We use an aggregate of approximately 1,937,300 square feet in approximately 105 office locations and approximately 410 store fronts. We have an ownership interest in the entities that own the buildings in which we lease space at two of these locations, which represent an aggregate of approximately 266,200 square feet.
The following tables set forth our selected historical consolidated financial and operating information for the periods ended and as of the dates indicated. The income statement data for the years ended December 31, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2016 and 2015 are derived from our audited financial statements included elsewhere in this annual report. These historical results are not necessarily indicative of results to be expected from any future period.
We evaluate our operations by monitoring key measures of growth and profitability, including net loss ratio, net combined ratio (non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) between 90% and 95% while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. To achieve our targeted net combined ratio (non-GAAP) we continually seek ways to reduce our operating costs and lower our expense ratio. For the year ended December 31, 2016, our operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.7x, which was within our planned target operating leverage of between 1.5x and 2.0x.
Investment income is also an important part of our business. Because we often do not settle claims until several months or longer after we receive the original policy premiums, we are able to invest cash from premiums for significant periods of time. We invest our capital and surplus in accordance with state and regulatory guidelines. Our net investment income was $99.6 million, $75.3 million and $52.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. We held 5.8% and 7.8%, of total invested assets in cash and cash equivalents as of December 31, 2016 and 2015, respectively.
Our most significant balance sheet liability is our unpaid loss and loss adjustment expense (“LAE”) reserves. As of December 31, 2016 and 2015, our reserves, net of reinsurance recoverables, were $1,384.3 million and $922.4 million, respectively. We record reserves for estimated losses under insurance policies that we write and for LAE related to the investigation and settlement of policy claims. Our reserves for loss and LAE represent the estimated cost of all reported and unreported loss and LAE incurred and unpaid at any time based on known facts and circumstances. Our reserves, excluding life reserves, for loss and
LAE incurred and unpaid are not discounted using present value factors. Our loss reserves are reviewed quarterly by internal actuaries and at least annually by our external actuaries. Reserves are based on estimates of the most likely ultimate cost of individual claims. These estimates are inherently uncertain. Judgment is required to determine the relevance of our historical experience and industry information under current facts and circumstances. The interpretation of this historical and industry data can be impacted by external forces, principally frequency and severity of future claims, the length of time needed to achieve ultimate settlement of claims, inflation of medical costs, insurance policy coverage interpretations, jury determinations and legislative changes. Accordingly, our reserves may prove to be inadequate to cover our actual losses. If we change our estimates, these changes would be reflected in our results of operations during the period in which they are made, with increases in our reserves resulting in decreases in our earnings.
In November 2016, we closed on the acquisition of Elara Holdings, Inc., the parent company of Direct General Corporation, a Tennessee based property and casualty insurance company (“Direct General”), that predominantly writes nonstandard auto business in the Southeast. The acquisition added a direct distribution channel to our growing personal lines business. The purchase price for the transaction was approximately $162.0 million.
In October 2016, we closed on the acquisition of Standard Property and Casualty Insurance Company (f/k/a Standard Mutual Insurance Company), an Illinois-based underwriter of personal auto and homeowners insurance in Illinois and Indiana (“SPCIC”). The transaction provides us entry into these states for both homeowners and package products, and adds to our expansion of standard and preferred lines. The purchase price for the transaction was approximately $4.9 million.
maturities and equity securities classified as trading. We report realized and unrealized gains (losses) on those securities classified as trading in earnings.
General and administrative expenses. General and administrative expenses are composed of all other operating expenses, including various departmental salaries and benefits expenses for employees that are directly involved in the maintenance of policies, information systems, and accounting for insurance transactions, and other insurance expenses such as federal excise tax, postage, telephones and Internet access charges, as well as legal and auditing fees and board and bureau charges. In addition, general and administrative expenses include those charges that are related to the amortization of tangible and intangible assets and non-insurance activities in which we engage.
Equity in earnings (losses) from unconsolidated subsidiaries. This represents primarily our share in earnings or losses of our investment in four companies that own life settlement contracts, which includes the gain realized upon a mortality event and the change in fair value of the investments in life settlements as evaluated at the end of each reporting period. These unconsolidated subsidiaries determine the fair value of life settlement contracts based upon an estimate of the discounted cash flow of the anticipated death benefits incorporating a number of factors, such as current life expectancy assumptions, expected premium payment obligations and increased cost assumptions, credit exposure to the insurance companies that issued the life insurance policies and the rate of return that a buyer would require on the policies. The gain realized upon a mortality event is the difference between the death benefit received and the recorded fair value of that particular policy.
Premiums. We recognize earned premium on a pro rata basis over the terms of the policies, generally periods of six or twelve months. Unearned premium represents the portion of premiums written applicable to the unexpired terms of the policies. Net premiums receivable represent premium written and not yet collected, net of an allowance for uncollectible premium. We regularly evaluate premium and other receivables and adjust for uncollectible amounts as appropriate. Receivables specifically identified as uncollectible are charged to expense in the period the determination is made.
We also collect service fees in the form of commissions and general agent fees by selling policies issued by third-party insurance companies. We do not bear insurance underwriting risk with respect to these policies. Commission income and general agent fees are recognized, net of an allowance for estimated policy cancellations, at the date the customer is initially billed or as of the effective date of the insurance policy, whichever is later. The allowance for estimated third-party cancellations is periodically evaluated and adjusted as necessary.
Investments. We account for investments in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, “Investments - Debt and Equity Securities,” which requires that equity securities that have readily determinable fair values and all investments in debt securities to be segregated into categories based upon our intention for those securities. Based on our intention, we have classified our investments as available for sale or trading, with the exception of our equity and cost method investments. We may sell our available-for-sale securities in response to changes in interest rates, risk/reward characteristics, liquidity needs or other factors. Available-for-sale securities are reported at their estimated fair values based on a recognized pricing service, with unrealized gains and losses, net of tax effects, reported as a separate component of other comprehensive income in the consolidated statements of comprehensive income. Trading securities are reported at their estimated fair values with net realized and unrealized gains and losses included in earnings.
whether management intends to sell the security and, if not, whether it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis;
Non-controlling Interest. The ownership interest in consolidated subsidiaries of non-controlling interests is reflected as non-controlling interest. Our consolidation principles also consolidate entities in which we are deemed a primary beneficiary. Non-controlling interest income or loss represents such non-controlling interests in the earnings of that entity. We consolidate the Reciprocal Exchanges as we have determined that these are variable interest entities and that we are the primary beneficiary.
•U.S. Treasury and Federal Agencies - Comprised primarily of bonds issued by the U.S. Treasury. The fair values of U.S. government securities are based on quoted market prices in active markets, and are included in the Level 1 fair value hierarchy. We believe the market for U.S. government securities is an actively traded market given the high level of daily trading volume.
•States and Political Subdivision Bonds - Comprised of bonds and auction rate securities issued by U.S. states and municipal entities or agencies. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, these are classified within Level 2 of the fair value hierarchy. We also hold certain municipal bonds that finance economic development, infrastructure and environmental projects which do not have an active market. These bonds are valued based on non-binding broker quotes where the inputs have not been corroborated to be market observable and are classified as Level 3 in the fair value hierarchy.
•Mortgage and Structured Securities - Comprised of commercial and residential mortgage-backed and structured securities. The primary inputs to the valuation include quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, prepayment speeds, collateral performance and credit spreads, these are classified within Level 2 of the fair value hierarchy. We also hold certain mortgage and structured securities valued based on non-binding broker quotes received from brokers who are familiar with the investments and where the inputs have not been corroborated to be market observable, these are classified within Level 3 of the fair value hierarchy.
•Debt - The amount reported in the accompanying balance sheets for these financial instruments represents the carrying value of our debt. We utilize a pricing service to estimate its fair value, other than our publicly traded debt.
Gross premium written. Gross premium written increased by $909.8 million, or 35.1%, from $2,589.7 million for the year ended December 31, 2015 to $3,499.5 million for the year ended December 31, 2016, due to an increase of $697.7 million in premiums received from the P&C segment primarily as a result of the acquisitions of Direct General ($58.5 million) and Century-National ($140.0 million), additional premiums from the LPI Business ($249.5 million) and ARS ($74.6 million), and organic growth ($203.4 million), partially offset by the first quarter deconsolidation of the Reciprocal Exchanges ($40.8 million). Premiums received from the A&H segment increased by $212.1 million, primarily as a result of additional premiums from the Assurant Transaction ($133.7 million) and organic growth ($76.7 million).
Net earned premium. Net earned premium increased by $864.0 million, or 40.6%, from $2,129.8 million for the year ended December 31, 2015 to $2,993.8 million for the year ended December 31, 2016. The increase by segment was: P&C $660.8 million and A&H $203.1 million. The increase in the P&C segment was primarily attributable to the acquisitions of Direct General ($68.3 million) and Century-National ($122.4 million), additional premiums from the LPI Business ($299.4 million) and ARS ($42.5 million), and organic growth ($140.4 million), partially offset by the first quarter deconsolidation of the Reciprocal Exchanges ($24.3 million). The increase in the A&H segment was primarily due to additional premiums from the Assurant Transaction ($134.1 million) and organic growth ($66.9 million).
Ceding commission income. Ceding commission income increased from $43.8 million for the year ended December 31, 2015 to $45.6 million for the year ended December 31, 2016, primarily driven by an increase attributable to the acquisition of Century-National, partially offset by an increase to the sliding scale adjustment on our terminated third-party quota share agreement and the first quarter deconsolidation of the Reciprocal Exchanges within our P&C segment.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $576.9 million, or 41.8%, from $1,381.6 million for the year ended December 31, 2015 to $1,958.5 million for the year ended December 31, 2016, primarily reflecting the Direct General and Century-National acquisitions; additional losses from the LPI Business, ARS and the Assurant Transaction; catastrophe losses related to hail storms that occurred in Dallas and San Antonio, Texas; floods that occurred in Louisiana; and Hurricane Matthew in the Southeast; and loss experience in our legacy domestic stop loss programs, partially offset by the first quarter deconsolidation of the Reciprocal Exchanges. The changes by segment were: P&C - increased $448.9 million and A&H - increased $128.0 million. Loss and LAE for the year ended December 31, 2016 included $13.5 million of unfavorable development on prior accident year loss and LAE reserves. The $4.2 million of unfavorable development in the P&C segment was primarily driven by higher than expected development in private passenger auto bodily injury coverage, and $9.3 million of unfavorable development in the A&H segment was primarily driven by unfavorable development in the domestic stop loss, short-term medical and European A&H policies. Our consolidated net loss ratio slightly increased from 64.9% for the year ended December 31, 2015 to 65.4% for the year ended December 31, 2016, with a higher P&C segment net loss ratio and a lower A&H segment net loss.
General and administrative expenses. General and administrative expenses increased by $313.8 million, or 59.2%, from $530.3 million for the year ended December 31, 2015 to $844.1 million for the year ended December 31, 2016, primarily as a result of the Direct General ($38.0 million) and Century-National ($34.4 million) acquisitions, additional expenses from the LPI Business ($148.7 million), ARS ($7.7 million) and the Assurant Transaction ($39.8 million), higher expenses on the Reciprocal Exchanges ($18.2 million), and organic growth and other ($26.8 million).
Bargain purchase gain and other revenue (expense). For the year ended December 31, 2016, we had a $24.3 million bargain purchase gains related to net assets acquired in excess of the purchase price paid for the acquisitions of Direct General ($7.1 million)
and SPCIC ($17.2 million). The SPCIC transaction was sponsored by us, with the conversion of a mutual company to stock company and our offering of common stock at a discount to members, directors and officers of the acquired company.
Equity in earnings of unconsolidated subsidiaries. Equity in earnings of unconsolidated subsidiaries, which primarily relates to our 50% interest in life settlement entities, increased by $14.8 million from $10.6 million in earnings for the year ended December 31, 2015 to $25.4 million in earnings for the year ended December 31, 2016, due to the change in fair market value of the life settlement contracts and income from our real estate investments.
The increase in consolidated tax expense was primarily driven by several factors. Pre-tax income increased by 27.6% year over year. Additionally, there was a 78.2% decrease in the tax benefit attributable to the utilization of our Luxembourg equalization reserves. The effects of the Luxembourg technical reserve utilization will likely conclude in the next fiscal year. The upward trend in our effective tax rate was limited by the effects of bargain purchase gains associated with two acquisitions during 2016 as well as a reduction of the valuation allowance at the Reciprocal Exchanges. Combined these two items has a net benefit of 10.4% to the effective tax rate of the consolidated group.
Net earned premium. Net earned premium increased by $496.6 million, or 30.4%, from $1,633.2 million for the year ended December 31, 2014 to $2,129.8 million for the year ended December 31, 2015. The increase by segment was: P&C - $405.8
Ceding commission income. Ceding commission income increased from $12.4 million for the year ended December 31, 2014 to $43.8 million for the year ended December 31, 2015, reflecting the consolidation of the Reciprocal Exchanges, partially offset by a decrease from the Quota Share Runoff, including a sliding scale adjustment to our terminated third-party quota share in 2015.
offset by the consolidation of our EHC business as all new and renewal policies placed by EHC after April 1, 2014 are underwritten by our European insurance subsidiaries.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $136.1 million, or 28.2%, from $482.9 million for the year ended December 31, 2014 to $618.9 million for the year ended December 31, 2015. The consolidated net operating expense ratio (non-GAAP), which includes the Reciprocal Exchanges, decreased to 29.1% in the year ended December 31, 2015 from 29.6% in the year ended December 31, 2014, primarily as a result of increased service and fee income and maturation of the A&H business, partially offset by increased general and administrative expenses, and increased acquisition costs and other underwriting expenses.
Excluding the Reciprocal Exchanges, the net operating expense ratio was 29.3% and 29.6% for the years ended December 31, 2015 and 2014, respectively. The Reciprocal Exchanges’ net operating expense ratio was 25.1% and 27.9% for the year ended December 31, 2015 and for the period ended December 31, 2014, respectively.
Interest expense. Interest expense for the years ended December 31, 2015 and 2014 was $28.9 million and $17.7 million, respectively, increasing primarily due to our (i) May 2014 issuance of $250.0 million aggregate principal amount of 6.75% Notes; (ii) August 2015 issuance of $100.0 million aggregate principal amount of 7.625% Notes; (iii) October 2015 issuance of $100.0 million aggregate principal amount of additional 6.75% Notes and (iv) the consolidation of the Reciprocal Exchanges.
NGHC, excluding the Reciprocal Exchanges, had income tax expense of $24.9 million and $22.7 million for the years ended December 31, 2015 and 2014, respectively, reflecting effective tax rates of 15.9% and 18.3%, respectively.
P&C Segment Results of Operations for the Year Ended December 31, 2016 Compared with the Year Ended December 31, 2015
Gross premium written. Gross premium written increased by $697.7 million, or 29.8%, from $2,337.8 million for the year ended December 31, 2015 to $3,035.5 million for the year ended December 31, 2016, primarily as a result of the acquisitions of Direct General ($58.5 million) and Century-National ($140.0 million), additional premiums from the LPI Business ($249.5 million) and ARS ($74.6 million), and organic growth ($203.4 million), partially offset by the first quarter deconsolidation of the Reciprocal Exchanges ($40.8 million).
Net earned premium. Net earned premium increased by $660.8 million, or 34.4%, from $1,918.5 million for the year ended December 31, 2015 to $2,579.4 million for the year ended December 31, 2016, primarily as a result of the acquisitions of Direct General ($68.3 million) and Century-National ($122.4 million), additional premiums from the LPI Business ($299.4 million) and
Ceding commission income. Our ceding commission income increased by $1.6 million from $42.7 million for the year ended December 31, 2015 to $44.3 million for the year ended December 31, 2016, driven by an increase attributable to the acquisition of Century-National, partially offset by an increase to the sliding scale adjustment on our terminated third-party quota share agreement and the first quarter deconsolidation of the Reciprocal Exchanges.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $54.5 million, or 16.0%, from $339.9 million for the year ended December 31, 2015 to $394.4 million for the year ended December 31, 2016. The increase was due to the Direct General ($1.9 million) and Century-National ($12.0 million) acquisitions, additional costs from the LPI Business ($33.3 million) and ARS ($7.3 million), and organic growth and other ($12.8 million), partially offset by lower costs on the Reciprocal Exchanges ($12.7 million).
General and administrative expenses. General and administrative expenses increased by $264.5 million, or 59.0%, from $448.2 million for the year ended December 31, 2015 to $712.7 million for the year ended December 31, 2016, as a result of the Direct General ($38.0 million) and Century-National ($34.4 million) acquisitions, additional expenses from the LPI Business ($148.7 million) and ARS ($7.7 million), higher expenses on the Reciprocal Exchanges ($18.2 million), and organic growth and other ($17.4 million).
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $250.3 million, or 43.8%, from $570.7 million for the year ended December 31, 2015 to $821.0 million for the year ended December 31, 2016. Our P&C segment net operating expense ratio, which includes the Reciprocal Exchanges, increased from 29.7% for the year ended December 31, 2015 to 31.8% for the year ended December 31, 2016. Excluding the Reciprocal Exchanges, the net operating expense ratio was 31.4% and 30.1% for the years ended December 31, 2016 and 2015, respectively. The Reciprocal Exchanges’ net operating expense ratio was 41.2% and 25.1% for the years ended December 31, 2016 and 2015, respectively.
Gross premium written. Gross premium written increased by $343.1 million, or 17.2%, from $1,994.7 million for the year ended December 31, 2014 to $2,337.8 million for the year ended December 31, 2015, primarily as a result of an increase in Imperial premium ($61.0 million), the consolidation of the Reciprocal Exchanges ($209.9 million), acquisition of the LPI Business ($126.6 million) and organic growth ($75.5 million), partially offset by a decrease in our Tower business ($131.9 million) which included a large one-time unearned premium reserve assumption of $158.8 million in 2014.
Net earned premium. Net earned premium increased by $405.8 million, or 26.8%, from $1,512.7 million for the year ended December 31, 2014 to $1,918.5 million for the year ended December 31, 2015, primarily as a result of an increase in Tower premium retention ($39.0 million), the Quota Share Runoff ($42.8 million), Imperial premium ($50.8 million), the consolidation of the Reciprocal Exchanges ($87.1 million), acquisition of the LPI Business ($123.3 million) and organic growth ($62.8 million).
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $243.1 million, or 25.1%, from $967.2 million for the year ended December 31, 2014 to $1,210.3 million for the year ended December 31, 2015, primarily reflecting the Quota Share Runoff, the Imperial acquisition, the consolidation of the Reciprocal Exchanges and the acquisition of the LPI Business. Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 63.9% for the year ended December 31, 2014 to 63.1% for the year ended December 31, 2015, primarily due to product mix changes. Excluding the Reciprocal Exchanges, the net loss ratio was 62.4% and 64.2% for the years ended December 31, 2015 and 2014, respectively. The Reciprocal Exchanges’ net loss ratio was 72.4% and 56.1% for the year ended December 31, 2015 and for the period ended December 31, 2014, respectively.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $79.5 million, or 30.5%, from $260.4 million for the year ended December 31, 2014 to $339.9 million for the year ended December 31, 2015. The increase was primarily due to an increase in Tower premium retention, the consolidation of the Reciprocal Exchanges, an increase resulting from our LPI Business and as a result of organic growth.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased by $140.7 million, or 32.7%, from $430.0 million for the year ended December 31, 2014 to $570.7 million for the year ended December 31, 2015. The P&C segment net operating expense ratio (non-GAAP), which includes the Reciprocal Exchanges, increased from 28.4% for the year ended December 31, 2014 to 29.7% for the year ended December 31, 2015, primarily as a result of increased general and administrative expenses, and increased acquisition costs and other underwriting expenses, partially offset by increased service and fee income. Excluding the Reciprocal Exchanges, the net operating expense ratio was 30.1% and 28.4% for the years ended December 31, 2015 and 2014, respectively. The Reciprocal Exchanges’ net operating expense ratio was 25.1% and 27.9% for the year ended December 31, 2015 and for the period ended December 31, 2014, respectively.
Underwriting income. Underwriting income increased from $115.6 million for the year ended December 31, 2014 to $137.5 million for the year ended December 31, 2015, primarily as a result of an increase resulting from our LPI Business and higher organic growth. The P&C segment combined ratio, which includes the Reciprocal Exchanges, for the year ended December 31, 2015 increased to 92.8% compared to 92.3% for the same period in 2014, primarily as a result of a higher net operating expense ratio, partially offset by the improved net loss ratio. Excluding the Reciprocal Exchanges, the combined ratio was 92.5% and 92.6% for the years ended December 31, 2015 and 2014, respectively. The Reciprocal Exchanges’ combined ratio was 97.5% and 84.0% for the year ended December 31, 2015 and for the period ended December 31, 2014, respectively.
Service and fee income. Service and fee income increased by $40.1 million, or 40.6%, from $98.8 million for the year ended December 31, 2015 to $138.9 million for the year ended December 31, 2016, primarily as a result of the Assurant Transaction and domestic organic growth.
Net operating expense; net operating expense ratio (non-GAAP). Net operating expense increased $45.7 million, or 94.7%, from $48.2 million for the year ended December 31, 2015 to $93.9 million for the year ended December 31, 2016, primarily as a result of the Assurant Transaction and our legacy domestic business. The net operating expense ratio decreased from 22.8% for the year ended December 31, 2015 to 22.7% for the year ended December 31, 2016, primarily as a result of increased net earned premiums and higher service and fee income, partially offset by an increase in general and administrative expenses and acquisition costs and other underwriting expenses.
Net earned premium. Net earned premium increased by $90.8 million, or 75.4%, from $120.5 million for the year ended December 31, 2014 to $211.3 million for the year ended December 31, 2015, primarily due to earned premium from the Assurant Transaction ($55.8 million) and organic growth ($34.9 million).
Service and fee income. Service and fee income increased by $40.4 million, or 69.0%, from $58.5 million for the year ended December 31, 2014 to $98.8 million for the year ended December 31, 2015 as a result of the Assurant Transaction and A&H organic growth.
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $85.4 million, or 99.4%, from $85.9 million for the year ended December 31, 2014 to $171.3 million for the year ended December 31, 2015. Our net loss ratio increased from 71.3% for the year ended December 31, 2014 to 81.1% for the year ended December 31, 2015. The loss ratio increase in the year ended December 31, 2015 was primarily driven by higher loss experience in our domestic stop loss programs.
General and administrative expenses. General and administrative expenses increased by $25.5 million, or 45.1%, from $56.6 million for the year ended December 31, 2014 to $82.1 million for the year ended December 31, 2015 as a result of an increase resulting from the Assurant Transaction and higher organic growth.
Underwriting loss. Underwriting loss decreased from a loss of $18.3 million for the year ended December 31, 2014 to a loss of $8.2 million for the year ended December 31, 2015 due to maturation of the A&H business. The combined ratio for the year ended December 31, 2015 decreased to 103.9% compared to 115.2% for the same period in 2014. The combined ratio was lower due to improved profitability driven by a reduced expense ratio reflecting continued maturation of the A&H business and higher service and fee income, partially offset by a higher net loss ratio.
Our investment strategy emphasizes, first, the preservation of capital and, second, maximization of an appropriate risk-adjusted return. We seek to maximize investment returns using investment guidelines that stress prudent allocation among cash and cash equivalents, fixed maturities and, to a lesser extent, equity securities. Cash and cash equivalents include cash on deposit, commercial paper, pooled short-term money market funds and certificates of deposit with an original maturity of 90 days or less. Our fixed maturities include obligations of the U.S. Treasury or U.S. government agencies, obligations of U.S. and Canadian corporations, mortgages guaranteed by the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, Federal Farm Credit entities, and structured securities and commercial mortgage obligations. Our equity securities include common and preferred stock of U.S. and Canadian corporations. From time to time, we also reclassify available-for-sale securities to trading securities for the purpose of buying and selling them in the near term and benefit from the change in market prices or spreads.
The decrease in gross unrealized losses from $64.8 million at December 31, 2015 to $37.0 million at December 31, 2016 resulted from the recognition of OTTI, fluctuations in market interest rates and performance of our equity securities.
There were 1,045 and 444 securities at December 31, 2016 and 2015, respectively, that account for the gross unrealized loss, none of which we deemed to be other-than-temporary impairments. Significant factors influencing our determination that none of these securities were OTTI included the length of time and/or magnitude of unrealized losses in relation to cost, the nature of the investment, the current financial condition of the issuer and its future prospects, the ability to recover to cost in the near term, and management’s intent not to sell these securities and it being more likely than not that we will not be required to sell these investments before anticipated recovery of fair value to our cost basis.
The tables below summarize the investment quality of our corporate bond holdings and industry concentrations as of December 31, 2016 and 2015.
Restricted Cash and Investments. In order to conduct business in certain states, we are required to maintain letters of credit or assets on deposit to support state-mandated regulatory requirements and certain third-party agreements. We also utilize trust accounts to collateralize business with our reinsurance counterparties. Assets held on deposit or in trust accounts are primarily in the form of cash or certain high-grade securities. The fair values of our restricted assets as of December 31, 2016 and 2015 are as follows:
Our other investments consisted primarily of limited partnerships, investments in residential and commercial real estate debt funds, preferred securities and certificates of deposit. We believe our exposure to risk associated with these investments is generally limited to the investment carrying amounts. The increase from December 31, 2015 to December 31, 2016 was to diversify our alternative investment portfolio.
The LSC Entities account for investments in life settlements in accordance with ASC 325-30, “Investments in Insurance Contracts,” which states that an investor shall elect to account for its investments in life settlement contracts by using either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. The LSC Entities have elected to account for these investments using the fair value method.
As of December 31, 2016, we have a 50% ownership interest in the LSC Entities that hold certain life settlement contracts, and the fair value of these contracts owned by the LSC Entities is $356.9 million, with our proportionate interest being $178.4 million. Total capital contributions of approximately $23.0 million and $1.1 million were made to the LSC Entities during the years ended December 31, 2016 and 2015, respectively, for which we contributed approximately $11.5 million and $0.6 million, respectively, in those same periods. The LSC Entities used the contributed capital to pay premiums and purchase policies.
For the contracts where the LSC Entities determined the fair value to be negative and therefore assigned a fair value of zero, the table below details the amount of premiums paid and the death benefits received for the year ended December 31, 2016:
Premiums to be paid by the LSC Entities, in which we have 50% ownership interests, for each of the five succeeding fiscal years to keep the life insurance policies in force as of December 31, 2016, are as follows:
We forecast claim payments based on our historical experience. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on both a short-term and long-term basis. Cash payments for claims were $1,794.9 million, $1,276.3 million and $866.0 million in the years ended December 31, 2016, 2015 and 2014, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums), net of amounts ceded to our third-party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash and investment portfolio has increased from $1,998.7 million at December 31, 2014 to $2,893.6 million at December 31, 2015 and increased to $3,768.7 million at December 31, 2016. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.
Net cash used in investing activities was $462.0 million for the year ended December 31, 2016, compared to $720.6 million net cash used in investing activities for the same period in 2015. For the year ended December 31, 2016, net cash used in investing activities decreased by $258.6 million, due to an increase of $410.4 million in proceeds received from sale of investments and distributions from unconsolidated subsidiaries, a decrease of $246.6 million in cash used in purchases of investments and a decrease of $46.2 million in cash used in investments in unconsolidated subsidiaries and non-controlling interest, partially offset by an increase of $432.5 million in cash used for acquisitions and an increase of $12.0 million in cash used in purchases of premises and equipment.
Net cash provided by financing activities was $155.4 million for the year ended December 31, 2016, compared to $554.6 million net cash provided by financing activities for the same period in 2015. For the year ended December 31, 2016, cash provided by financing activities decreased by $399.2 million, due to a decrease of $171.7 million in proceeds received from issuances of common and preferred stock, a decrease of $162.9 million in proceeds received from borrowings, net of repayments and returns of capital, a decrease of $53.2 million in the securities sold under agreements to repurchase, net of short sales and an increase of $15.7 million in 2016 payments of dividends, partially offset by an increase of $4.4 million in cash received for stock options and cash retained for excess tax benefits on shared-based payments arrangements.
Net cash used in investing activities was $720.6 million for the year ended December 31, 2015, compared with net cash used in investing activities of $656.5 million for the year ended December 31, 2014. For the year ended December 31, 2015, net cash used in investing activities increased primarily due to an increase of $84.9 million in the purchases of short-term investments and an increase of $564.2 million in the purchases of fixed-maturity investments, partially offset by the change in loans to a related party (notes receivable) of $125.0 million, an increase of $185.6 million in the proceeds from the sale and maturity of fixed-maturity investments, a $92.0 million increase in the proceeds from the sale of short-term investments and an increase of $198.8 million in cash from acquisitions.
Consolidating Balance Sheet Information as of December 31, 2016 and 2015
Our reinsurance transactions include premiums written under state-mandated involuntary plans for commercial vehicles and premiums ceded to state-provided reinsurance facilities such as the Michigan Catastrophic Claims Association (the “MCCA”), and the North Carolina Reinsurance Facility (the “NCRF”) (collectively, “State Plans”), for which we retain no loss indemnity risk. Prepaid reinsurance premiums are earned on a pro rata basis over the period of risk, based on a daily earnings convention, which is consistent with premiums written.
All automobile insurers doing business in Michigan are required to participate in the MCCA. The MCCA is a reinsurance mechanism that covers no-fault first party medical losses of retentions in excess of a set limit. Insurers are reimbursed for their covered losses in excess of a $545,000 threshold for policies effective after July 1, 2015 through June 30, 2017. We currently have claims with retentions ranging from $250,000 to $545,000. Funding for the MCCA comes from assessments against automobile insurers based upon their share of insured automobiles in the state. Insurers are allowed to pass along this cost to Michigan automobile policyholders.
The following is a summary of premium and related losses ceded to the MCCA for the years ended December 31, 2016, 2015 and 2014:
The following is a summary of premium and related losses ceded to the NCRF for the years ended December 31, 2016, 2015 and 2014:
Reinsurance recoverables from the NCRF as of December 31, 2016 and 2015 are as follows:
In addition to the reinsurance programs described above, until July 31, 2013, we used the Personal Lines Quota Share reinsurance arrangement to limit our maximum loss, provide greater diversification of risk and minimize exposure on larger risks. For further discussion on the Personal Lines Quota Share arrangement. (See Note 18, “Related Party Transactions” in the notes to our consolidated financial statements).
We have a concentration of credit risk associated with the MCCA, the NCRF and the reinsurance under the Personal Lines Quota Share arrangement. Reinsurance recoverables on unpaid losses from these entities at December 31, 2016 and 2015 are as follows:
On August 18, 2015, we sold $100.0 million aggregate principal amount of our 7.625% subordinated notes due 2055 (the “7.625% Notes”) in a public offering. The net proceeds we received from the issuance was approximately $96.6 million, after deducting the underwriting discount, commissions and expenses.
The 7.625% Notes bear interest at a rate equal to 7.625% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, beginning on December 15, 2015. The 7.625% Notes are our subordinated unsecured obligations and rank (i) senior in right of payment to any future junior subordinated debt, (ii) equal in right of payment with any unsecured, subordinated debt that we incur in the future that ranks equally with the 7.625% Notes, and (iii) subordinate in right of payment to any of our existing and future senior debt, including amounts outstanding under our revolving credit facility, our 6.75% Notes and certain of our other obligations. In addition, the 7.625% Notes are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. The 7.625% Notes mature on September 15, 2055, unless earlier redeemed or purchased by us. Interest expense on the 7.625% Notes for the years ended December 31, 2016 and 2015 was $7.6 million and $3.0 million, respectively.
The indenture contains customary covenants, such as reporting of annual and quarterly financial results, and restrictions on certain mergers and consolidations. The indenture also includes covenants relating to the incurrence of debt if our consolidated leverage ratio would exceed 0.35 to 1.00, a limitation on liens, a limitation on the disposition of stock of certain of our subsidiaries and a limitation on transactions with certain of our affiliates. We were in compliance with all covenants contained in the indenture as of December 31, 2016.
On May 31, 2016, we borrowed $50.0 million under the Credit Agreement, Eurodollar borrowings was elected for interest rate. Interest payments are due the last day of the interest period in intervals of three months duration, commencing on the date of such borrowing. The borrowing bears interest at the adjusted LIBOR rate which was 3.5625% as of December 31, 2016. Interest expense on the Credit Agreement for the year ended December 31, 2016 was $0.9 million. We were in compliance with all covenants under the Credit Agreement as of December 31, 2016.
On June 1, 2016, in connection with the closing of our acquisition of all of the issued and outstanding shares of capital stock of Century-National and Western General, we issued a promissory note (“Century-National Promissory Note”) in the approximate amount of $178.9 million to the seller to fund a portion of the purchase price for the acquisition. The Century-National Promissory Note is unsecured and has a two-year term. Principal on the Century-National Promissory Note is payable in two equal installments of approximately $89.4 million on June 1, 2017 and 2018, respectively. Interest on the outstanding principal balance of the Century-National Promissory Note accrues at an annual rate of 4.4% and is payable in arrears on each of the two payment dates. The Century-National Promissory Note may be prepaid at any time, without penalty. The Century-National Promissory Note contains a cross-acceleration provision that is triggered in the event that payment under our $225.0 million Credit Agreement is accelerated and such acceleration is not revoked, rescinded or withdrawn within 30 days of such acceleration. The Century-National Promissory Note also contains customary events of default. Interest expense on the Century-National Promissory Note for the year ended December 31, 2016 was $4.6 million.
On February 19, 2014, we sold 13,570,000 shares of common stock in a private placement in reliance on exemptions from registration under the Securities Act of 1933 at a price of $14.00 per share, subject to a placement fee of $0.840 per share. We recorded the cost of obtaining new capital as a reduction of the related proceeds. The cost of issuance of stock of approximately $12.1 million was charged directly to additional paid-in capital. The net proceeds to us after expenses were approximately $177.8 million.
On June 25, 2014, we issued 2,200,000 shares of 7.50% Non-Cumulative Preferred Stock (“Series A Preferred Stock”) in a public offering. Dividends on the Series A Preferred Stock when, as and if declared by our Board of Directors (the “Board”) or a duly authorized committee of the Board, will be payable on the liquidation preference amount of $25.00 per share, on a non-cumulative basis, quarterly in arrears on the 15th day of January, April, July and October of each year (each, a “dividend payment date”), commencing on October 15, 2014, at an annual rate of 7.50%. Dividends on the Series A Preferred Stock are not cumulative. Accordingly, in the event dividends are not declared on the Series A Preferred Stock for payment on any dividend payment date, then those dividends will not accumulate and will not be payable. If we have not declared a dividend before the dividend payment date for any dividend period, we will have no obligation to pay dividends for that dividend period, whether or not dividends on the Series A Preferred Stock are declared for any future dividend payment. The net proceeds we received from the issuance was approximately $53.2 million, after deducting the underwriting discount and issuance expenses.
On July 28, 2016, NG Re Ltd., a subsidiary of the Company, AmTrust and its wholly-owned subsidiary AmTrust International Insurance, Ltd. (“AIIL”), entered into a restatement agreement (the “Restatement Agreement”) to the ACP Re Credit Agreement, dated September 15, 2014, among AmTrust, as Administrative Agent, ACP Re, ACP Re Holdings, LLC, as Guarantor, and AIIL and NG Re Ltd., as Lenders.
The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31, 2016, and actuarial estimates of expected payout patterns and are not contractual liabilities with finite maturities. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and LAE payments due by period is subject to the same uncertainties associated with determining the level of loss and LAE generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and LAE estimate process, see Item 1, “Business-Loss Reserves.” Actual payments of loss and LAE by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and LAE vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See Item 1A, “Risk Factors-Risks Relating to Our Business Generally-If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely affected” for a discussion of the uncertainties associated with estimating loss and LAE.
The interest related to our debt by period as of December 31, 2016 was as follows: $42.6 million - less than 1 year, $75.6 million - 1 - 3 years, $70.5 million - 3 - 5 years and $368.6 million - more than 5 years.