Rental expense for the Company's operations was approximately $52,925,000, $47,453,000 and $46,271,000 for 2017, 2016 and 2015, respectively. Future minimum lease payments, without provision for sublease income, are $50,117,000 in 2018, $41,326,000 in 2019 and $195,509,000 thereafter.
During 2017, catastrophe losses were $184 million, mainly related to hurricanes Harvey, Irma, and Maria, two earthquakes in Mexico, and wildfires in California.
The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2017:
Our net reserves for losses and loss expenses of approximately $10.1 billion as of December 31, 2017 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident.
Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of December 31, 2017 and 2016:
Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of December 31, 2017 and 2016:
Favorable prior year development (net of additional and return premiums) was $37 million in 2017.
Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional liability business.
Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business.
Favorable prior year development (net of additional and return premiums) was $63 million in 2015.
For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. In 2015, reported workers' compensation losses were below our expectations for many of our operating units. In addition, overall loss frequency and severity trends emerged better than the assumptions underlying our previous reserve estimates. The long term trend of declining workers' compensation claim frequency continued in 2015. The improvement is attributable to better workplace safety and to benign medical severity trends as we continue to invest in medical case management services and higher usage of preferred provider networks.
Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $56 million and $68 million at December 31, 2017 and 2016, respectively. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.
Preferred Stocks - At December 31, 2017, there was one preferred stock in an unrealized loss position, with an aggregate fair value of $23.1 million and a gross unrealized loss of $2.6 million. The preferred stock is rated investment grade. Management believes the unrealized loss is due primarily to market and sector related factors and does not consider it to be OTTI. For the years ended December 31, 2017 and 2016, there were no OTTI for preferred stocks.
Loans Receivable - The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $3 million for both December 31, 2017 and 2016.
Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date". The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.
The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of December 31, 2017:
Cash flow model - If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3.
Premiums. Gross premiums written were $7,477 million in 2017, a decrease of 1% from $7,544 million in 2016. The decrease was due to a decrease in the Reinsurance segment of $141 million, partially offset by an increase in the Insurance segment of $74 million. Approximately 79% of policies expiring in 2017 were renewed and 77% of policies expiring in 2016 were renewed.
Average renewal premium rates (adjusted for change in exposures) increased 0.9% in 2017, 0.3% in 2016 and 1.2% in 2015. However, overall loss costs are also increasing, and current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives.
Insurance gross premiums increased 1% to $6,870 million in 2017 from $6,796 million in 2016. Gross premiums increased $38 million (6%) for commercial auto, $37 million (5%) for professional liability, $6 million (less than 1%) for short-tail lines and $6 million (less than 1%) for other liability, partially offset by a decrease of $13 million (1%) for workers' compensation.
Premiums earned increased less than 1% to $6,311 million in 2017 from $6,293 million in 2016. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly recent rate increases will be earned over the upcoming quarters. Premiums earned in 2017 are related to business written during both 2017 and 2016. Audit premiums were $172 million in 2017 compared with $156 million in 2016.
Net investment income increased 2% to $576 million in 2017 from $564 million in 2016 primarily due to an increase in income from fixed maturity securities of $29 million, as well as real estate of $13 million and a decrease in investment expenses of $2 million, partially offset by a decrease in investment funds of $31 million. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities was 3.3% in 2017 and 3.2% in 2016; accordingly the increase in fixed maturity securities income was mainly the result of a larger investment portfolio. The effective duration of the fixed maturity portfolio was 3.0 years at December 31, 2017, down from 3.1 years at December 31, 2016. Average invested assets, at cost (including cash and cash equivalents), were $17.5 billion in 2017 and $16.7 billion in 2016.
Net foreign currency (gains) losses result from transactions denominated in a currency other than an operating unit’s functional currency. Net foreign currency losses were $15 million in 2017 compared to gains of $12 million in 2016.
Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 2016 and 2015. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
Insurance gross premiums increased 4% to $6,796 million in 2016 from $6,565 million in 2015. Gross premiums increased $198 million (10%) for other liability, $58 million (9%) for professional liability and $32 million (2%) for workers' compensation, partially offset by decreases of $30 million (4%) for commercial auto and $27 million (2%) for short-tail lines.
Reinsurance gross premiums increased 9% to $748 million in 2016 from $685 million in 2015. Gross premiums written decreased $7 million (2%) for casualty lines and increased $70 million (29%) for property lines.
A summary of loss ratios in 2016 compared with 2015 by business segment follows:
Insurance - The loss ratio of 61.0% in 2016 was 0.2 points higher than the loss ratio of 60.8% in 2015. Catastrophe losses were $89 million in 2016 compared with $55 million in 2015, an increase of 0.6 loss ratio points. Favorable prior year reserve development was $53 million in 2016 compared with $52 million in 2015, reflecting no difference of loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.4 points to 60.4% in 2016 from 60.8% in 2015.
Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased 4%, the same as the increase in net premiums earned of 4%. The expense ratio (policy acquisition and insurance operating expenses expressed as a percentage of premiums earned) was 33.2% in both 2016 and 2015.
Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with a business engaged in the distribution of promotional merchandise and aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from non-insurance businesses were $375 million in 2016 compared to $397 million in 2015, with the decrease primarily related to the sale of Aero Precision Industries in August 2016.
As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the near historically low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
The Company also attempts to maintain an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration of the investment portfolio was 3.0 years and 3.1 years at December 31, 2017 and 2016, respectively. The Company’s investment portfolio and investment-related assets as of December 31, 2017 were as follows:
Investment Funds. At December 31, 2017, the carrying value of investment funds was $1,156 million, including investments in real estate funds of $607 million, energy funds of $83 million, and other funds of $466 million. Investment funds are primarily reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At December 31, 2017, real estate properties in operation included a long-term ground lease in Washington D.C., a hotel in Memphis, Tennessee, an office complex in New York City and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are two properties under development: an office building in London and a mixed-use project in Washington D.C. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.
Loans Receivable. Loans receivable, which are carried at amortized cost, had an amortized cost of $80 million and an aggregate fair value of $82 million at December 31, 2017. The amortized cost of loans receivable is net of a valuation allowance of $3 million as of December 31, 2017. Loans receivable include real estate loans of $66 million that are secured by commercial real estate located primarily in Georgia and New York. Real estate loans receivable generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. Loans receivable include commercial loans of $14 million that are secured by business assets and have fixed interest rates and varying maturities not exceeding 15 years.
The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company generally targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 80% invested in cash, cash equivalents and marketable fixed maturity securities as of December 31, 2017. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.
Debt. At December 31, 2017, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,497 million and a face amount of $2,530 million. The maturities of the outstanding debt are $443 million in 2019, $311 million in 2020, $426 million in 2022, $250 million in 2037, $350 million in 2044, $350 million in 2053 and $400 million in 2056.
In February 2016, the Company issued $110 million aggregate principal amount of its 5.9% subordinated debentures due 2056, and in May 2016, the Company issued $290 million aggregate principal amount of its 5.75% subordinated debentures due 2056. During 2016, the Company repaid $83 million of debt on various issuances, mainly in connection with the sale of Aero Precision Industries. During 2017, one of the Company's non-insurance subsidiaries issued $7 million of debt.
Total Capital. Total capitalization (equity, senior notes and other debt and subordinated debentures) was $7.9 billion at December 31, 2017. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 32% at December 31, 2017 and 33% at December 31, 2016.
Property reinsurance treaties - The Company purchases property reinsurance to reduce its exposure to large individual property losses and catastrophe events. Following is a summary of significant property reinsurance treaties in effect as of January 1, 2018: The Company’s property per risk reinsurance generally covers losses between $2.5 million and $50 million. The Company’s catastrophe excess of loss reinsurance program provides protection for net losses between $30 million and $355 million for the majority of business written by its U.S. Insurance segment operating units, excluding offshore energy. The Company has separate catastrophe excess of loss reinsurance for business written through its Lloyd’s Syndicate that provides protection for losses between $8.5 million and $52.5 million for events in North America. For North American losses greater than $52.5 million, the business written through the Company's Lloyd's Syndicate is protected within the U.S. program up to $355 million. The Company’s catastrophe reinsurance agreements are subject to certain limits, exclusions and reinstatement premiums.
Ceded earned premiums increased 5.7% in 2017 to $1,162 million. The ceded losses and loss expenses ratio decreased 12 points to 52% in 2017 from 64% in 2016.
S&P rating, or if not rated by S&P, A.M. Best rating.
The estimated payments for reserves for losses and loss expenses in the above table represent the projected (undiscounted) payments for gross loss and loss expense reserves related to losses incurred as of December 31, 2017. The estimated payments in the above table do not consider payments for losses to be incurred in future periods. These amounts include reserves for reported losses and reserves for incurred but not reported losses. Estimated amounts recoverable from reinsurers are not reflected. The estimated payments by year are based on historical loss payment patterns.The actual payments may differ from the estimated amounts due to changes in ultimate loss reserves and in the timing of the settlement of those reserves. In addition, at December 31, 2017, the Company had commitments to invest up to $406.2 million and $359.7 million in certain investment funds and real estate construction projects, respectively. These amounts are not included in the above table.
The Company utilizes letters of credit to back certain reinsurance payments and obligations. Outstanding letters of credit were $4 million as of December 31, 2017. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels.
Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums increased net premiums written and premiums earned by $8 million, $8 million and $3 million in 2017, 2016 and 2015, respectively.
Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives
The Company files a consolidated income tax return in the U.S. and foreign tax returns in countries where it has overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under this method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense.
Interest payments were $145 million, $137 million and $130 million in 2017, 2016 and 2015, respectively. Income taxes paid were $207 million, $232 million and $165 million in 2017, 2016 and 2015, respectively. Other non-cash items include unrealized investment gains and losses. (See Note 11 of Notes to Consolidated Financial Statements.)
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various previous provisions related to how share-based payments are accounted for and presented in the financial statements. Under the new guidance, excess tax benefits (deductions for share
In May 2014, the FASB issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The Company determined that the adoption of this guidance on January 1, 2018 will not have a material effect on the Company’s financial condition or results of operations.
In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income, which amends previous guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018, and is eligible for early adoption. The Company expects to adopt the updated guidance in 2018, which should not impact its results of operations or financial position.
At December 31, 2017 and 2016, investments in fixed maturity securities were as follows:
(1) Gross unrealized gain (losses) for mortgage-backed securities include $76,467 and ($818,691) as of December 31, 2017 and 2016, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.
The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2017, the fair value of long option contracts outstanding was $1 million (notional amount of $136 million) and the fair value of short option contracts outstanding was $8 million (notional amount of $135 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.
In 2017, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, an office complex in New York City and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $25,646,000 and $16,425,000 as of December 31, 2017 and 2016, respectively. Related depreciation expense was $9,212,000 and $6,940,000 for the years ended December 31, 2017 and 2016, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $28,175,755 in 2018, $33,653,067 in 2019, $33,435,418 in 2020, $33,878,321 in 2021, $33,885,797 in 2022 and $517,372,272 thereafter.
The real estate loans are secured by commercial real estate primarily located in Georgia and New York. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans generally earn interest on a fixed basis and have varying maturities not exceeding 15 years.
In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at December 31, 2017, and accordingly, the Company determined that a specific valuation allowance was not required.
Fixed Maturity Securities - A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2017 is presented in the table below:
Common Stocks - At December 31, 2017, there were three common stocks in an unrealized loss position, with an aggregate fair value of $18.6 million and a gross unrealized loss of $2.0 million. Based on management's view of these securities, the Company does not consider the common stocks to be OTTI. For the year ended December 31, 2017, there were no OTTI for common stocks. OTTI for common stocks for the year ended December 31, 2016 were $18.1 million.
The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
There were no significant transfers between Levels 1 and 2 for the years ended December 31, 2017 and 2016.
The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2017 and 2016:
During the years ended December 31, 2017 and 2016, there were no securities transferred out of Level 3.
The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions.
The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns.
The claim count information set forth in the tables presented below may not provide an accurate reflection of ultimate loss payouts by product line.
Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2017) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.
The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $1,010,000, $1,049,000 and $1,020,000 as of December 31, 2017, 2016 and 2015, respectively.
The following table presents the amounts due from reinsurers as of December 31, 2017:
Indebtedness consisted of the following as of December 31, 2017 (the difference between the face value and the carrying value is unamortized discount and debt issuance costs):
(1) Subsidiary debt is due as follows: $2 million in 2019, $11 million in 2020, and $0.03 million in 2022.
Income before income taxes from domestic operations was $797 million, $837 million and $689 million for the years ended December 31, 2017, 2016 and 2015, respectively. Income (loss) before income taxes from foreign operations was ($25) million, $59 million and $43 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Tax Cuts and Jobs Act of 2017 (the Tax Act) was enacted on December 22, 2017. The Tax Act provides for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also provides for a mandatory repatriation of foreign earnings, which requires companies to pay a one-time tax on the unremitted accumulated earnings of their foreign subsidiaries.
In 2017, the Company reported a net tax benefit related to the Tax Act in the amount of $20.7 million. This included a tax benefit due to the reduction of the tax rate as applied to the net U.S. deferred tax liability in the amount of $30.5 million. Offsetting this tax benefit, the Company recorded a provisional charge of $9.8 million on the deemed repatriation of earnings and related impact of utilization of foreign losses. The charge may be adjusted as the applicable earnings related to the foreign subsidiaries are finalized for the purpose of the mandatory repatriation inclusion computation.
The U.S. tax law requires insurance reserves to be discounted and new guidance on the appropriate discount rates required by the Tax Act has not yet been published. The Company has not included a provisional amount for the impact of the Tax Act on the tax deductible insurance reserves.
The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. The Company’s lead insurer, Berkley Insurance Company (BIC), directly or indirectly owns all of the Company’s other insurance companies. During 2018, the maximum amount of dividends that can be paid by BIC without such approval is approximately $699 million.
BIC’s combined net income and statutory capital and surplus, as determined in accordance with statutory accounting practices (SAP), are as follows:
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2017 and 2016:
The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Future minimum lease payments, without provision for sublease income, are: $50,117,000 in 2018; $41,326,000 in 2019; $38,721,000 in 2020; $34,982,000 in 2021, 29,720,000 in 2022 and $92,086,000 thereafter. Rental expense was $52,925,000, $47,453,000, and $46,271,000 for 2017, 2016, and 2015 respectively.
Pursuant to the Company's stock incentive plan, the Company may issue restricted stock units (RSUs) to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2017:
Upon vesting, shares of the Company’s common stock equal to the number of vested RSUs are issued or deferred to a later date, depending on the terms of the specific award agreement. As of December 31, 2017, 5,027,614 RSUs had been deferred. RSUs that have not yet vested and vested RSUs that have been deferred are not considered to be issued and outstanding shares.
The fair value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and expensed over the vesting period. Following is a summary of changes in unearned compensation for the three years ended December 31, 2017:
The following table summarizes the outstanding LTIP awards as of December 31, 2017:
Commencing with the first quarter of 2017, the Company reclassified two businesses from the Insurance segment to the Reinsurance segment. Reclassifications have been made to the Company's prior periods financial information to conform with this presentation.
(1) Revenues for Insurance includes $688.2 million, $733.3 million and $786.9 million in 2017, 2016 and 2015, respectively, from foreign countries. Revenues for Reinsurance includes $201.3 million, $200.5 million and $223.4 million in 2017, 2016 and 2015, respectively, from foreign countries.