the years ended December 31, 2016, 2015, and 2014, respectively.
The Company's reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Losses occurring reinsurance contracts accounted for approximately 19%, 16%, and 20% of the Company's gross premiums written during the years ended December 31, 2016, 2015, and 2014, respectively. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies which began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24 month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period. Policies attaching reinsurance contracts accounted for approximately 20%, 21%, and 21% of the Company's gross premiums written during the years ended December 31, 2016, 2015, and 2014, respectively.
The Company's historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 10%, although larger variations, both positive and negative, are possible as a result of changes in one or more of the premium assumptions as noted above. A 10% variation in the Company's proportional premiums receivable, net as of December 31, 2016, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $5.8 million on the Company's net income.
As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premiums receivable asset on our balance sheet. We actively monitor our premiums receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. At December 31, 2016, the Company has an allowance for estimated uncollectible premiums receivable of $6.2 million (2015 - $7.4 million).
The Company's loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company's financial condition for any particular period. While we believe that we have made a reasonable estimate of loss and loss expense reserves, the ultimate loss experience may not be reliably predicted, and it is possible that losses and loss expenses will be higher or lower than the total reserve for losses and loss expenses recorded by the Company.
For the agriculture insurance line of business, case reserves are established from initial loss notifications that are provided to our independent agents from insureds. Based on the information provided, the Company's system establishes a case reserve amount calculated from a formulaic model that includes historical experience, type of crop, and percent of liability. As actual claims are adjusted, outstanding reserves are adjusted to reflect the actual losses incurred.
The Company uses reserving methods that are commonly applied when limited loss development experience exists. As the Company has accumulated its own loss reserve history, it has incorporated the Company's actual loss experience for certain lines of business that have reached a level of maturity sufficient to provide a credible basis on which to estimate its reserve for losses and loss expenses related to these lines of business. The Company continues to utilize industry loss and development patterns in the establishment of loss and loss expense reserves where appropriate.
Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2016 to estimate the reserve for losses and loss expenses within the Company's Insurance and Reinsurance segments are as follows:
no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur; and
the Company's need to rely on its ceding companies for loss information; and
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company's underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company's ceding companies. Findings are communicated as appropriate to the ceding companies and are utilized in the establishment or revision of the Company's case reserves and related IBNR reserves. On occasion, these reviews reveal that the ceding company's reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company's policy is to vigorously defend its position in litigation or arbitration. As of December 31, 2016, the Company was not involved in any material claims litigation or arbitration proceedings.
The Company assumes in its loss and loss expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time.
The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as agriculture, to many years for some casualty lines of business. For the Company's Reinsurance business segment, due to ceding company and reinsurance intermediary reporting frequency, the time period is generally longer than for its Insurance segment, resulting in a reliance by the Company for a longer period of time on its actuarial estimates of loss and loss expense reserves. To the extent that actual reported losses are reported more quickly than expected, the Company may adjust upward its estimate of ultimate loss and to the extent that actual reported losses are reported more slowly than expected, the Company may reduce its estimate of ultimate loss.
The Company's estimates of reserves for losses and loss expenses can also change over time because of changes in internal company operations, such as:
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company's own views about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
For the remaining fixed maturity and short-term investments classified as available for sale in an unrealized loss position for which a decision to sell has not been made and it is more likely than not that the Company will not be required to sell, the Company performs additional reviews to determine whether the investment will recover its amortized cost. If the amortized cost of the Company's fixed maturity or short-term investments classified as available for sale is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.
Goodwill and Intangible Assets. The Company is required to make an annual assessment as to whether the value of the Company's goodwill and intangible assets are impaired. Impairment of these assets can be either partial or full. For goodwill, impairment is based on a fair value analysis by individual reporting unit. Based upon the Company's assessment at the reporting unit level, there was no impairment of its goodwill asset of $175.5 million during 2016.
Intangible assets are tested for impairment annually. For the years ended December 31, 2016 and 2015, an analysis was performed to determine if the carrying value of the Company's intangible assets with indefinite lives was impaired. No impairments were recorded as for the years ended December 31, 2016 and 2015.
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016; however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as
In May 2015, the FASB issued ASU 2015-09, "Disclosures about Short-Duration Contracts" ("ASU 2015-09"). The objective of ASU 2015-09 is to make targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts. The guidance requires additional disclosures of claims development tables, frequency of reported claims, and history of claims duration. This information is required to be disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail, or the aggregation of items that have significantly different characteristics. ASU 2015-09 was effective for public business entities in annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. ASU 2015-09 should be applied retrospectively. The Company adopted this standard in the fourth quarter of 2016 and has included the appropriate annual disclosures within Note 6, Reserves for losses and loss expenses. The adoption of this standard did not have a material impact on the Company's Consolidated Financial Statements.
The following is a discussion and analysis of the Company's consolidated results of operations for the years ended December 31, 2016, 2015 and 2014:
Increases in gross premiums written for 2016 versus 2015 and 2014 were driven by the following factors:
A decrease in gross premiums written in the agriculture line of business in the Insurance segment due to lower commodity prices and from reductions in the Company's crop hail portfolio.
Net premiums written in 2016 increased $419.5 million, or 21.5%, compared to 2015 and $435.7 million, or 22.5% compared to 2014. The change in net premiums written from 2016 compared to 2015 and 2014 was driven primarily by growth in gross premiums written in both the Insurance and Reinsurance segments. Partially offsetting this increase was growth in ceded premiums written in 2016 compared to 2015 and 2014. Ceded premiums increased across all lines of business, except in the agriculture line of business in the Insurance segment. The Company purchased additional quota share, facultative and excess of loss reinsurance across most lines of business in the Insurance segment. In the Reinsurance segment, ceded premium written increased as the Company purchased increased levels of protection, including additional proportional and excess of loss retrocessional coverage within the catastrophe line of business, and additional proportional coverage on the specialty line of business.
Net premiums earned in 2016 increased $385.2 million, or 19.5% compared to 2015 and $499.7 million, or 26.8% compared to 2014 principally due to the increase in gross premiums written and the earning of Montpelier premiums acquired in 2015, partially offset by increased ceded premiums.
The Company's 2016 net investment income increased 55.1% or $62.8 million compared to 2015 and 34.2% or $45.0 million compared to 2014. Net investment income during 2016 included net mark to market gains of $12.4 million on other investments as compared to mark to market losses of $13.6 million in 2015 and mark to market gains of $19.6 million in 2014. Investment income generated by the Company's equity securities and fixed income investments increased by $36.9 million compared to 2015 and $54.1 million compared to 2014. The increase in 2016 resulted primarily from an increase in fixed income investments acquired as part of the Company's acquisition of Montpelier. The value of the investment portfolio (including cash and cash equivalents and pending investment purchases and sales) as of December 31, 2016 decreased 0.9% from 2015. Investment expenses in 2016 increased compared to 2015 and 2014 due to an increase in invested assets.
The Company's investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing and recognition of net realized gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales and maturities of investments classified as trading and available for sale for the year ended December 31, 2016 were $6,592.9 million compared to $6,352.7 million for the year ended December 31, 2015 and $4,145.9 million for the year ended December 31, 2014. Net realized and unrealized losses were $12.4 million for the year ended December 31, 2016 compared to gains of $12.7 million and $14.3 million for 2015 and 2014, respectively. The increase in net realized and unrealized losses in 2016 compared to 2015 and 2014 resulted from net realized losses on sales of securities in the current period which were negatively impacted by a rise in interest rates during 2016.
Realized investment gains and losses, intangible asset impairment loss, net unrealized gains (losses) and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2016, 2015 and 2014 were as follows:
During 2016, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange gains of $74.7 million compared to losses of $27.0 million for 2015 and $3.8 million for 2014. The gains recorded in 2016 resulted primarily from British Sterling weakening against the U.S. dollar over the year resulting in the upward revaluation of U.S. dollar assets held by Endurance U.K., which has a functional currency of British Sterling. The losses recorded in 2015 resulted from a decrease in the value of net asset positions in key foreign currencies as the U.S. dollar strengthened generally during the year. Additionally, sales of invested assets yielded realized foreign exchange losses recognized in net income that had previously been recognized as unrealized foreign exchange losses in other comprehensive (loss) income. In 2014, the net foreign exchange losses resulted from offsetting exposures across the Company as the U.S. dollar weakened generally in the first half of the year before strengthening against the major currencies in the second half.
For 2016, catastrophe related losses added 7.0 percentage points to the Company's net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 2.3 percentage points in 2015 and 2.9 percentage points in 2014. The Company's net loss ratio was higher in 2016 compared to 2015 and 2014 due to an increase in catastrophe losses, higher than expected attritional losses and decreased favorable prior year loss reserve development.
One of the key measures used by management in assessing the Company's underwriting performance is the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company's historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, net investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining general and administrative expenses
The increase in the Insurance business segment gross premiums written in 2016 compared to 2015 and 2014 was driven by the following factors:
Net premiums earned by the Company in 2016 in the Insurance segment increased compared to net premiums earned in 2015 and 2014 primarily due to the earnings of gross premiums written in more recent periods partially offset by increased ceded premiums across the segment.
Net Losses and Loss Expenses. The increase in the net loss ratio in the Company's Insurance segment for the year ended December 31, 2016 compared to 2015 resulted primarily from a higher current accident year loss ratio and decreased levels of favorable loss reserve development. The current accident year loss ratio was impacted in 2016 by higher actual losses incurred and changes in loss picks reflecting increased attritional and large losses primarily in the property, marine/energy and aviation and casualty and other specialty lines of business. Partially offsetting these losses in 2016 were better results in the Company's agriculture line of business resulting from favorable crop results. Prior year loss reserves were reduced in 2016 by $77.1 million as compared to reductions of $82.0 million and $80.6 million for the years ended December 31, 2015 and 2014. The Company's Insurance segment experienced net reductions in the Company's estimated losses for prior accident years in 2016 as claims have not materialized as originally estimated by the Company, primarily in the casualty and other specialty and property, marine/energy and aviation lines of business.
The change in the Reinsurance business segment gross premiums written during 2016 compared to 2015 and 2014 was driven by the following factors:
An increase in gross premiums written in the catastrophe and property lines of business compared to 2015 primarily due to new business resulting from the Company's acquisition of Montpelier, partially offset by targeted line size reductions;
An increase in gross premiums written in the specialty line of business compared to 2015 and 2014 primarily due to growth in international marine, aerospace, trade credit and surety and agriculture business written by new underwriting teams, partially offset by non-renewals due to increased ceding company retentions; and
Net premiums earned by the Company in the Reinsurance segment increased in 2016 compared to 2015 and 2014 primarily due to reinsurance premiums earned resulting from the Company's acquisition of Montpelier and overall increases in gross premiums written in more recent periods, partially offset by the increase in ceded premiums written during 2016.
General and Administrative Expenses. The general and administrative expense ratio in the Reinsurance segment decreased for the year ended December 31, 2016 compared to 2015 and 2014. The decrease in the ratio for 2016 compared to 2015 and 2014 was primarily due to increased ceding commission offsets.
The Company's investment portfolio was valued at $8.8 billion as of December 31, 2016 compared to $8.9 billion as of December 31, 2015. The Company's investment portfolio contains cash and cash equivalents, fixed maturity investments, short-term investments, equity securities and other investments, comprised of alternative funds. Alternative funds include investments in hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity.
The following tables set forth the types of securities and fair values of the Company's fixed maturity investments, short-term investments and equity securities as of December 31, 2016 and 2015:
Foreign Government Securities. Non U.S. government securities represent the fixed maturity obligations of non-U.S. governmental entities.
Residential Mortgage-Backed Securities. The majority of the residential mortgage-backed securities in the Company's investment portfolio are issued by Freddie Mac and Fannie Mae. The principal risks inherent in holding agency mortgage-backed securities are prepayment and extension risks, which will affect the timing of when principal cash flows will be received. Non-agency mortgage-backed securities also have credit risk should losses on the underlying collateral exceed the credit protection provided.
The investment ratings (provided by major rating agencies) for the fixed income investments held as of December 31, 2016 and 2015 and the percentage of our fixed income investments they represented at such date were as follows:
The credit rating for each security reflected above was determined based on the highest rating assigned to the individual security by Standard & Poor's Financial Services LLC ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Ratings, Inc., or DBRS, Inc.
The Company's other investments are comprised of hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity ("alternative funds") and are recorded on the Company's balance sheet as "other investments." As of December 31, 2016, the Company's Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to 25% of total shareholders' equity. Using this measure, as of December 31, 2016, alternative funds represented 12% of the Company's shareholders’ equity. As of December 31, 2016, the Company's other investments totaled $588.3 million and represented 6.7% of the Company's investment portfolio. As of December 31, 2016, the Company had invested, net of capital returned, a total of $470.3 million in alternative funds. As of December 31, 2016, the market value of alternative funds represented $588.3 million.
Other investments are accounted for under the equity method of accounting. Adjustments to the carrying value of these investments are made based upon the net valuation criteria established by the managers of the other investments, which in turn are established based upon the valuation criteria in the governing documents of the other investments. Such valuations may differ significantly from the values that would have been used had liquid markets existed for the shares or partnership interests of the other investments. Due to a delay in the valuations reported by certain of the fund managers, valuations of certain alternative funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements. Many of the other investments are subject to restrictions on redemptions and sale that limit our ability to liquidate these investments in the short-term. Interest income, income distributions and realized and unrealized gains and losses on other investments included in net investment income were gains of $12.4 million for the year ended 2016, losses of $13.6 million and gains of $19.6 million for the years ended 2015 and 2014, respectively.
Our investment returns for the years ended December 31, 2016, 2015 and 2014 were as follows:
The following table shows the fair value as of December 31, 2016 based on the ratings of the securities held by country of risk in those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2016:
Endurance Corporate Capital Limited, Syndicate 5151 and Endurance at Lloyd's Limited are subject to oversight by the Council of Lloyd's. Endurance at Lloyd's is also subject to regulation by the PRA and the Financial Conduct Authority. Underwriting capacity of a member of Lloyd's must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd's ("FAL"). This amount is determined by Lloyd's and is based on Syndicate 5151's solvency and capital requirement as calculated through its internal model. In addition, if the FAL are not sufficient to cover all losses, the Lloyd's Central Fund provides an additional level of security for policyholders. At December 31, 2016, the FAL requirement set by Lloyd's for Syndicate 5151 was $293.1 million based on its business plan, approved in November 2016. Actual FAL posted for Syndicate 5151 at December 31, 2016 by was $323.6 million. At December 31, 2016, Endurance Corporate Capital Limited did not have assets available for distribution.
At December 31, 2016, the Company's available for sale investments had gross unrealized gains of $95.3 million and gross unrealized losses of $37.4 million compared to gross unrealized gains of $40.8 million and gross unrealized losses of $72.6 million at December 31, 2015. The increase in gross unrealized gains on the Company's available for sale investments at December 31, 2016 compared to 2015 was primarily due to tightening of credit spreads and strong high yield returns during the year. At December 31, 2016, the Company had certain equity securities that were in an unrealized loss position for more than twelve months. As a result, total other-than-temporary impairments of $10.8 million for the year (2015 - $3.7 million; 2014 - $0.6 million) were recognized in earnings.
the assets held in the Reduced Collateral Trust exceeded $16.4 million (2015- $10.8 million), the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to Montpelier U.S. Insurance Company ("MUSIC") in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC to Selective Insurance Group, Inc. ("Selective"). As of December 31, 2016, the fair value of the assets held in the MUSIC Trust was $24.6 million (2015- $21.3 million).
Cash flows provided by operating activities. Cash flows provided by operating activities for the year ended December 31, 2016 were $415.5 million compared to $245.5 million for the year ended December 31, 2015 and $266.3 million for the year ended December 31, 2014. The increase in cash flows provided by operating activities in 2016 compared to 2015 and 2014 was primarily due to higher cash inflows from premiums collections and lower levels of gross loss payments, partially offset by lower ceded loss collections and higher payments of ceded premiums.
Cash flows (used in) provided by investing activities. During the year ended December 31, 2016, cash flows used in investing activities were $19.2 million, compared to cash flows provided by investing activities of $486.8 million for 2015 and cash flows used in investing activities of $236.9 million in 2014. The Company actively manages its investment portfolio on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The increase in cash flows used in investing activities in 2016 compared to 2015 is primarily due to the decrease in cash assumed from the acquisition of Montpelier in 2015 and higher net purchases of trading and available for sale investments, offset by higher net proceeds from the redemption of other investments. The decrease in cash flows used in investing activities in 2016 compared to 2014 is primarily due to lower net purchases of trading and available for sale investments and higher net proceeds from the redemption of other investments.
Cash flows used in financing activities. The Company's cash flows used in financing activities for the year ended December 31, 2016 were $403.6 million, compared to $274.8 million and $99.7 million in 2015 and 2014, respectively. The 2016 cash flows used in financing activities increased compared to 2015 and 2014 due to the redemption of the Company's 7.5% Non-Cumulative Preferred Shares, Series B, higher dividends paid and increased net distributions to non-controlling interest.
As of December 31, 2016 and 2015, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $199.8 million (2015 - $329.9 million).
The Credit Facility requires the Company's compliance with certain customary restrictive covenants, including a financial covenant that the Company maintain a leverage ratio of no greater than 0.35:1.00 at any time. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least
Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and The Bank of New York Mellon, as trustee, entered into a Fourth Supplemental Indenture, dated as of July 31, 2015 (the "Fourth Supplemental Indenture"). The Fourth Supplemental Indenture amended the Indenture, dated as of July 15, 2003 (as amended and supplemented from time to time (collectively, the "Senior Notes Supplemental Indentures")). The Senior Notes Supplemental Indentures provided for the unconditional assumption of the due and punctual payment of the principal of, any premium and interest on and any additional amounts with respect to the 4.7% Senior Unsecured Notes Due 2022 (the "4.7% Senior Notes") originally issued by Montpelier on October 2, 2012 in an aggregate principal amount of $300.0 million and the performance of every obligation in the Senior Notes Indenture and the 4.7% Senior Notes to be performed or observed. The 4.7% Senior Notes bear a rate of interest equal to 4.7% per annum, payable semi-annually in arrears on April 15 and October 15 each year. The 4.7% Senior Notes mature on October 15, 2022. The 4.7% Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
The 4.7% Senior Notes and the 7% Senior Notes (collectively, the "Senior Notes") are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings' existing and future unsecured and unsubordinated debt. The Senior Notes are also effectively junior to claims of creditors of Endurance Holdings' subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
Trust Preferred Securities. Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and Wilmington Trust Company, as trustee, entered into the Second Supplemental Indenture, dated as of July 31, 2015 (the "Second Supplemental Indenture"). The Second Supplemental Indenture amended the Junior Subordinated Indenture, dated as of January 6, 2006 (as amended and supplemented from time to time (collectively, the "Junior Subordinated Supplemental Indentures")). The Junior Subordinated Supplemental Indentures provided for the express assumption by Endurance Holdings of the due and punctual payment of the principal of and any premium and interest (including any additional interest) on the unsecured junior subordinated deferrable interest notes issued by Montpelier in connection with the issuance of the trust preferred securities (the "Trust Preferred Securities") by MRH Capital Trust III (the "MRH Capital Trust") and the performance of every covenant of the Junior Subordinated Indenture on the part of Montpelier to be performed or observed. The MRH Capital Trust originally issued the Trust Preferred Securities in January 2006 in an aggregate principal amount of $100.0 million. The Trust Preferred Securities mature on March 30, 2036 and bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. The Trust Preferred Securities may be redeemed prior to maturity at a redemption price equal to 100% of the principal amount thereof plus accrued interest, provided that the prior approval of any applicable insurance regulatory authority with respect to such redemption has been received. The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
At December 31, 2016, the carrying value of the Senior Notes and Trust Preferred Securities stood at $705.3 million while the fair value as determined by quoted market valuation was $770.7 million.
BCRH Credit Agreement. On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCRH (the "BCRH Credit Facility"). The BCRH Credit Facility provides BCRH with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCRH Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. The BCRH Credit Facility contains covenants that limit BCRH's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCRH fails to comply with any of these covenants, the Company could terminate the BCRH Credit Facility and exercise remedies against BCRH. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCRH, the Company has the right to terminate the BCRH Credit Facility. As of December 31, 2016, BCRH had no outstanding borrowings under the BCRH Credit Facility.
BCGR Credit Agreement. On May 16, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCGR (the "BCGR Credit Facility"). The BCGR Credit Facility provides BCGR with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCGR Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. The BCGR Credit Facility contains covenants that limit BCGR's ability, among other things,
to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCGR fails to comply with any of these covenants, the Company could terminate the BCGR Credit Facility and exercise remedies against BCGR. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCGR, the Company has the right to terminate the BCGR Credit Facility. As of December 31, 2016, BCGR had no outstanding borrowings under the BCGR Credit Facility.
Holders of the Series C Preferred Shares have no voting rights, except with respect to certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings' bye-laws.
The following table summarizes the components of our capital resources at December 31, 2016 and 2015:
Certain of our ongoing obligations to Selective in connection with the sale of MUSIC constitute off-balance sheet arrangements. Excluding these specific transactions, as of December 31, 2016, we were not party to any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K, to which an entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we believe is material to investors.
Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive loss.
Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.
As more fully described under "Reserving Process" above, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company's business segments. The Company's loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company's own operating history. Refer to Note 6, "Reserves for loss and loss expenses" in the Notes to the Consolidated Financial Statements of the Company for additional information related to claims development.
Differences between actual reported losses and expected losses are anticipated to occur in any individual period and such deviations may influence future initial expected loss ratios and/or expected loss reporting patterns as recent actual experience becomes part of the historical data utilized as part of the ongoing reserve estimation process. The Company has demonstrated the impact of changes in the speed of loss reporting patterns, as well as changes in expected loss ratios, within the table under the heading "Potential Variability in Reserves for Losses and Loss Expenses" below.
Current and prior year incurred losses and loss expenses by segment and line of business for the year ended December 31, 2015 were as follows:
Losses and loss expenses for the year ended December 31, 2015 include $243.5 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during 2015 benefited the Company's 2015 reported loss ratio by approximately 12.3 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company's reserve categories within both the Insurance and Reinsurance segments.
For the year ended December 31, 2015, as part of the Company's periodic review of key inputs and parameters it uses to establish its reserve for losses and loss expenses and in order to recognize accumulated historical experience and other relevant industry information, the Company adjusted the loss reporting patterns used for a limited number of business units within the Insurance and Reinsurance segments. For the Insurance segment, the loss reporting patterns were accelerated for the healthcare business within the casualty and other specialty line of business, and slowed for the professional liability business within the professional line of business. For the Reinsurance segment, the loss reporting pattern used for the U.S. and international property catastrophe business within the catastrophe line of business was accelerated for the most recent accident year and slowed for subsequent accident years.
Property, marine/energy and aviation. The favorable loss emergence within the property, marine/energy and aviation line of business during 2016 and 2015 was primarily due to lower than expected reported claim emergence within the Company's U.K. property and energy businesses.
Catastrophe. The Company recorded favorable loss emergence within the catastrophe line of business during 2015 and 2016 primarily due to lower than expected claims activity within the U.S. and international property catastrophe businesses.
Property. The Company recorded favorable loss emergence in the property line of business in 2016 due primarily to lower than expected claims activity within the Bermuda and United States property lines of business. The Company recorded favorable loss emergence in the property line of business during 2015 primarily due to lower than expected claims activity within the property treaty business for accident years 2012 and 2013.
Specialty. The Company recorded favorable loss emergence within this line of business during 2016 primarily due to lower than expected claims emergence in the marine, aerospace, political risk, surety, and mortgage businesses. The Company recorded favorable loss emergence within this line of business during 2015 primarily due to lower than expected claims emergence in the Company's aerospace, political risk, and surety businesses, as well as an IBNR reduction for the Company's self insured risk business, which was shut down in 2003.
Selected quarterly activity in the reserve for losses and loss expenses for the years ended December 31, 2016 and 2015 is summarized as follows:
At December 31, 2016 and 2015, the Company had reinsurance recoverables of $1,486.9 million and $1,196.0 million, respectively, related to its ceded reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. At December 31, 2016 and 2015, the Company held collateral of $493.3 million and $321.5 million, respectively, related to its ceded reinsurance agreements. The balance of losses recoverable at December 31, 2016 was distributed as follows based on the ratings of the reinsurers:
In 2016 a full valuation allowance has been recorded against the net deferred asset position of Endurance Bermuda's branches in Singapore and Switzerland. In 2015 a full valuation allowance had been recorded against the net asset position of Endurance Bermuda's branches in Singapore and Switzerland and United Kingdom subsidiary.
Net income tax payments in 2016, 2015, and 2014 totaled $7.8 million, $2.4 million and $0.9 million, respectively. Net operating loss carryforwards gross of tax in the amount of $119.8 million, $45.9 million, $61.1 million and $44.5 million are available for application against future taxable income in the United States, United Kingdom, and Endurance Bermuda's branches in Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States, the net operating loss carry forwards expire through 2016 and 2028, respectively.
in the underlying type of business underwritten, the underwriting profitability attributable to such business, and the applicable investment income generated.
Pre-tax income for our non-U.S. operations was higher than that of our U.S. operations for the years ended December 31, 2016, 2015 and 2014. The higher pre-tax income in our non-U.S. operations resulted primarily from the more volatile catastrophe business underwritten in our non-U.S. operations having below average losses and thus generating higher levels of net underwriting income during the years ended December 31, 2016, 2015 and 2014. In addition, our non-U.S. operations hold a substantial amount of our invested assets and thus a larger portion of the Company’s investment income is earned in our non-U.S. operations as compared to our U.S. operations.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2014, the United States Internal Revenue Service ("IRS") completed its audit of the income tax returns of the Company's U.S. subsidiaries for 2009, 2010 and 2011. The audit results were immaterial to the operations of the Company. During 2015, the IRS commenced an examination of the 2012 income tax return of Endurance Bermuda. Although the timing and ultimate resolution of the IRS examinations is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations or cash flows. In January 2017, the Switzerland tax authority issued a tax assessment for the Swiss branch of Endurance Bermuda for years 2013 and 2014. The Company disagrees with the assessment and is appealing the assessment. Although the timing and ultimate resolution of the Swiss assessment is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations or cash flows. As of December 31, 2016, none of the Company's other operating subsidiaries or branch operations were under examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2008 through 2016.
In 2015 Management concluded that valuation allowances were required against the net operating loss and net capital loss carryforwards assumed as part of the Montpelier acquisition. The valuation allowances had been established as Internal Revenue Code Section 382 limits the application of net operating loss and net capital loss carryforwards following an ownership change. Accordingly, a tax effected valuation allowance of $11.6 million and $0.7 million, respectively, was required as of August 1, 2015. The Montpelier capital loss carryforwards have fully expired. Net operating loss carryforwards available per year are $0.2 million as required by Internal Revenue Code Section 382.
In 2016 valuation allowances were established against net deferred tax assets in the Company's United States subsidiaries and Endurance Bermuda's non-U.S. branches. In 2015 valuation allowances were established against net operating loss carryforwards in the Company's United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The increase in the valuation allowance was charged to the Company's income tax expense during 2016. Management believes the net deferred tax assets, less the valuation allowance noted, are more likely than not to be fully realized in corresponding future periods, and the Company's net deferred tax asset has been fairly stated as at December 31, 2016. In the event that management determines in the future that it is more likely than not that the net deferred tax assets will be fully realized in the near term and prior to their expiration, the Company will reassess the valuation allowance against the net deferred tax assets and record any changes to income tax expense in the period determined.
We have audited Endurance Specialty Holdings Ltd.'s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the "COSO criteria"). Endurance Specialty Holdings Ltd.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.
We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") for the acquisition of 100% of the outstanding ordinary shares of the Company by SOMPO for $93.00 per share in cash (the "Merger"). The Merger has been approved by each company's Board of Directors and the Company's ordinary and preferred shareholders at a special general meeting. The Merger is expected to close as soon as practicable following the satisfaction of customary closing conditions including, but not limited to, regulatory approvals. There can be no assurance that the Merger will occur.
Blue Capital Management Ltd., manager of Blue Water Re Ltd. and Blue Water Re II Ltd.
Endurance Assurance Corporation ("Endurance Assurance", formerly Endurance Reinsurance Corporation of America)
BCRH is a Bermuda-based exempted limited liability holding company managed by BCML that provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries, Blue Capital Re. Ltd. ("Blue Capital Re") and Blue Capital Re ILS Ltd. ("Blue Capital Re ILS"). BCRH's shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.
Premiums receivable are recorded at amounts due less any allowance for estimated uncollectible premiums receivable. At December 31, 2016, the Company had an allowance for estimated uncollectible premiums receivable of $6.2 million (2015 - $7.4 million).
The Company currently classifies its fixed maturity investments, short-term investments and equity securities as trading or available for sale. Trading securities are carried at estimated fair value, with related net realized and unrealized gains or losses included in earnings. The Company acquired a portfolio of investments classified as trading from Montpelier.
Available for sale securities are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders' equity as a component of accumulated other comprehensive loss. Investment transactions are recorded on a trade date basis. The Company determines the fair value of its trading and available for sale investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs.
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the Company's own views about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
For fixed maturity and short-term investments classified as available for sale in an unrealized loss position for which a decision to sell has not been made and it is not more likely than not that the Company will be required to sell the security, the Company performs additional reviews to determine whether the investment will recover its amortized cost. If the amortized cost of the Company's fixed maturity and short-term investments classified as available for sale is, based upon the judgment of management, unlikely to be recovered, the Company writes down the investment by the amount representing the credit related portion of the decline in value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an OTTI loss. The new cost basis is not changed for subsequent recoveries in fair value.
To the extent the Company determines that the amortized cost of the Company's fixed maturity and short-term investments classified as available for sale is likely to be recovered and the decline in value is related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive loss in the shareholders' equity section of the Company's Consolidated Balance Sheets.
Cash equivalents include highly liquid short-term deposits and securities with maturities of ninety days or less at the time of purchase. Cash equivalents are valued at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities. Deposits and securities with maturities greater than ninety days and less than one year are classified as short-term investments.
Identifiable intangible assets are amortized in accordance with their useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually at the beginning of the fourth quarter, or more often if impairment indicators arise. In making an assessment of the value of its goodwill and intangible assets, the Company uses both market based and non-market based valuations.
Assets and liabilities of foreign operations whose functional currency is not the United States dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at weighted average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive loss, net of applicable deferred income taxes. Other monetary assets and liabilities denominated in foreign currencies are revalued at the exchange rates in effect at the balance sheet date with the resulting net foreign exchange gains and losses included in earnings. Revenues and expenses denominated in foreign currencies are translated at the prevailing exchange rate on the transaction date.
The Company may use various derivative instruments such as foreign exchange forward, future and option contracts; industry loss warranty swaps; interest rate futures, swaps, swaptions, and options; credit default swaps; LIBOR swaps; commodity futures and options; weather swaps and options; loss development covers; and to-be-announced mortgage-backed securities. These derivative instruments are used to manage exposure to interest rate and currency risk, to enhance the efficiency of the Company's investment portfolio, to economically hedge certain risks, and as part of its weather risk management business. Except for a cash flow hedge entered into in 2004 as disclosed in Note 9, Derivatives, these derivative instruments do not qualify, and are not designated, as hedges. Derivatives are recorded at fair value with changes in fair value and any gains or losses are recognized in net realized and unrealized (losses) gains, net foreign exchange (gains) losses, or other underwriting loss in the Consolidated Statements of Income and Comprehensive Income.
The two-class method utilized by the Company is an earnings allocation formula that determines earnings per share for the holders of Endurance Holdings' ordinary shares (also referred to as "common shares") and participating common shares, which includes unvested restricted shares and restricted share units that receive cash dividends, according to dividends declared (or accumulated) and participation rights in undistributed earnings. Net income available to common and participating common shareholders is reduced by the amount of dividends declared in the current period and by the contractual amount of dividends that must be paid for the current period related to the Company's common and participating common shares. Any remaining undistributed earnings are allocated to the common and participating common shareholders to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. In periods of loss, no losses are allocated to participating common shareholders. Instead, all such losses are allocated solely to the common shareholders.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"). Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 was effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. ASU 2015-02 may be applied retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption. The Company adopted this standard on January 1, 2016 and it did not have a material impact on the Company's Consolidated Financial Statements.
The purchase price was allocated to the acquired assets and liabilities of Montpelier based on estimated fair values on July 31, 2015, the Closing Date, as detailed below. The Company recognized goodwill of $87.6 million primarily attributable to Montpelier's assembled workforce and synergies expected to result upon integration of Montpelier into the Company's operations. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes. The allocation of the purchase price was based on information that was available to management at the time the 2015 consolidated financial statements were prepared. The allocation was subject to change as additional information became available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair value recorded for these items may be subject to adjustments, which may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.
The Company identified finite lived intangible assets of $293.2 million, which will be amortized over a weighted average period of 8 years, identifiable indefinite lived intangible assets of $57.6 million, and certain other adjustments to the fair values of the assets acquired, liabilities assumed and shareholders' equity of Montpelier at July 31, 2015 as summarized in the table below:
An explanation of the significant fair value adjustments is as follows:
Other non-contractual relationships - these relationships consisted of Montpelier's brokers with the exception of those top brokers previously listed above as key non-contractual relationships and consideration was given to the expectation of the renewal of these relationships and the associated expenses;
The following table summarizes the fair value of the fixed maturity investments, short-term investments and equity securities classified as trading at December 31, 2016 and 2015.
Other investment funds - Other investment funds includes funds on deposit with Lloyd's, which are restricted, and the Company's investment in BCGR, which represents the net carrying value of the Company's investment in BCGR that has not been deployed into the BCGR cell.
High yield loan funds - There are generally no restrictions on the Company's right to redeem its interest in high yield loan funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds ranges from monthly to quarterly with notice periods from 30 to 90 days. The Company had no investments in high yield loan funds as of December 31, 2016.
Realized and unrealized gains and losses are recognized in earnings using the first in, first out method. The analysis of gross realized gains and losses, net unrealized gains and losses on trading securities, intangible asset impairment loss, and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2016, 2015 and 2014 are as follows:
During the year ended December 31, 2016, the Company impaired certain equity securities that were in an unrealized loss position for more than twelve consecutive months and therefore recognized in earnings total other-than-temporary impairments of $10.8 million (2015 - $3.7 million; 2014 - $0.6 million). As of December 31, 2016, the Company did not have the intent to sell any of the the remaining equity securities in an unrealized loss position.
As of December 31, 2016, Endurance Bermuda owned 25.2% of BCGR. BCGR is considered a "voting interest entity" under U.S. GAAP and, because the Company owns less than 50% of its outstanding ordinary shares, the Company does not consolidate BCGR's assets, liabilities or operations within its Consolidated Financial Statements. However, the BCGR Cell and Blue Water Re, the Company's wholly-owned Bermuda-based special purpose insurance vehicle, are considered VIEs under U.S. GAAP and the Company has determined that it is the primary beneficiary of these entities. Therefore, as funds held in BCGR are deployed into the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company's consolidated financial statements. Conversely, as funds previously deployed by BCGR and the BCGR Cell into Blue Water Re are returned to BCGR, they are no longer included in the Company's consolidated financial statements. The interests in the BCGR Cell and Blue Water Re that the Company fully consolidate that are attributable to third-party investors are reported within the Company's consolidated financial statements as non-controlling interests. BCGR's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determinations with respect to the BCGR Cell and Blue Water Re on an ongoing basis.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2016:
During the year ended December 31, 2016, $79.3 million of investments, consisting primarily of corporate securities, that were previously held by the Company indirectly in an equity fund as part of the Company's other investments, were transferred into Level 3 as no observable inputs were available, and $7.3 million of primarily collateralized loan and debt obligations, asset-backed and commercial mortgage-backed securities were transferred out of Level 3 to Level 2 during the year as market activity for these securities increased and observable inputs became available. During the year ended December 31, 2016, $18.4 million of U.S. government and agencies securities were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.
Observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits, temperature, rainfall, windspeed, wave height, snow fall, cyclone category;
A significant portion of the Company's contracts and policies cover excess layers for high severity exposures. Underwriting results and ultimate claims payments for this type of coverage are therefore not typically reported to the Company until later in the contract and policy lives. As a result, the level of losses reported to date is not necessarily indicative of expected future results.
The Company has included reserves acquired as part of its acquisition of Montpelier on a retrospective basis within its existing lines of business. In addition, the Company has restated all periods reflected in the various tables at the foreign exchange rates as of December 31, 2016.
The Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company's business segments. The Company's loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company's own operating history.
The Company establishes loss and loss expense reserves to provide for the estimated costs of paying claims under insurance policies and reinsurance contracts underwritten by the Company. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is based on management judgment and thus, actual losses incurred may vary significantly from management's estimates.
For insurance policies, the Company generally receives claims notices that are recorded by the claims staff within our underwriting, financial and claims systems. When we are notified of insured losses or discover potential losses as part of our claims audits, claims personnel record a case reserve as appropriate for the estimated amount of the exposure at that time. Reserves are also established to provide for the estimated expense of settling claims, including legal and other fees and the general expenses of administering the claims adjustment process.
The Company's Reinsurance segment and line of business include contracts written on a proportional or excess of loss basis. For proportional reinsurance business, the Company receives a bordereau indicating the Company's share of losses as well as other financial items. The Company does not have direct access to claims frequency information, and as such, the number of claims represented by the losses reported cannot be determined by the Company. The Company has determined that it is impracticable to provide claims frequency information related to its reinsurance contracts written on a proportional basis. The amount of IBNR related to proportional reinsurance contracts was $700.0 million at December 31, 2016.
Reconciliation of Claims Development Tables to Gross Reserve for Losses and Loss Expenses
The following is a reconciliation of the net incurred and paid claims development tables to the reserve for losses and loss expenses in the consolidated balance sheet at December 31, 2016.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2016, 2015 and 2014 are as follows:
At December 31, 2016 and 2015, the Company held collateral of $493.3 million and $321.5 million, respectively, related to its ceded reinsurance agreements.
On March 23, 2016, the Company and certain designated subsidiaries of the Company entered into a $450.0 million five-year letter of credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent (the "Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $700.0 million credit agreement, dated April 19, 2012, with JPMorgan as administrative agent. The Credit Facility does not provide for revolving or term loans. As of December 31, 2016 and 2015, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $199.8 million (2015 - $329.9 million).
The Credit Facility is collateralized on a several basis by each entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas as collateral agent. So long as there is no default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $100.0 million, but no participating lender is obligated to increase its commitments under the Credit Facility.
The Credit Facility requires the Company's compliance with certain customary restrictive covenants, including a financial covenant that the Company maintain a leverage ratio of no greater than 0.35:1.00 at any time. In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least "B+" at all times.
The indentures governing the 7% Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the 7% Senior Notes as of December 31, 2016 and 2015.
Upon closing the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and Wilmington Trust Company, as trustee, entered into the Second Supplemental Indenture, dated as of July 31, 2015 (the "Second Supplemental Indenture"). The Second Supplemental Indenture amended the Junior Subordinated Indenture, dated as of January 6, 2006 (as amended and supplemented from time to time (collectively, the "Junior Subordinated Supplemental Indentures")). The Junior Subordinated Supplemental Indentures provided for the express assumption by Endurance Holdings of the due and punctual payment of the principal of and any premium and interest (including any additional interest) on the unsecured junior subordinated deferrable interest notes issued by Montpelier in connection with the issuance of the trust preferred securities (the "Trust Preferred Securities") by MRH Capital Trust III (the "MRH Capital Trust") and the performance of every covenant of the Junior Subordinated Indenture on the part of Montpelier to be performed or observed. The MRH Capital Trust originally issued the Trust Preferred Securities in January 2006 in an aggregate principal amount of $100.0 million. The Trust Preferred Securities mature on March 30, 2036 and bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. The Trust Preferred Securities may be redeemed prior to maturity at a redemption price equal to 100% of the principal amount thereof plus accrued interest, provided that the prior approval of any applicable insurance regulatory authority with respect to such redemption has been received. The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
The Company made aggregate interest payments of $42.7 million during the year ended December 31, 2016 (2015 - $40.5 million; 2014 - $40.4 million).
On May 6, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCRH (the "BCRH Credit Facility"). The BCRH Credit Facility provides BCRH with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCRH Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. The BCRH Credit Facility contains covenants that limit BCRH's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCRH fails to comply with any of these covenants, the Company could terminate the BCRH Credit Facility and exercise remedies against BCRH. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCRH, the Company has the right to terminate the BCRH Credit Facility. As of December 31, 2016, BCRH had no outstanding borrowings under the BCRH Credit Facility.
Credit Default Swaps - to manage market exposures. The Company may assume or economically hedge credit risk through credit default swaps to replicate or hedge investment positions. The original term of these credit default swaps is generally five years or less.
To-Be-Announced Mortgage-backed Securities (“TBAs”) - to enhance investment performance and as part of the overall investment strategy. TBAs represent commitments to purchase or sell a future issuance of agency mortgage-backed securities. For the period between the purchase of a TBA and issuance of the underlying securities, the Company’s position is accounted for as a derivative.
The fair values and the related notional values of derivatives at December 31, 2016 and 2015 are noted below.
At December 31, 2016, derivative assets of $166.7 million (December 31, 2015 - $68.9 million) and liabilities of $84.1 million (December 31, 2015 - $46.1 million) were subject to master netting agreements, which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Interest rate futures are not subject to master netting agreements. At December 31, 2016 and 2015, the Company's derivative instruments were recorded on a gross basis in the Consolidated Balance Sheets.
The determination of the Company's business segments is based on how the Company monitors the performance of its underwriting operations. The Company has two reportable business segments, Insurance and Reinsurance.
Insurance - This segment is comprised of four lines of business: agriculture, casualty and other specialty, professional lines, and property, marine/energy and aviation. The agriculture line of business is comprised of multi-peril crop insurance, crop hail, livestock risk protection and other agriculture risk management products. The casualty and other specialty line of business is comprised of the insurance and facultative reinsurance of third party liability exposures, including casualty and healthcare liability. The professional line of business includes directors' and officers' liability, errors and omissions, employment practices liability, environmental liability and pension trust liability insurance. The property, marine/energy and aviation line of business is comprised of the insurance and facultative reinsurance of commercial properties, inland marine and ocean marine insurance, energy insurance, and general liability and property coverages for a wide range of general aviation risks.
Reinsurance - This segment is comprised of five lines of business: catastrophe, property, casualty, professional lines, and specialty. The catastrophe line of business includes reinsurance for catastrophic perils on a treaty basis. The property line of business includes proportional and excess of loss reinsurance of personal and commercial exposures. The casualty line of business is comprised of third party liability exposures, clash and workers' compensation coverages. The professional line of business includes directors' and officers' liability, errors and omissions, employment practices liability, environmental liability and pension trust liability reinsurance. The specialty line of business includes the reinsurance of aviation and space business and proportional and non-proportional reinsurance of hull and cargo insurance business, and proportional and excess of loss coverages of contract and commercial surety business, personal accident coverages, political risk coverages, weather risk management products and agriculture coverages for weather related perils as well as protection from yield and price risks.
The following table provides a summary of the segment revenues and results for the year ended December 31, 2016, reserve for losses and loss expenses as of December 31, 2016 and the carrying value of goodwill as of December 31, 2016:
The following table provides a summary of the segment revenues and results for the year ended December 31, 2015, reserve for losses and loss expenses as of December 31, 2015 and the carrying value of goodwill as of December 31, 2015:
No impairment of the Company's goodwill asset was noted following the annual impairment reviews during the years ended December 31, 2016 and 2015. The Company expects the amortization of the intangible assets with finite lives to approximate $63.7 million in 2017, $37.7 million in 2018, $27.5 million in 2019, $22.8 million in 2020, $21.6 million in 2021 and $53.0 million in all years thereafter.
Investment commitments. As of December 31, 2016 and 2015, the Company had pledged cash and cash equivalents and fixed maturity investments of $106.8 million and $108.9 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2016 and 2015, the Company had also pledged $252.2 million and $383.3 million of its cash and fixed maturity investments as required to meet collateral obligations for $222.3 million and $341.6 million in secured letters of credit outstanding under its credit facilities, respectively. In addition, at December 31, 2016 and 2015, cash and fixed maturity investments with fair values of $207.8 million and $208.3 million were on deposit with U.S. state regulators, respectively.
The Company is subject to certain commitments with respect to other investments at December 31, 2016 and 2015. See Note 4, Investments.
Premiums received by Syndicate 5151 are required to be received into the Lloyd's Premiums Trust Funds (the "Premiums Trust Funds"). Under the Premiums Trust Funds' deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time. As of December 31, 2016, the fair value of assets held in the Premiums Trust Funds was $184.1 million (2015- $231.9 million).
The Company's investment assets held in trust appear on the Company's Consolidated Balance Sheets as cash and cash equivalents, fixed maturity investments. short-term investments and accrued investment income, as appropriate.
Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2016 are as follows:
Total lease expense under operating leases for the year ended December 31, 2016 was $12.8 million (2015 - $16.5 million; 2014 - $14.7 million). Total sublease income included in total lease expense under operating leases for the year ended December 31, 2016 was $0.4 million (2015 - $1.3 million; 2014 - $1.3 million).
Legal Proceedings. The Company is party to various legal proceedings generally arising in the normal course of its business. While any proceeding contains an element of uncertainty, the Company does not believe that the eventual outcome of any litigation or arbitration proceeding to which it is presently a party could have a material adverse effect on its financial condition, results of operations or business. Pursuant to the Company's insurance and reinsurance agreements, disputes are generally required to be finally settled by arbitration.
The Company’s share capital at December 31, 2016 and 2015 is comprised as follows:
On June 1, 2011, Endurance Holdings issued 9,200,000 shares of its 7.5% Non-Cumulative Preferred Shares, Series B (the "Series B Preferred Shares"). Endurance Holdings received net proceeds of $224.0 million from its offering of Series B Preferred Shares, after expenses and underwriting discounts. The proceeds from the Series B Preferred Shares were used to provide additional capital to Endurance Holdings' subsidiaries and for other general corporate purposes.
Dividends on the Series C Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 6.35%. Dividends on the Series C Preferred Shares are not cumulative.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series C Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings' assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings' common equity securities, a liquidating distribution in the amount of $25,000.00 per Series C Preferred Share (equivalent to $25.00 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series C Preferred Shares and any parity shares and only to the extent of Endurance Holdings' assets, if any, that are available after satisfaction of all liabilities to creditors.
The following tables present the significant items reclassified out of accumulated other comprehensive loss during the years ended December 31, 2016 and 2015:
Fidelity Institutional Asset Management, a subsidiary of FMR, LLC ("Fidelity"), provides investment management services to the Company. Fidelity and its affiliates previously owned greater than 5% of Endurance Holdings' ordinary shares outstanding and was considered a related party. At December 31, 2016 Fidelity and its affiliates were no longer considered a related party as Fidelity's share ownership was less than 5%.
Upon completion of the acquisition of Montpelier, the Company assumed the Montpelier Re Holdings Ltd. 2012 Long-Term Incentive Plan (the "2012 Montpelier Equity Plan") and all awards outstanding thereunder and the future use of the remaining shares available for issuance under the 2012 Montpelier Equity Plan. The number of remaining shares under the 2012 Montpelier Equity Plan was adjusted pursuant to the terms of the Merger Agreement resulting in the registration of 1,025,349 ordinary shares under the 2007 Plan as amended, for future issuance thereunder.
On May 28, 2013, the Board of Directors elected John R. Charman as the Company's Chairman and Chief Executive Officer. Mr. Charman received an option to purchase 800,000 ordinary shares at an exercise price of $48.20 per share, and a grant of 708,890 restricted shares, as an employment inducement pursuant to Rule 303A.08 of the New York Stock Exchange Corporate Governance Standards and were made outside of the 2007 Plan.
The 800,000 options awarded to Mr. Charman, as discussed above, vest annually, in five equal tranches commencing on May 28, 2013, subject to the Mr. Charman's continued employment, or in the event of certain terminations of employment and other events. Mr. Charman's options have a ten-year contractual life. The Company uses the Black-Scholes-Merton formula to estimate the value of stock options granted.
Performance-based restricted shares are forfeited upon departure from the Company for any reason prior to the applicable vesting date other than in cases of death, disability, termination of employment in connection with a change in control or retirement. In the case of death, disability or change in control, 50% of the performance-based restricted shares will vest upon the date of death or disability or termination of employment in connection with a change in control. Where an employee meets certain retirement eligibility criteria, the performance-based restricted shares will continue to vest post-employment, subject to compliance with certain non-competition obligations.
The Company has issued time-based restricted shares to employees and non-employee directors of the Company's Board of Directors under the 2007 Plan. Restricted shares granted to employees generally vest pro-rata over a four-year period. Restricted shares are forfeited upon departure from the Company for any reason prior to the applicable vesting date other than in cases where an employee meets certain retirement eligibility criteria that allow for continuing post-employment vesting of restricted shares, subject to compliance with certain non-competition obligations.
The 708,890 restricted shares awarded to Mr. Charman, as discussed above, vest annually, in five equal tranches
The fair value of the restricted shares granted is equal to the fair market value of the Company's ordinary shares on the grant date. Compensation equal to the fair market value of the restricted shares at the measurement date is amortized and charged to income over the vesting period.
On July 31, 2015, upon completion of the Company's acquisition of Montpelier, outstanding Montpelier restricted share units were assumed by the Company and adjusted to represent the right to receive 0.472 of the Company's ordinary shares for each outstanding Montpelier restricted share unit rounded down to the next whole number of the Company's ordinary shares.
The fair value of the restricted share units granted or assumed is equal to the fair market value of the Company's ordinary shares on the grant or assumption date, as applicable. Compensation equal to the fair market value of the restricted share units at the measurement date is amortized and charged to income over the vesting period.
A summary of option activity, including options held by employees, during the year ended December 31, 2016 is presented below:
No options were granted or expired during the years ended December 31, 2016, 2015, and 2014. During the years ended December 31, 2016, 2015 and 2014, 160,000, 160,000 and 160,000 options vested, respectively. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $3.2 million, $9.5 million, and $0.3 million, respectively. The Company received proceeds of $7.7 million from the exercise of options during the year ended December 31, 2016. The Company issued new ordinary shares in connection with the exercise of the above options.
For the years ended December 31, 2016, 2015 and 2014, compensation costs recognized in earnings for all restricted shares and restricted share units were $35.7 million, $53.9 million, and $27.9 million, respectively. At December 31, 2016, compensation costs not yet recognized related to non-vested awards was $26.2 million (2015 - $26.7 million). This expense is expected to be recognized between 2017 and 2020, with approximately 65.3% expected to be recognized during 2017.
The 2015 ESPP is not subject to any provisions of the Employee Retirement Income Security Act of 1974 as amended, and is not a qualified plan within the meaning of Section 402(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The ESPP is a qualified plan under Section 423 of the Code.
On signing of the Merger Agreement with Sompo, the 2015 ESPP was suspended as of January 1, 2017 and will be terminated if and when the Merger closes.
Blue Water Re and Blue Water Re II are registered with the BMA as Special Purpose Insurers and are not subject to the BMA's Bermuda Solvency Capital Requirement ("BSCR"); however, the Bermuda Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by Blue Water Re and Blue Water Re II. There is no minimum solvency margin or liquidity ratio that must be maintained by Blue Water Re or Blue Water Re II so long as the value of their assets exceed the value of their liabilities. At December 31, 2016, Blue Water Re's assets exceeded the value of its liabilities by $263.1 million (2015 - $269.6 million), and Blue Water Re II's assets exceeded the value of its liabilities by $11.3 million (2015 - $212.5 million). Blue Water Re and Blue Water Re II did not declare or pay any dividends to their parent, BCML, during 2016.
Blue Capital Re is registered with the BMA as a Class 3A insurer. The Bermuda Insurance Act requires Blue Capital Re to maintain minimum levels of statutory capital and surplus to maintain minimum liquidity ratios and to meet minimum solvency margins. At December 31, 2016, Blue Capital Re exceeded these minimum requirements. At December 31, 2016, Blue Capital Re can pay dividends of $45.9 million (2015- $50.6 million) to it's parent without prior approval under Bermuda law.
BCML is licensed and supervised by the BMA to carry on investment business and as an insurance agent/manager. BCML is not subject to any material minimum solvency requirements.
The required and actual statutory capital amounts in the "U.K." category in the table above include amounts related to Endurance U.K. Under the jurisdiction of the United Kingdom's Prudential Regulation Authority ("PRA"), Endurance U.K. must maintain a margin of solvency at all times under the Solvency II Directive from the European Insurance and Occupational Pensions Authority which was effective January 1, 2016. The regulations stipulate that insurers are required to calculate their minimum capital requirement and solvency capital requirement ("SCR"). Insurers can either apply for approval of an internal model to calculate the SCR or adopt the standard formula. Endurance U.K. has utilized the standard formula for the SCR as of December 31, 2016. As of December 31, 2015, the SCR was based upon Solvency I to calculate the capital requirement under Individual Capital Guidance, the risk based capital assessment, superseded by Solvency II. At December 31, 2016 and 2015, the actual capital for Endurance U.K. exceeded all of the capital requirements promulgated by the PRA.
ECCL is required to deposit cash, securities or letters of credit (or a combination of these assets) with Lloyd's in order to satisfy its FAL requirements, which are met through the Lloyd's Capital Trust. At December 31, 2016, ECCL had total FAL of $323.6 million (2015- $276.8 million) which was provided by Endurance Bermuda.
The income tax benefit (expense) was as follows for the years ended December 31, 2016, 2015 and 2014, respectively:
Net income tax payments for the years ended December 31, 2016, 2015 and 2014 totaled $7.8 million, $2.4 million, and $0.9 million respectively. Net operating loss carryforwards gross of tax in the amount of $119.8 million, $45.9 million, $61.1 million and $44.5 million are available for application against future taxable income in the United States, United Kingdom, and Endurance Bermuda's branches in Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States, the net operating loss carry forwards expire through 2016 and 2028, respectively.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2016, management has established a valuation allowance of $104.8 million (2015 - $131.1 million) against net deferred tax assets in the Company's United States subsidiaries and Endurance Bermuda's Singapore and Switzerland branches.
In 2015 Management concluded that valuation allowances were required against the net operating loss and net capital loss carryforwards assumed as part of the Montpelier acquisition. The valuation allowances had been established as Internal Revenue Code Section 382 limits the application of net operating loss and net capital loss carryforwards following an ownership change. Accordingly, a tax effected valuation allowance of $11.6 million and $0.7 million, respectively, was required as of August 1, 2015. The Montpelier capital loss carryforwards have fully expired. The operating loss carryforwards available per year are $0.2 million as required by Internal Revenue Code Section 382.
The following is a summary of the unaudited quarterly data for the year ended December 31, 2016: