We lease office space in Bermuda, which houses our executive offices and operations for our Catastrophe Reinsurance and Specialty Reinsurance segments. Our U.S. based subsidiaries lease office space in a number of U.S. locations, including New York, New York, Stamford, Connecticut, Chicago, Illinois and Raleigh, North Carolina. We also lease office space in London, England (U.K.), principally for our Lloyd’s segment, and in Dublin, Ireland and Singapore. While we believe that our current office space is sufficient for us to conduct our operations, we may expand into additional facilities and new locations to accommodate future growth. To date, the cost of acquiring and maintaining our office space has not been material to us as a whole.
The following tables set forth our selected consolidated financial data and other financial information at the end of and for each of the years in the five-year period ended December 31, 2015. The results of Platinum are included in our consolidated financial data from March 2, 2015. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto and “Part II,
The following is a discussion and analysis of our results of operations for 2015, compared to 2014, and 2014, compared to 2013, respectively. The following also includes a discussion of our liquidity and capital resources at December 31, 2015. The results of Platinum are included in our results of operations from March 2, 2015. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto included in this filing. This filing contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by these forward-looking statements. See “Note on Forward-Looking Statements.”
On March 2, 2015 we acquired Platinum and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values, including Platinum’s claims and claim expense reserves, which totaled $1.4 billion at March 2, 2015, and consisted of $117.4 million and $1.3 billion included in our Catastrophe Reinsurance and Specialty Reinsurance segments, respectively. These claims and claim expense reserves are subject to the reserving methodologies for each respective line of business as described below.
The following table summarizes our claims and claim expense reserves by line of business, split between case reserves, additional case reserves and IBNR:
assumptions underlying our loss estimates. In addition, our actual net losses from these events may increase if our reinsurers or other obligors fail to meet their obligations.
Coverage can also vary from “all property” perils to limited coverage on selected perils, such as “earthquake only” coverage. We also enter into retrocessional contracts that provide property catastrophe coverage to
other reinsurers or retrocedants. This coverage is generally in the form of excess of loss retrocessional contracts and may cover all perils and exposures on a worldwide basis or be limited in scope to selected geographic areas, perils and/or exposures. The exposures we assume from retrocessional business can change within a contract term as the underwriters of a retrocedant may alter their book of business after the retrocessional coverage has been bound. We also offer dual trigger reinsurance contracts which require us to pay claims based on claims incurred by insurers and reinsurers in addition to the estimate of insured industry losses as reported by referenced statistical reporting agencies.
In general, our property catastrophe reinsurance reserves for our more recent reinsured catastrophic events are subject to greater uncertainty and, therefore, greater potential variability, and are likely to experience material changes from one period to the next. This is due to the uncertainty as to the size of the industry losses from the event, uncertainty as to which contracts have been exposed to the catastrophic event, uncertainty due to complex legal and coverage issues that can arise out of large or complex catastrophic events such as the events of September 11, 2001, Hurricane Katrina and Storm Sandy, and uncertainty as to the magnitude of claims incurred by our customers. As our property catastrophe reinsurance claims age, more information becomes available and we believe our estimates become more certain, although there is no assurance this trend will continue in the future.
The following table details the development of our liability for unpaid claims and claim expenses for the Catastrophe Reinsurance segment for the year ended December 31, 2015:
The table below summarizes our initial assumptions and changes in those assumptions for claims and claim expense reserves within our Catastrophe Reinsurance segment. As discussed above, the key assumption in estimating reserves for our Catastrophe Reinsurance segment is our estimate of ultimate claims and claim expenses. The table shows our initial estimates of ultimate claims and claim expenses for each accident year and how these initial estimates have developed over time. The initial estimate of accident year claims and claim expenses represents our estimate of the ultimate settlement and administration costs for claims incurred from catastrophic events occurring during a particular accident year, and as reported as of December 31 of that year. The re-estimated ultimate claims and claim expenses as of December 31, 2013, 2014 and 2015, represent our revised estimates as reported as of those dates. The cumulative favorable (adverse) development shows how our most recent estimates as reported at December 31, 2015 differ from our initial accident year estimates. Favorable development implies that our current estimates are lower than our initial estimates while adverse development implies that our current estimates are higher
As previously noted, we recorded $1.4 billion of claims and claim expense reserves on March 2, 2015 as a result of the Platinum acquisition, of which $117.4 million is included in our Catastrophe Reinsurance segment with the remaining balance included in our Specialty Reinsurance segment. The $117.4 million is included in the Initial Estimate of Accident Year Claims and Claim Expenses column and is allocated to each individual accident year based on the year in which the underlying catastrophe loss event took place. The Cumulative Favorable (Adverse) Development column includes favorable or adverse development on the acquired Platinum claims and claim expense reserves since the date of acquisition.
initial estimates of claims and claim expenses for the 2005 accident year as estimated as of December 31, 2005, while our 2004 accident year developed unfavorably by $52.2 million, or negative 6.8%. On a net basis, our cumulative favorable or unfavorable development is generally reduced by offsetting changes in our reinsurance recoverables, as well as changes to loss related premiums such as reinstatement premiums, and redeemable noncontrolling interest for changes in claims and claim expenses that impact DaVinciRe, all of which generally move in the opposite direction to changes in our ultimate claims and claim expenses.
The table below shows the impact on our ultimate claims and claim expenses, net income and shareholders’ equity as of and for the year ended December 31, 2015 of reasonably likely changes to our estimates of ultimate losses for claims and claim expenses incurred from catastrophic events within our Catastrophe Reinsurance segment. The reasonably likely changes are based on an historical analysis of the period-to-period variability of our ultimate costs to settle claims from catastrophic events, giving due consideration to changes in our reserving practices over time. In general, our claim reserves for our more recent catastrophic events are subject to greater uncertainty and, therefore, greater variability and are likely to experience material changes from one period to the next. This is due to the uncertainty as to the size of the industry losses from the event, uncertainty as to which contracts have been exposed to the catastrophic event, and uncertainty as to the magnitude of claims incurred by our clients. As our claims age, more information becomes available and we believe our estimates become more certain, although there is no assurance this trend will continue in the future. As a result, the sensitivity analysis below is based on the age of each accident year, our current estimated ultimate claims and claim expenses for the catastrophic events occurring in each accident year, and the reasonably likely variability of our current estimates of claims and claim expenses by accident year. The impact on net income and shareholders’ equity assumes no increase or decrease in reinsurance recoveries, loss related premium or redeemable noncontrolling interest - DaVinciRe.
Within our Specialty Reinsurance segment, we write various classes of casualty business, such as automobile liability, casualty clash, catastrophe exposed workers’ compensation, cyber liability, directors and officers liability, environmental liability, general liability, medical malpractice and professional indemnity, and other specialty lines of reinsurance such as accident and health, agriculture, aviation, financial guaranty, marine and energy, mortgage guaranty, multi-line regional, political risk, terrorism and trade credit, which we collectively refer to as specialty reinsurance. We offer our specialty reinsurance products principally on an excess of loss basis, as described above with respect to our property catastrophe reinsurance products, and we also provide proportional coverage, which we expect to grow on an absolute or relative basis within this segment in the future. In a proportional reinsurance arrangement (also referred to as quota share reinsurance or pro rata reinsurance), the reinsurer shares a proportional part of the original premiums and losses of the reinsured. We offer our specialty reinsurance products to insurance and reinsurance companies and provide coverage for specific geographic regions or on a worldwide basis.
More recently, we have positioned RenaissanceRe Specialty Risks and RenaissanceRe Specialty U.S. to accept a wider range of quota share or proportional risks, facilitating our efforts to expand trading relationships with core clients via separate, highly-rated balance sheets. In addition, on March 2, 2015 we acquired Platinum and recorded $1.4 billion of claims and claim expense reserves related to the acquisition, of which $1.3 billion was recorded in our Specialty Reinsurance segment, with the balance recorded in our Catastrophe Reinsurance segment. While we remain focused on underwriting discipline, and are seeking to remain focused on opportunities amenable to stochastic representation and supported by strong data and analytics, our expanded product suite through RenaissanceRe Specialty Risks and RenaissanceRe Specialty U.S. and the addition of the claims and claim expense reserves acquired through the Platinum transaction, may pose new, unmodelled or unforeseen risks for which we may not be adequately
compensated and may also result in a higher level of attritional claims and claim expenses and the potential for reserve development, either adverse or favorable.
We calculate multiple point estimates for claims and claim expense reserves using a variety of actuarial reserving techniques for many, but not all, of our classes of business for each underwriting year within our Specialty Reinsurance segment. We do not believe that these multiple point estimates are, or should be considered a range. We consider each class of business and determine the most appropriate point estimate for each underwriting year based on the characteristics of the particular class including: (1) loss development patterns derived from historical data; (2) the credibility of the selected loss development pattern; (3) the stability of the loss development patterns; (4) how developed the underwriting year is; and (5) the observed loss development of other underwriting years for the same class. We also consider other relevant factors, including: (1) historical ultimate loss ratios; (2) the presence of individual large losses; and (3) known occurrences that have not yet resulted in reported losses. We make determinations of the most appropriate point estimate of loss for each class based on an evaluation of relevant information and do not ascribe any particular portion of the estimate to a particular factor or consideration. In addition, we believe that a review of individual contract information improves the loss estimates for some classes of business.
When developing our claims and claims expense reserves for our Specialty Reinsurance segment, we consider several actuarial techniques such as the expected loss ratio method, the Bornhuetter-Ferguson actuarial method and the paid and reported chain ladder actuarial method. For classes of business where we lack significant historical claims experience, we principally use the Bornhuetter-Ferguson actuarial method. This method allows for greater weight to be applied to expected results in periods where little or no actual experience is available, and, hence, is less susceptible to the potential pitfall of being excessively swayed by one year or one quarter of actual paid and/or reported loss data. This method uses initial expected loss ratio expectations to the extent that the expected paid or reported losses are zero, and it assumes that past experience is not fully representative of the future. As our reserves for claims and claim expenses age, and actual claims experience becomes available, this method places less weight on expected experience and places more weight on actual experience. This experience, which represents the difference between expected reported claims and actual reported claims, is reflected in the respective reporting period as a change in estimate.
For classes of business where we have significant historical claims experience, estimates of ultimate losses that are not related to a specific event are generally initially determined based on the loss ratio method applied to each underwriting year and to each class of business. The selected ultimate losses are determined by multiplying the initial expected loss ratio by the earned premium. The initial expected loss ratios are key inputs that involve management judgment and are based on a variety of factors, including: (1) contract by contract expected loss ratios developed during our pricing process; and (2) our historical loss ratios and combined ratios adjusted for rate change and trend. These judgments take into account
management’s view of past, current and future factors that may influence ultimate losses, including: (1) market conditions; (2) changes in the business underwritten; (3) changes in timing of the emergence of claims; and (4) other factors that may influence ultimate loss ratios and losses.
In addition, certain of our specialty reinsurance coverages may be impacted by natural and man-made catastrophes. We estimate claim reserves for these losses after the event giving rise to these losses occurs, following a process that is similar to our Catastrophe Reinsurance segment described above.
including in 2010 the 2010 New Zealand Earthquake, in 2011 the 2011 New Zealand and Tohoku Earthquakes, the Australian Floods, losses arising from certain aggregate contracts and the Thailand Floods, and in 2012 Storm Sandy, all which initially resulted in increases in the re-estimated ultimate claims and claim expense ratio. As recent as 2015, we re-estimated our ultimate claims and claim expense ratios for certain large events included in the 2010, 2011 and 2012 underwriting years based on available data, including but not limited to industry loss estimates and actual claims from cedants, resulting in decreases to the re-estimated ultimate claims and claim expense ratio. The re-estimated loss ratio for the 2015 underwriting year as of December 31, 2015 is higher than the initial estimate as actual paid and reported losses during 2015 were greater than expected, driven in part by large losses associated with wildfires in California and the Tianjin Explosion.
We principally use the Bornhuetter-Ferguson actuarial method to estimate claims and claim expenses within our Lloyd’s segment for our specialty reinsurance and insurance lines of business. The comments discussed above relating to our reserving techniques and processes for our Specialty Reinsurance segment apply to the specialty reinsurance and insurance lines of business within our Lloyd’s segment. In addition, certain of our coverages may be impacted by natural and man-made catastrophes. We estimate claim reserves for these losses after the event giving rise to these losses occurs, following a process that is similar to our Catastrophe Reinsurance segment as noted above.
The favorable development of prior accident years net claims and claim expenses within our Lloyd’s segment of $0.3 million was comprised of adverse development of $1.6 million and favorable development of $1.2 million related to small catastrophe events and attritional net claims and claim expenses, respectively. Included in attritional net claims and claim expenses was $1.5 million of favorable development associated with actuarial assumption changes.
The following table details the development of our liability for unpaid claims and claim expenses for our Lloyd’s segment for the year ended December 31, 2014 split between catastrophe net claims and claim expenses and attritional net claims and claim expenses:
The favorable development of prior accident years net claims and claim expenses within our Lloyd’s segment of $16.2 million was comprised of $6.6 million, $2.7 million and $6.9 million related to large catastrophe events, small catastrophe events and attritional net claims and claim expenses, respectively. Included in the favorable development of prior accident years net claims and claim expenses is a $4.1 million reduction in the estimated ultimate loss related to Storm Sandy included in large catastrophe events, with the $6.9 million favorable development of prior accident years net claims and claim expenses related to attritional net claims and claim expenses principally due to reported claims activity coming in lower than expected on prior accident years events. There were no actuarial reserving assumption changes during 2014.
The table below summarizes our initial assumptions and changes in those assumptions for catastrophe claims and claim expense reserves associated with our property catastrophe reinsurance business within our Lloyd’s segment. Similar to our Catastrophe Reinsurance segment, the key assumption in estimating reserves for property catastrophe reinsurance losses in our Lloyd’s segment is our estimate of the ultimate claims and claim expenses. The table shows our initial estimates of ultimate claims and claim expenses for each accident year and how these initial estimates have developed over time. The initial estimate of accident year claims and claim expenses represents our estimate of the ultimate settlement and administration costs for claims incurred from catastrophic events occurring during a particular accident year, and as reported as of December 31 of that year. The re-estimated ultimate claims and claim expenses represent our revised estimates as reported as at the respective year end. The cumulative favorable (adverse) development shows how our most recent estimates as reported at December 31, 2015 differ from our initial accident year estimates. Favorable development implies that our current estimates are lower than our initial estimates while adverse development implies that our current estimates are higher than our original estimates. Total reserves as of December 31, 2015 reflect the unpaid portion of our estimates of
ultimate claims and claim expenses. The table is presented on a gross basis and therefore does not include the benefit of reinsurance recoveries or loss related premium such as reinstatement premium.
The percentage of claims unpaid at December 31, 2015 for each accident year reflects both the speed at which claims and claim expenses for each accident year have been paid and our estimate of claims and claim expenses for that accident year. This is driven in part by the mix of our business and the speed of the settlement and payment of claims by our underlying cedants.
future expectations. In addition, we believe that the adjustments we made to speed up or slow down our estimated loss reporting patterns are reasonably likely changes. While we believe these are reasonably likely changes, we do not believe the reader should consider the above sensitivity analysis an actuarial reserve range. In addition, we caution the reader that the above sensitivity analysis only reflects reasonably likely changes. It is possible that our initial estimated claims and claim expense ratios and loss reporting patterns could be significantly different from the sensitivity analysis described above. For example, we could be liable for events which we have not estimated reserves for or for exposures we do not currently think are covered under our contracts. These changes could result in significantly larger changes to reserves for claims and claim expenses, net income and shareholders’ equity than those noted above. We also caution the reader that the above sensitivity analysis is not used by management in developing our reserve estimates and is also not used by management in managing the business.
We enter into reinsurance agreements in order to help reduce our exposure to large losses and to help manage our risk portfolio. Amounts recoverable from reinsurers are estimated in a manner consistent with the claims and claim expense reserves associated with the related assumed reinsurance. For multi-year retrospectively rated contracts, we accrue amounts (either assets or liabilities) that are due to or from our retrocessionaires based on estimated contract experience. If we determine that adjustments to earlier estimates are appropriate, such adjustments are recorded in the period in which they are determined.
The majority of the balance we have accrued as recoverable will not be due for collection until some point in the future. The amounts recoverable ultimately collected are open to uncertainty due to the ultimate ability and willingness of reinsurers to pay our claims, for reasons including insolvency and elective run-off, contractual dispute and various other reasons. In addition, because the majority of the balances recoverable will not be collected for some time, economic conditions as well as the financial and operational performance of a particular reinsurer may change, and these changes may affect the reinsurer’s willingness and ability to meet their contractual obligations to us. To reflect these uncertainties, we estimate and record
We estimate our valuation allowance by applying specific percentages against each reinsurance recoverable based on our counterparty’s credit rating. The percentages applied are based on historical industry default statistics developed by major rating agencies and are then adjusted by us based on industry knowledge and our judgment and estimates. We also apply case-specific valuation allowances against certain recoveries we deem unlikely to be collected in full. We then evaluate the overall adequacy of the valuation allowance based on other qualitative and judgmental factors. The valuation allowance recorded against reinsurance recoverable was $1.6 million at December 31, 2015 (2014 - $1.0 million). The reinsurers with the three largest balances accounted for 21.5%, 13.8% and 13.1%, respectively, of our reinsurance recoverable balance at December 31, 2015 (2014 - 35.4%, 14.9% and 7%, respectively). The three largest company-specific components of the valuation allowance represented 22.7%, 8.3% and 3.2%, respectively, of our total valuation allowance at December 31, 2015 (2014 - 17.9%, 4.0% and 2.9%, respectively).
Included in assumed and ceded (re)insurance contracts at December 31, 2015 are $3.5 million and $9.4 million of other assets and other liabilities, respectively.
At December 31, 2015, we classified $251.4 million and $9.4 million of our assets and liabilities, respectively, at fair value on a recurring basis using Level 3 inputs. This represented 2.2% and 0.2% of our total assets and liabilities, respectively. Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. These measurements are made under circumstances in which there is little, if any, market activity for the asset or liability. We use valuation models or other pricing techniques that require a variety of inputs including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs, some of which may be unobservable, to value these Level 3 assets and liabilities. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we considered factors specific to the asset or liability. In certain cases, the inputs
Refer to “Note 7. Fair Value Measurements in our Notes to the Consolidated Financial Statements” for additional information about fair value measurements.
Investments in which we have significant influence over the operating and financial policies of the investee are classified as investments in other ventures, under equity method, and are accounted for under the equity method of accounting. Under this method, we record our proportionate share of income or loss from such investments in our results for the period. Any decline in the value of investments in other ventures, under equity method, including goodwill and other intangible assets arising upon acquisition of the investee, considered by management to be other-than-temporary, is reflected in our consolidated statements of operations in the period in which it is determined. As of December 31, 2015, we had $132.4 million (2014 - $120.7 million) in investments in other ventures, under equity method on our consolidated balance sheets, including $7.8 million of goodwill and $15.3 million of other intangible assets (2014 - $12.3 million and $12.9 million). The carrying value of our investments in other ventures, under equity method, individually or in the aggregate, may, and likely will, differ from the realized value we may ultimately attain, perhaps significantly so.
On March 2, 2015 we acquired Platinum and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values. In connection with the acquisition of Platinum we recognized identifiable finite lived intangible assets of $75.2 million, which will be amortized over a weighted average period of 8 years, identifiable indefinite lived intangible assets of $8.4 million, and certain other adjustments to the fair values of the assets acquired, liabilities assumed and
We test goodwill and other intangible assets for impairment in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of the annual impairment evaluation, goodwill is assigned to the applicable reporting unit of the acquired entities giving rise to the goodwill and other intangible assets and is tested based on the cash flows they produce. There are generally many assumptions and estimates underlying the fair value calculation. Principally, we identify the reporting unit or business entity that the goodwill or other intangible asset is attributed to, and review historical and forecasted operating and financial performance and other underlying factors affecting such analysis, including market conditions. Other assumptions used could produce significantly different results which may result in a change in the value of goodwill or our other intangible assets and a related charge in our consolidated statements of operations. An impairment charge could be recognized in the event of a significant decline in the implied fair value of those operations where the goodwill or other intangible assets are applicable. In the event we determine that the value of goodwill has become impaired, an accounting charge will be taken in the fiscal quarter in which such determination is made. As at December 31, 2015, excluding the amounts recorded in investments in other ventures, under the equity method, as noted above, our consolidated balance sheets include $197.6 million of goodwill (2014 - $5.9 million) and $67.6 million of other intangible assets (2014 - $2.0 million). Impairment charges related to these balances were $Nil during the year ended December 31, 2015 (2014 - $Nil, 2013 - $Nil). In the future it is possible we will hold more goodwill, which would increase the degree of judgment and uncertainty embedded in our financial statements, and potentially increase the volatility of our reported results.
Below is a discussion of the results of operations for 2015 compared to 2014.
Net income available to RenaissanceRe common shareholders was $408.8 million in 2015, compared to $510.3 million in 2014, a decrease of $101.5 million. As a result of our net income available to RenaissanceRe common shareholders in 2015, we generated an annualized return on average common equity of 9.8% and our book value per common share increased from $90.15 at December 31, 2014 to $99.13 at December 31, 2015, an 11.3% increase, after considering the change in accumulated dividends paid to our common shareholders.
The most significant events affecting our financial performance during 2015, on a comparative basis to 2014, include:
Lower Underwriting Income - we generated underwriting income of $494.6 million and a combined ratio of 64.7% in 2015, compared to $529.4 million and 50.2%, respectively, in 2014. The $34.7 million decrease in underwriting income was primarily driven by a $268.9 million increase in current accident year net claims and claim expenses and a $94.1 million increase in acquisition expenses, partially offset by a $338.1 million increase in net premiums earned. The increase in current accident year net claims and claim expenses was primarily driven by our Specialty Reinsurance and Catastrophe Reinsurance segments, while the increase in acquisition expenses and net premiums earned are principally driven by our Specialty Reinsurance segment; and
Below is a discussion of the results of operations for 2014 compared to 2013.
Net income available to RenaissanceRe common shareholders was $510.3 million in 2014, compared to $665.7 million in 2013, a decrease of $155.3 million. As a result of our net income available to RenaissanceRe common shareholders in 2014, we generated an annualized return on average common equity of 14.9% and our book value per common share increased from $80.29 at December 31, 2013 to $90.15 at December 31, 2014, a 13.7% increase, after considering the change in accumulated dividends paid to our common shareholders.
Lower Gross Premiums Written - our gross premiums written of $1,550.6 million decreased $54.8 million, or 3.4%, in 2014, compared to 2013, with the decrease principally driven by our Catastrophe segment which experienced a decrease of $186.4 million or 16.6%, partially offset by increases in our Specialty Reinsurance and Lloyd’s segments’ gross premiums written of $87.1 million or 33.6%, and $43.1 million or 19.0%, respectively; and
Catastrophe Reinsurance Gross Premiums Written - In 2015, our Catastrophe Reinsurance segment gross premiums written decreased by $65.3 million, or 7.0%, to $868.6 million, compared to $934.0 million in 2014. Market conditions remained challenging during 2015, and we continued to exercise underwriting discipline given prevailing terms and conditions, resulting in decreased gross premiums written on certain programs and transactions, offset in part by increased demand and growth in certain areas, including some new programs which provided opportunities we believed to be attractive. These new programs included the
In 2014, our Catastrophe Reinsurance segment gross premiums written decreased by $186.4 million, or 16.6%, to $934.0 million, compared to $1,120.4 million in 2013, primarily driven by the continued softening of market conditions, including reduced risk-adjusted pricing for the January and June renewals, our underwriting discipline given prevailing terms and conditions, and reduced participation on certain quota share deals. Excluding the impact of $3.9 million and $24.1 million of net negative reinstatement premiums written in 2014 and 2013, respectively, both due to net reductions in net claims and claim expenses and related reinstatement premiums with respect to a number of large loss events, gross premiums written in the Catastrophe Reinsurance segment decreased $206.6 million, or 18.1%. In addition, gross premiums written in our Catastrophe Reinsurance segment in 2014 were impacted by a decrease of $32.7 million in gross premiums written related to one quota share deal and a $27.0 million multi-year transaction that occurred during 2013, and did not reoccur in 2014.
Catastrophe Reinsurance Ceded Premiums Written - Ceded premiums written in our Catastrophe Reinsurance segment decreased $81.1 million, to $311.3 million in 2015, compared to $392.4 million in 2014, primarily reflecting a reduction in purchases of retrocessional reinsurance driven by reduced gross premiums written, as noted above, a reduction in premiums ceded to company-sponsored third party capital vehicles to $32.9 million in 2015, compared to $65.5 million 2014, and lower premiums paid for retrocessional reinsurance purchases.
Catastrophe Reinsurance Underwriting Results - Our Catastrophe Reinsurance segment generated underwriting income of $406.4 million in 2015, compared to $450.1 million in 2014, a decrease of $43.7 million. In 2015, our Catastrophe Reinsurance segment generated a net claims and claim expense ratio of 12.1%, an underwriting expense ratio of 22.6% and a combined ratio of 34.7%, compared to 0.3%, 23.5% and 23.8%, respectively, in 2014.
The $43.7 million decrease in underwriting income in our Catastrophe Reinsurance segment in 2015, compared to 2014, was primarily driven by a $73.8 million increase in net claims and claim expenses, comprised of a $78.7 million increase in current accident year net claims and claim expenses, due to higher catastrophe losses in 2015, partially offset by a $31.9 million increase in net premiums earned, which was driven by lower ceded premiums earned due to the reduction in ceded premiums written, noted above. Included in current accident year net claims and claim expenses is $27.3 million related to a number of U.S. winter storms, $21.6 million related to the Tianjin Explosion and $21.2 million related to a U.S. wind and thunderstorm event, with the remainder due to a number of other smaller catastrophe events. During the fourth quarter of 2015, we recognized a recovery and corresponding reduction to acquisition expenses in our Catastrophe Reinsurance segment of $7.7 million associated with the December 2015 decision by the IRS to revoke its position that the excise tax applies on foreign to foreign retrocessions.
Our Catastrophe Reinsurance segment generated underwriting income of $450.1 million in 2014, compared to $558.5 million in 2013, a decrease of $108.4 million. In 2014, our Catastrophe Reinsurance segment generated a net claims and claim expense ratio of 0.3%, an underwriting expense ratio of 23.5% and a combined ratio of 23.8%, compared to 1.1%, 21.7% and 22.8%, respectively, in 2013. The $108.4 million decrease in underwriting income in our Catastrophe Reinsurance segment in 2014, compared to 2013, was primarily driven by a $132.9 million decrease in net premiums earned as a result of the decrease in gross premiums written, combined with an increase of $41.2 million in ceded premiums earned as a result of the increase in ceded premiums written.
Specialty Reinsurance Gross Premiums Written - In 2015, our Specialty Reinsurance segment gross premiums written increased $419.4 million, or 121.0%, to $766.1 million, compared to $346.6 million in 2014, driven primarily by the acquisition of Platinum and increases in certain casualty and credit related lines of business, while we continued to exercise underwriting discipline given prevailing terms and conditions.
In 2014, our Specialty Reinsurance segment gross premiums written increased $87.1 million, or 33.6%, to $346.6 million, compared to $259.5 million in 2013, driven primarily by increases in certain financial liability and casualty related lines of business.
Our Specialty Reinsurance segment gross premiums written in force at December 31, 2015 reflected a relatively larger proportion of quota share, or proportional, reinsurance compared to excess of loss reinsurance than in many of our comparative periods. Our relative mix of business between quota share, or proportional business, and excess of loss business has fluctuated in the past and will likely vary in the future. Quota share business typically has relatively higher premiums per unit of expected underwriting income, together with a higher combined ratio, than traditional excess of loss reinsurance. In addition, quota share coverage tends to be exposed to relatively more attritional, and frequent, losses while subject to less expected severity. Moreover, market conditions for our Specialty Reinsurance segment have been impacted by a trend towards increased ceding commissions on our assumed quota share reinsurance.
Specialty Reinsurance Ceded Premiums Written - Ceded premiums written in our Specialty Reinsurance segment increased $132.4 million to $183.1 million in 2015, compared to $50.8 million in 2014, primarily reflecting an increase in the purchase of retrocessional reinsurance driven by the increased gross premiums written, as noted above.
Our Specialty Reinsurance segment ceded premiums written increased $39.9 million to $50.8 million in 2014, compared to $10.9 million in 2013, primarily reflecting an increase in the purchase of retrocessional reinsurance driven by the increased gross premiums written, as noted above.
Specialty Reinsurance Underwriting Results - Our Specialty Reinsurance segment generated underwriting income of $98.0 million in 2015, compared to $60.7 million in 2014. In 2015, our Specialty Reinsurance segment generated a net claims and claim expense ratio of 44.6%, an underwriting expense ratio of 37.5% and a combined ratio of 82.1%, compared to 34.9%, 41.1% and 76.0%, respectively, in 2014.
The Specialty Reinsurance segment experienced $91.9 million of favorable development on prior accident years net claims and claim expenses in 2015, compared to $55.9 million in 2014. Included in the favorable development of prior accident years net claims and claim expenses of $91.9 million in 2015 was $94.9 million related to attritional net claims and claim expenses reported coming in better than expected on prior accident years events and $8.1 million related to reductions in estimated ultimate losses related to the Deepwater Horizon explosion and oil spill in 2010, partially offset by adverse development of $8.5 million related to the sub-prime related casualty losses from 2007 driven by reported claims from a number of cedants and adverse development of $4.8 million associated to actuarial assumption changes.
Our Specialty Reinsurance segment generated underwriting income of $60.7 million in 2014, compared to $73.8 million in 2013. In 2014, our Specialty Reinsurance segment generated a net claims and claim
The $13.0 million decrease in our Specialty Reinsurance segment’s underwriting income during 2014, compared to 2013, was principally driven by a $43.1 million increase in current accident year net claims and claim expenses and a $31.0 million increase in underwriting expenses, partially offset by a $39.2 million increase in net premiums earned due to the increase in gross premiums written, as noted above. The $43.1 million increase in current accident year net claims and claim expenses is principally driven by attritional losses arising from the increase in net premiums earned during 2014, compared to 2013, combined with a number of large losses. The $31.0 million increase in underwriting expenses is primarily driven by the increase in net premiums earned, combined with the relative increase in the percentage of quota share reinsurance, compared to excess of loss reinsurance, as a percentage of gross premiums written within the Specialty Reinsurance segment, as quota share reinsurance typically carries a higher acquisition expense ratio, compared to excess of loss reinsurance. In addition, operational expenses in our Specialty Reinsurance segment have increased to support the growth in this segment.
Our Lloyd’s segment ceded premiums written increased $14.4 million to $39.2 million in 2014, compared to $24.8 million in 2013, primarily reflecting an increase in the purchase of retrocessional reinsurance driven by the increased gross premiums written, as noted above.
The $12.1 million increase in underwriting expenses in our Lloyd’s segment in 2015, compared to 2014, was primarily driven by increased acquisition expenses as a result of the higher level of net premiums earned, as well as the increased proportion of quota share and delegated authority business written, which generally carry higher acquisition expenses, compared to non-proportional business.
The adverse development of prior accident years net claims and claim expenses within our Lloyd’s segment of $0.3 million during 2015, compared to $16.2 million of favorable development of prior accident years net claims and claim expenses during 2014, was principally driven by an increase in net claims and claim expenses related to small catastrophe events of $1.6 million, partially offset by $1.5 million of favorable development associated with actuarial assumption changes.
Our Lloyd’s segment generated underwriting income of $5.8 million and a combined ratio of 97.3% in 2014, compared to an underwriting loss of $5.0 million and a combined ratio of 102.9% in 2013. Impacting the underwriting result of our Lloyd’s segment is a $41.6 million increase in net premiums earned principally driven by the increase in gross premiums written, noted above, partially offset by a $26.1 million increase in current accident year net claims and claim expenses, and a $12.7 million increase in underwriting expenses, each as discussed below.
Net investment income was $152.6 million in 2015, compared to $124.3 million in 2014, an increase of $28.3 million. Impacting our net investment income for 2015 was higher net investment income in our portfolio of fixed maturity investments primarily driven by higher average invested assets, in part due to the acquisition of Platinum, partially offset by lower returns in our portfolio of private equity investments as a result of the weaker returns in the broader equity markets.
Low interest rates in recent years have lowered the yields at which we invest our assets relative to historical levels, and combined with the current composition of our investment portfolio and other factors, we expect these developments to constrain investment income growth for the near term. The private equity and other investment portfolios are accounted for at fair value with the change in fair value recorded in net investment income, which included net unrealized losses of $13.5 million in 2015, compared to unrealized losses of $1.4 million in 2014.
Net investment income was $124.3 million in 2014, compared to $208.0 million in 2013, a decrease of $83.7 million, principally due to lower returns in our portfolio of private equity investments, driven by weaker returns in the public equity markets, and due to unrealized gains of $56.9 million included in net investment income in 2013 related to our investment in Essent.
Net realized and unrealized losses on investments were $68.9 million in 2015, compared to net realized and unrealized gains on investments of $41.4 million in 2014, a decrease of $110.4 million. Impacting our net realized and unrealized losses on investments was:
Net realized and unrealized gains on investments were $41.4 million in 2014, compared to gains of $35.1 million in 2013, an improvement of $6.4 million. Included in net realized and unrealized gains on investments are the following components:
a reshaping of the yield curve which experienced decreasing rates in longer dated maturities, as compared to short and intermediate term maturities during 2014, compared to the significant steepening of the yield curve that occurred in 2013. This was partially offset by a decrease of $62.0 million in net realized and unrealized losses on investments-related derivatives, to a loss of $30.9 million in 2014, from a gain of $31.1 million in 2013, which was conversely impacted by the factors noted above in 2014, compared to 2013; and
Equity in earnings of other ventures was $20.5 million in 2015, compared to $26.1 million in 2014, with the decrease driven by lower profitability in the Tower Hill Companies and Top Layer Re.
The carrying value of these investments on our consolidated balance sheets, individually or in the aggregate, may differ from the realized value we may ultimately attain, perhaps significantly so.
Corporate expenses include certain executive, director, legal and consulting expenses, costs for research and development, transaction and integration-related expenses, impairment charges related to goodwill and other intangible assets, and other miscellaneous costs, including those associated with operating as a publicly traded company. Corporate expenses increased $54.1 million to $77.1 million in 2015, compared to $23.0 million in 2014, primarily due to $53.5 million of expenses associated with the acquisition and integration of Platinum, comprised of $11.8 million of transaction-related expenses, $5.4 million of integration-related expenses and $36.3 million of compensation-related expenses. Also included in corporate expenses in 2015 was a $5.6 million charge associated with the impairment of the goodwill and other intangible assets of an investment in other ventures, recorded under the equity method.
Corporate expenses decreased $10.6 million to $23.0 million in 2014, compared to $33.6 million in 2013, primarily due to costs associated with senior management transitions in 2013 that did not reoccur, partially offset by $6.7 million of expenses incurred during the fourth quarter of 2014 related to the acquisition of Platinum, which was announced on November 24, 2014.
interest expense of $15.6 million related to the acquisition of $250.0 million Series B 7.50% Notes due June 1, 2017, in connection with acquisition of Platinum;
the issuance on March 24, 2015 of $300.0 million of 3.700% Senior Notes due April 1, 2025, resulting in interest expense of $8.6 million; and
Preferred share dividends were flat at $22.4 million in 2015, compared to $22.4 million in 2014.
At December 31, 2015, our U.S. tax-paying subsidiaries had a net deferred tax asset (after valuation allowance) of $78.1 million. Our Ireland, U.K. and Singapore operations have historically produced GAAP taxable losses and we currently do not believe it is more likely than not that we will be able to recover the predominant amount of our net deferred tax assets in these jurisdictions. Our valuation allowance totaled $17.9 million and $61.7 million at December 31, 2015 and 2014, respectively.
Our effective income tax rate, which we calculate as income tax expense divided by income before taxes, may fluctuate significantly from period to period depending on the geographic distribution of pre-tax income in any given period between different jurisdictions with comparatively higher tax rates and those with comparatively lower tax rates. The geographic distribution of pre-tax income can vary significantly between periods due to, but not limited to, the following factors: the business mix of net premiums written and earned; the size and nature of net claims and claim expenses incurred; the amount and geographic location of operating expenses, net investment income, net realized and unrealized gains (losses) on investments; outstanding debt and related interest expense; and the amount of specific adjustments to determine the income tax basis in each of our operating jurisdictions. In addition, a significant portion of our gross and net premiums are currently written and earned in Bermuda, which does not have a corporate income tax, including the majority of our catastrophe business, which can result in significant volatility to our pre-tax income (loss) in any given period. We expect our consolidated effective tax rate to increase in the future, as our global operations outside of Bermuda expand, including in connection with the acquisition of Platinum. In addition, it is possible we could be adversely affected by changes in tax laws, regulation, or enforcement, any of which could increase our effective tax rate more rapidly or steeply than we currently anticipate.
Our net income attributable to noncontrolling interests was $153.5 million in 2014, compared to $151.1 million in 2013. The $2.4 million increase in net income attributable to noncontrolling interests is principally due to a decrease in our ownership in DaVinciRe to 23.4% at December 31, 2014, compared to 27.3% at December 31, 2013, resulting in an increase in the net income attributable to noncontrolling interests, partially offset by a decrease in the profitability of DaVinciRe.
The payment of dividends by our subsidiaries is, under certain circumstances, limited under statutory regulations and insurance law, which require our insurance subsidiaries to maintain certain measures of solvency and liquidity. During the year ended December 31, 2015, RenaissanceRe’s principal operating subsidiaries returned capital, which included dividends declared and return of capital, net of capital contributions received, of $1.2 billion (2014 - $472.8 million).
As a result of the acquisition of Platinum and the potential for organizational and capital changes, Renaissance Reinsurance and RenaissanceRe Specialty Risks and its subsidiaries each received a request from the BMA, on February 24, 2015 and March 27, 2015, respectively, to obtain written approval prior to paying dividends or returning capital to RenaissanceRe during 2015. Subsequent to these requests and through December 31, 2015, Renaissance Reinsurance and RenaissanceRe Specialty Risks returned capital, which included dividends declared and return of capital, of $245.0 million and $680.0 million, respectively.
(“ECR”) which is established by reference to the Bermuda Solvency Capital Requirement (“BSCR”) model. The BSCR is a risk-based capital model designed to give the BMA more advanced methods for determining an insurer’s capital adequacy. Underlying the BSCR is the belief that all insurers should operate on an ongoing basis with a view to maintaining their capital at a prudent level in excess of the minimum solvency margin (“MSM”) otherwise prescribed under the Insurance Act. Alternatively, under the Insurance Act, insurers may, subject to the terms of the Insurance Act and to the BMA’s oversight, elect to utilize an approved internal capital model to determine regulatory capital. In either case, the ECR shall at all times equal or exceed the respective Class 3B and Class 4 insurer’s MSM and may be adjusted in circumstances where the BMA concludes that the insurer’s risk profile deviates significantly from the assumptions underlying its ECR or the insurer’s assessment of its risk management policies and practices used to calculate the ECR applicable to it. While not specifically referred to in the Insurance Act, the BMA has also established a target capital level (“TCL”) for each Class 3B and Class 4 insurer equal to 120% of its respective ECR. While a Class 3B or Class 4 insurer is not currently required to maintain its statutory capital and surplus at this level, the TCL serves as an early warning tool for the BMA and failure to maintain statutory capital at least equal to the TCL will likely result in increased BMA regulatory oversight. The 2015 BSCR for Renaissance Reinsurance, RenaissanceRe Specialty Risks, RenaissanceRe Specialty U.S., DaVinci and Platinum Bermuda must be filed with the BMA before April 30, 2016; at this time, we believe each company will exceed its respective target level of required capital. In addition, audited annual financial statements prepared in accordance with generally accepted accounting principles for each of Renaissance Reinsurance, RenaissanceRe Specialty Risks, RenaissanceRe Specialty U.S., DaVinci and Platinum Bermuda are filed prior to April 30 of each year with the BMA and are available free of charge on the BMA’s website.
The NAIC uses a risk-based capital ("RBC") model to monitor and regulate the solvency of licensed life, health, and property and casualty insurance and reinsurance companies. Renaissance Reinsurance U.S. is domiciled in Maryland, which has adopted the NAIC's model law. The RBC calculation is used to measure an insurer's capital adequacy with respect to: the risk characteristics of the insurer's premiums written and net claims and claim expenses, rate of growth and quality of assets, among other measures. Depending on the results of the RBC calculation, insurers may be subject to varying degrees of regulatory action depending upon the level of their capital inadequacy.
Refer to “Note 19. Statutory Requirements in our Notes to the Consolidated Financial Statements” for additional information with respect to our statutory requirements.
RenaissanceRe’s principal uses of liquidity are: (1) common share related transactions including dividend payments to holders of its common shareholders as well as common share repurchases from time to time; (2) preference share related transactions including dividend payments to its preference shareholders as well as preference share redemptions from time to time; (3) interest and principal payments on debt; (4) capital investments in its subsidiaries; (5) acquisition of new or existing companies or businesses, such as our acquisition of Platinum; and (6) certain corporate and operating expenses.
Historically, cash receipts from operations, consisting of premiums and investment income, generally have provided sufficient funds to pay losses as well as operating expenses of our subsidiaries and to fund dividends to RenaissanceRe. The premiums received by our operating subsidiaries are generally received months or even years before losses are paid under the policies related to such premiums. Premiums and acquisition expenses are settled based on terms of trade as stipulated by an underwriting contract, and generally are received within the first two years of inception of a contract when the premium is written. Operating expenses are generally paid within a year of being incurred. Claims and claims expenses generally take a much longer time before they are reported and ultimately settled, requiring the establishment of reserves for claims and claim expenses. Therefore, the amount of claims paid in any one year is not necessarily related to the amount of net claims incurred in that year, as reported in the consolidated statement of operations.
As a result of the combination of current market conditions, lower investment yields, and the nature of our business where a large portion of the coverages we provide can produce losses of high severity and low frequency, it is not possible to accurately predict our future cash flows from operating activities. As a consequence, cash flows from operating activities may fluctuate, perhaps significantly, between individual quarters and years. Due to the magnitude and complexity of certain large loss events, meaningful uncertainty remains regarding losses from these events and our actual ultimate net losses from these events may vary from preliminary estimates, perhaps materially. As a result, our cash flows from operations would be impacted accordingly.
We are a “well-known seasoned issuer” as defined by the rules promulgated under the Securities Act, and we maintain a “shelf” Registration Statement on Form S-3 (the “Shelf Registration Statement”) under the Securities Act and are eligible to file additional automatically effective Registration Statements on Form S-3 in the future for the potential offering and sale of an unlimited amount of debt and equity securities. The Shelf Registration Statement allows for various types of securities to be offered, including, but not limited to, common shares, preference shares and debt securities.
In addition, we maintain letter of credit facilities which provide liquidity. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, Capital Resources” for details of these facilities.
a $64.9 million and $128.4 million increase in reinsurance balances payable and prepaid reinsurance premiums, respectively, due to the increase in gross premiums ceded and the timing of our payments of gross premiums ceded;
an increase in premiums receivable and deferred acquisition costs of $105.3 million and $89.2 million, respectively, due to the increase in our gross premiums written;
Cash flows used in investing activities. During the year ended December 31, 2015, our cash flows used in investing activities were $339.0 million, principally reflecting the net cash consideration paid for Platinum of $678.2 million, which was comprised of gross cash outflows of $904.4 million, net of cash acquired of $226.3 million; net purchases of fixed maturity investments of $192.6 million; and net purchases of equity investments trading of $147.6 million. Partially offsetting these net outflows were our net sales of short term investments of $669.1 million. Refer to “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary Results of Operations and Liquidity and Capital Resources, Impact of Platinum Acquisition on Liquidity and Capital Resources” and “Note 3. Acquisition of Platinum in our Notes to the Consolidated Financial Statements” for additional information with respect to the acquisition of Platinum.
Cash flows used in financing activities. Our cash flows used in financing activities in the year ended December 31, 2015 were $83.7 million, and were principally the result of net outflows related to the settlement of $259.9 million of common share repurchases, net outflows of $193.0 million related to a net return of capital to third party shareholders, principally in DaVinciRe, and $54.0 million and $22.4 million of dividends paid on our common and preferred shares, respectively, partially offset by the issuance of $300.0 million of our 3.700% Senior Notes due 2025, net of expenses, of $297.8 million, and the issuance of $150.0 million of DaVinciRe’s 4.750% Senior Notes due 2025, net of expenses, of $147.8 million.
During 2014, our cash and cash equivalents increased $117.6 million, to $525.6 million at December 31, 2014, compared to $408.0 million at December 31, 2013.
Cash flows used in financing activities. Our cash flows used in financing activities in 2014 were $694.7 million, and were principally the result of the settlement of $514.7 million of common share repurchases; net outflows of $111.7 million related to net capital changes to third party shareholders in DaVinciRe and Medici; and $45.9 million and $22.4 million of dividends paid on our common and preference shares, respectively.
The aggregate consideration for the transaction was $1.93 billion, comprised of the Special Dividend of $253.2 million paid by Platinum, the issuance of 7.4 million RenaissanceRe common shares valued at $761.8 million, and cash consideration of $904.4 million. As discussed in “Capital Resources” below, RenaissanceRe used a short term bridge loan to fund $300.0 million of the cash consideration paid by RenaissanceRe and on March 24, 2015, issued $300.0 million of its 3.700% Senior Notes due 2025 (together with cash on hand) to replace the short term bridge loan used to fund part of the cash consideration. The remaining $604.4 million of cash consideration was funded through RenaissanceRe available funds.
ability to produce sufficient cash flows to meet their expected claims payments and operational expenses and to provide dividend payments to RenaissanceRe. In turn, we anticipate RenaissanceRe will have adequate capital resources, or access to capital resources, as discussed in “Capital Resources” below, to meet its obligations, including but not limited to dividend payments to its common and preferred shareholders, interest payments on its senior notes and other liabilities as they come due.
In connection with the acquisition of Platinum, RenaissanceRe became an additional guarantor of Platinum Finance’s obligations under the Platinum Finance Notes and the Platinum Finance indenture. Pursuant to the Platinum Finance indenture, Platinum Finance previously issued $250.0 million in aggregate principal amount of its Series B 7.50% Notes due June 1, 2017, which is recorded on our consolidated balance sheet at $268.2 million at December 31, 2015;
On March 24, 2015, RenaissanceRe Finance issued $300.0 million of 3.700% Senior Notes due April 1, 2025, with interest on the notes payable on April 1 and October 1 of each year. Through a series of intercompany transactions (including a loan from RenaissanceRe Finance to RenaissanceRe), the net proceeds from the offering of the notes (together with cash on hand) were used by RenaissanceRe to repay in full a $300.0 million bridge loan that Barclays Bank PLC provided to RenaissanceRe on February 26, 2015 in order to finance a portion of the cash consideration paid by RenaissanceRe in connection with the acquisition of Platinum. Refer to “Note 3. Acquisition of Platinum in our Notes to the Consolidated Financial Statements” for additional
Refer to “Note 10. Debt and Credit Facilities in our Notes to the Consolidated Financial Statements” for additional information related to our debt and credit facilities and “Note 13. Shareholders’ Equity in our Notes to the Consolidated Financial Statements” for additional information related to our common and preference shares.
outstanding letters of credit to the appropriate MBRT as determined by cedant state of domicile, thereby reducing our absolute and relative reliance on letters of credit. Accordingly, it is our intention to seek to have new business incepting with cedants domiciled in approved states collateralized using a MBRT. Cedants collateralized with a MBRT will be eligible for automatic reinsurance credit in their respective U.S. regulatory filings. Assets held under trust at December 31, 2015 with respect to the MBRTs totaled $505.0 million and $135.3 million for Renaissance Reinsurance and DaVinci, respectively, compared to the minimum amount required under U.S. state regulations of $378.8 million and $100.1 million, respectively.
Effective December 31, 2012, each of Renaissance Reinsurance and DaVinci has been approved as an “eligible reinsurer” in the state of Florida, and are authorized to provide reduced collateral equal to 20% and 50%, respectively, of their net outstanding insurance liabilities to Florida-domiciled insurers. Each of Renaissance Reinsurance and DaVinci has established a multi-beneficiary reduced collateral reinsurance trust (“RCT”) to collateralize its (re)insurance liabilities associated with Florida-domiciled cedants. Because the RCTs were established in New York, they are subject to the rules and regulations of the state of New York including but not limited to certain minimum capital funding requirements, investment guidelines, capital distribution restrictions and regulatory reporting requirements. Assets held under trust at December 31, 2015 with respect to the RCTs totaled $41.7 million and $18.9 million for Renaissance Reinsurance and DaVinci, respectively, compared to the minimum amount required under U.S. state regulations of $15.2 million and $10.4 million, respectively.
During January 2016, DaVinciRe redeemed a portion of its outstanding shares from certain existing DaVinciRe shareholders, including RenaissanceRe, while new DaVinciRe shareholders purchased shares in DaVinciRe from RenaissanceRe. The net redemption as a result of these transactions was $100.0 million. In connection with the redemption, DaVinciRe retained a $20.0 million holdback. Our noncontrolling economic ownership in DaVinciRe subsequent to these transactions was 24.0%, effective January 1, 2016.
Refer to “Note 11. Noncontrolling Interests in our Notes to the Consolidated Financial Statements” for additional information related to redeemable noncontrolling interest - DaVinciRe.
The A.M. Best, S&P and Fitch ratings for the Lloyd’s Overall Market Rating represent its financial strength rating.
A.M. Best. “A+” is the second highest designation of A.M. Best’s sixteen rating levels. “A+” rated insurance companies are defined as “Superior” companies and are considered by A.M. Best to have a very strong ability to meet their obligations to policyholders. “A” is the third highest designation assigned by A.M. Best, representing A.M. Best’s opinion that the insurer has an “Excellent” ability to meet its ongoing obligations to policyholders.
On December 14, 2015, S&P affirmed the FSRs of RenaissanceRe’s subsidiaries, as shown in the table above, the ICR of RenaissanceRe of “A” and ERM rating of RenaissanceRe of “Very Strong”. The outlook for these ratings is stable.
On November 24, 2014, following our announcement of RenaissanceRe’s intention to acquire Platinum, S&P affirmed the FCR and ICR ratings of RenaissanceRe and RenaissanceRe’s operating subsidiaries.
On November 25, 2014, following our announcement of RenaissanceRe’s intention to acquire Platinum, Moody’s affirmed its ratings of RenaissanceRe and RenaissanceRe’s operating subsidiaries. However, Moody’s changed its outlook to negative, from stable. The negative outlook reflected Moody’s opinion of the uncertain benefits and higher financial leverage of the combined entity. Following the acquisition of Platinum, Moody’s evaluated its negative outlook and on November 25, 2015, Moody’s affirmed its ratings of RenaissanceRe and RenaissanceRe’s operating subsidiaries and changed its to stable, from negative. The stable outlook reflects Moody’s more positive view of the acquisition of Platinum, although concerns linger about reinsurance sector fundamentals.
On November 25, 2014, following our announcement of RenaissanceRe’s intention to acquire Platinum, Fitch affirmed its ratings of RenaissanceRe and RenaissanceRe’s operating subsidiaries. The outlook is stable for these ratings.
A.M. Best, S&P and Fitch have each assigned an FSR to the Lloyd’s overall market. The financial risks to policy holders of syndicates within the Lloyd’s market are partially mutualized through the Lloyd’s Central Fund, to which all underwriting members contribute. Because of the presence of the Lloyd’s Central Fund, and the current legal and regulatory structure of the Lloyd’s market, FSRs on individual syndicates would not be particularly meaningful and in any event would not be lower than the FSR of the Lloyd’s overall market.
While the ratings of our principal operating subsidiaries and joint ventures remain among the highest in our business, adverse ratings actions could have a negative effect on our ability to fully realize current or future market opportunities. In addition, it is common for our reinsurance contracts to contain provisions permitting our customers to cancel coverage pro rata if our relevant operating subsidiary is downgraded below a certain rating level. Whether a client would exercise this right would depend, among other factors, on the reason for such a downgrade, the extent of the downgrade, the prevailing market conditions and the pricing and availability of replacement reinsurance coverage. Therefore, in the event of a downgrade, it is not possible to predict the extent to which this cancellation right would be exercised, if at all, or what effect such
cancellations would have on our financial condition or future operations, but such effect potentially could be material. To date, we are not aware that we have experienced such a cancellation. Our ratings are subject to periodic review and may be revised or revoked by the agencies which issue them.
On March 2, 2015 we acquired Platinum and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values, including Platinum’s claims and claim expense reserves, which totaled $1.4 billion at March 2, 2015 and consisted of $117.4 million and $1.3 billion included in our Catastrophe Reinsurance and Specialty Reinsurance segments, respectively. These claims and claim expense reserves are subject to the reserving methodologies for each respective line of business as described below.
Our estimates of claims and claim expense reserves are not precise in that, among other matters, they are based on predictions of future developments and estimates of future trends and other variable factors. Some, but not all, of our reserves are further subject to the uncertainty inherent in actuarial methodologies and estimates. Because a reserve estimate is simply an insurer’s estimate at a point in time of its ultimate liability, and because there are numerous factors which affect reserves and claims payments that cannot be determined with certainty in advance, our ultimate payments will vary, perhaps materially, from our estimates of reserves. If we determine in a subsequent period that adjustments to our previously established reserves are appropriate, such adjustments are recorded in the period in which they are identified. Because of the inherent uncertainties discussed below, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior accident years net claims and claim expenses in the last several years. However, there is no assurance that this will occur in future periods. During the year ended December 31, 2015, changes to prior year estimated claims reserves increased our net income by $162.4
Our reserving techniques, assumptions and processes differ between our Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Estimates, Claims and Claim Expense Reserves” for more information on the risks we insure and reinsure, the reserving techniques, assumptions and processes we follow to estimate our claims and claim expense reserves, and our current estimates versus our initial estimates of our claims reserves, for each of these units.
At December 31, 2015, we held investments totaling $9.0 billion, compared to $6.7 billion at December 31, 2014, with net unrealized appreciation included in accumulated other comprehensive income of $2.1 million at December 31, 2015, compared to $3.4 million at December 31, 2014. In connection with the acquisition of Platinum, we acquired $2.7 billion of investments, including $1.8 billion of fixed maturity investments trading and $883.5 million of short term investments. Our investment guidelines stress preservation of capital, market liquidity, and diversification of risk. Notwithstanding the foregoing, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. Refer to “Note 7. Fair Value Measurements in our Notes to the Consolidated Financial Statements” for additional information regarding the fair value of measurement of our investments.
As the reinsurance coverages we sell include substantial protection for damages resulting from natural and man-made catastrophes, we expect from time to time to become liable for substantial claim payments on short notice. Accordingly, our investment portfolio as a whole is structured to seek to preserve capital and provide a high level of liquidity which means that the large majority of our investment portfolio consists of highly rated fixed income securities, including U.S. treasuries, agencies, municipals, highly rated sovereign and supranational securities, high-grade corporate securities and mortgage-backed and asset-backed
securities. We also have an allocation to publicly traded equities reflected on our consolidated balance sheet as equity investments trading and an allocation to other investments (including catastrophe bonds, private equity partnerships, a senior secured bank loan fund, hedge funds and other investments). At December 31, 2015, our portfolio of equity investments trading totaled $393.9 million, or 4.4%, of our total investments (December 31, 2014 - $322.1 million or 4.8%) inclusive of our investment in Essent Group Ltd. of $102.1 million (December 31, 2014 - $120.0 million), and our portfolio of other investments totaled $481.6 million, or 5.4%, of our total investments (December 31, 2014 - $504.1 million or 7.5%).
The duration of our fixed maturity investments and short term investments at December 31, 2015 was 2.3 years (2014 - 2.1 years). From time to time, we may reevaluate the duration of our portfolio in light of the duration of our liabilities and market conditions.
We have a public equity securities mandate with a third party investment manager which currently comprises the majority of our investments included in equity investments trading. In addition, the financial category of our equity investments trading at December 31, 2015 includes $102.1 million (2014 - $120.0 million) related to our investment in Essent and $26.9 million (2014 - $17.1 million) related to our investment in Trupanion. It is possible our equity allocation will increase in the future, although we do not expect it to represent a material portion of our invested assets or to have a material effect on our financial results for the reasonably foreseeable future.
In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, we estimate the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, as well as the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which we estimate the return for the current period, all information available to us is utilized. This principally includes preliminary estimates reported to us by our fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to us with respect to the underlying investments, reviewing various indices for similar investments or asset classes, as well as estimating returns based on the results of similar types of investments for which we have obtained reported results, or other valuation methods, where possible. Actual final fund valuations may differ, perhaps materially so, from our estimates and these differences are recorded in our consolidated statement of operations in the period in which they are reported to us as a change in estimate. Included in net investment income for the year ended December 31, 2015 is a loss of $2.5 million (2014 - loss of $0.6 million) representing the change in estimate during the period related to the difference between our
Our estimate of the fair value of catastrophe bonds is based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications.
Refer to “Note 7. Fair Value Measurements in our Notes to the Consolidated Financial Statements” for additional information regarding the fair value measurement of our investments.
Interest income, income distributions and realized and unrealized gains (losses) on other investments are included in net investment income and resulted in $21.9 million of net investment income for the year ended December 31, 2015 (2014 - $30.0 million). Of this amount, $13.5 million related to net unrealized losses (2014 - unrealized losses of $1.4 million).
We have committed capital to private equity partnerships and other investments of $724.5 million, of which $528.8 million has been contributed at December 31, 2015. Our remaining commitments to these investments at December 31, 2015 totaled $204.5 million. In the future, we may enter into additional commitments in respect of private equity partnerships or individual portfolio company investment opportunities.
The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. The anticipated effects on us are considered in our catastrophe loss models. Our estimates of the potential effects of inflation are also considered in pricing and in estimating reserves for unpaid claims and claim expenses. In addition, it is possible that the risk of general economic inflation has increased which could, among other things, cause claims and claim expenses to increase and also impact the performance of our investment portfolio. The actual effects of this potential increase in inflation on our results cannot be accurately known until, among other items, claims are ultimately settled. The onset, duration and severity of an inflationary period cannot be estimated with precision.
At December 31, 2015, we had not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.
unforeseen claims or tort law developments. Our reserve for claims and claim expenses also grew meaningfully as a result of the acquisition, and our future results will be impacted by the potential for adverse or favorable development on prior accident years claims and claim expenses from the business written prior to the closing by both of our companies. In addition, as a result of the acquisition, the face value of our indebtedness increased by $550.0 million, consisting of $250.0 million of publicly traded notes previously issued by a subsidiary of Platinum, which remain outstanding, and $300.0 million of new senior public notes issued by RenaissanceRe Finance.
In the markets in which our Specialty Reinsurance segment operates, we continue to expect casualty insurance and reinsurance capacity to remain abundant during 2016. Accordingly, we believe that the potential for overall improvement in risk adjusted rates prevailing in the market will be limited. We believe that prevailing terms and conditions in the casualty market are such that many programs and treaties do not meet our pricing standards. We believe our combined operations following the acquisition of Platinum are
These economic conditions impact the risk-adjusted attractiveness and absolute returns and yields of our investment portfolio. In addition, our underwriting activities can be impacted, in particular our specialty and casualty reinsurance and Lloyd’s portfolios, each of which can be exposed to risks arising from the ongoing economic weakness or dislocations, including with respect to a potential increase of claims in directors and officers, errors and omissions, surety, casualty clash and other lines of business.
Leading global intermediaries and other sources have generally reported that the U.S. casualty reinsurance market reflects a soft pricing environment, although we believe that pockets of niche or specialty casualty lines may provide more attractive opportunities for stronger or well-positioned reinsurers. While we believe that these dynamics have supported our recent specialty and casualty growth, we cannot assure you that
any overall market increase in demand will indeed materialize or we will continue to be successful in consummating new or expanded transactions.
On November 26, 2015, the BMA was granted full Solvency II equivalence for an unlimited period by the EC based on an assessment conducted by the European Insurance and Occupational Pensions Authority. Official confirmation of Bermuda’s equivalence is expected in 2016 following a three month review by the European Parliament and Council. If Bermuda is not officially confirmed as equivalent to Solvency II, our Bermuda reinsurance companies may be required to post collateral in respect of any reinsurance of European Economic Area cedants.
In June 2012, Congress passed the Biggert-Waters Bill, which provided for a five-year renewal of the National Flood Insurance Program (the “NFIP”) and effected substantial reforms in the program. Among other things, pursuant to this statute, the Federal Emergency Management Agency (“FEMA”) was explicitly authorized to carry out initiatives to determine the capacity of private insurers, reinsurers, and financial markets to assume a greater portion of the flood risk exposure in the U.S., and to assess the capacity of the private reinsurance market to assume some of the program’s risk. The bill also provided for increasing the annual limitation on program premium increases from 10% to 20% of the average of the risk premium rates for certain properties concerned; established a four-year phase-in, after the first year, in annual 20% increments, of full actuarial rates for a newly mapped risk premium rate area; instructed FEMA to establish new flood insurance rate maps; allowed multi-family properties to purchase NFIP policies; and introduced minimum deductibles for flood claims. In March 2014, the U.S. Congress passed the Grimm-Waters Act, which amends, delays or defers some of the provisions of Biggert-Waters Bill. Among other things, the Grimm-Waters Act reverts back to exempting “grandfathered” policies from rate increases that might otherwise have been applied upon the approval of updated flood maps, introduces certain caps on the rate of premium increases even where actuarially indicated; eliminates certain provisions which provided for accelerated rate adequacy on the sale of covered properties; and introduces policy surcharges of $25 for residences and $250 for commercial properties near-term. We believe that the passage of the Grimm-Waters Act has had an adverse impact on near term prospects for increased U.S. private flood insurance demand, the stability of the NFIP and the primary insurers that produce policies for the NFIP or offer private coverages. However, the Grimm-Waters Act did not amend certain features of the Biggert-Waters Bill which could, over time, support the growth of such demand, albeit at a slower pace and with greater uncertainty, such as the continuation, subject to annual limits, of some potential premium increases and the potential continuation of certain reforms relating to commercial properties and to homes that are not primary residences. However, we cannot assure you that the provisions of the Biggert-Waters Bill will not be superseded by additional new legislation or will otherwise ultimately be implemented by the NFIP or that, if
implemented, will materially benefit private carriers, or we will succeed in participating in any positive market developments that may transpire.
Over the past few years, and again in February 2016, the Obama administration has proposed and the U.S. Congress has considered legislation which, if passed, would limit or deny U.S. insurers and reinsurers the deduction for reinsurance placed with non-U.S. affiliates. We believe that the passage of such legislation could adversely affect the reinsurance market broadly and potentially impact our own current or future operations in particular.
In July 2014, the Senate Finance Committee conducted hearings in respect of transactions in which U.S.-based companies merge with or acquire foreign companies in structures referred to as inversions. In September 2014 the IRS and the Treasury Department issued a notice describing issued regulations that the government intends to issue to eliminate certain of the tax benefits of corporate inversions, which regulations would apply to any inversion transaction closing on or after September 22, 2014. In November 2015 the IRS and the Treasury Department supplemented the 2014 notice with another notice describing further regulations that the government intends to issue in connection with corporate inversion transactions, which generally apply to any inversion transaction closing on or after November 19, 2015. These regulations could negatively impact us, including our ability to acquire U.S. companies using our common shares as acquisition consideration.
On July 24, 2013, the New York State Department of Financial Services (the “DFS”) issued an Insurance Circular Letter No. 6 (2013) (the “Circular”) to all Accredited Reinsurers writing business in New York State. Renaissance Reinsurance and DaVinci are Accredited Reinsurers in New York. As described in the Circular, the DFS is seeking information concerning Accredited Reinsurers’ compliance with the Iran Freedom and Counter-Proliferation Act of 2012 (the “IFCPA”), which was passed by the U.S. Congress in 2012 and which became effective on July 1, 2013. The Accredited Reinsurers to whom the Circular applies do business in New York and are all based outside the United States. The DFS is responsible for the regulation of insurers doing business in New York State. We intend to cooperate with the DFS in its request for information in this regard. We believe our existing risk-based compliance program is responsive to the IFCPA and we are not aware of any non-compliance with the IFCPA. While we believe that this request for information by the DFS will not have a material adverse impact on our operations, it is possible that our industry could see increased scrutiny and perhaps additional enforcement of sanction laws and regulations. We cannot assure you that increased enforcement of sanction laws and regulations will not impact our business more adversely than we currently estimate.