The following is a list of GAAP and non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations:
Reserve for Losses and LAE, as shown in the liabilities section of our Consolidated Balance Sheets, represents the total obligations to claimants for both estimates of known claims and estimates for IBNR claims. The related asset item, Reinsurance Recoverable on Unpaid Losses and LAE, is the estimate of both known claims and IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as Net Losses and LAE Reserves and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.
Net Operating Earnings is a “non-GAAP financial measure” as defined in Regulation G. Net Operating Earnings is comprised of Net Income excluding After-Tax adjustments, including: Total Net Realized and Unrealized Gains (Losses), Foreign Exchange Gains (Losses), the Net Gain on Disposition of Product Line, Merger Transaction Costs, and the impact of the Tax Act at enactment recognized in our Consolidated Statements of Income. We believe that this presentation reflects the underlying fundamentals of our business.
The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward-looking statements that involve risks and uncertainties. Please refer to Forward-Looking Statements and Risk Factors for more information. Our results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described below and elsewhere in this Form 10-K.
On February 7, 2018, certain wholly owned subsidiaries of our Company entered into a Renewal Rights Agreement with Thomas Miller Specialty Underwriting Agency Limited and Thomas Miller & Co Limited (collectively “Thomas Miller”), pursuant to which Thomas Miller agreed to acquire the renewal rights to our Company’s fixed-premium protection and indemnity business. During the first quarter of 2018, our Company recorded a gain from this transaction. Our Company agreed to continue to underwrite such business from February 8, 2018 through an end date of August 31, 2018, while all transitional arrangements were put in place, and ceded 100% of such business through a quota share agreement. After August 31, 2018 this business renewed through Thomas Miller. Our Company remains responsible for all losses incurred on such business written prior to February 8, 2018, and our Company continues to participate in the protection and indemnity market primarily through reinsurance of mutual clubs via our Lloyd’s of London (“Lloyd’s”) syndicate, Syndicate 1221.
On August 22, 2018, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Hartford Financial Services Group, Inc. (“The Hartford”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, our Company will merge with an existing subsidiary of The Hartford, with our Company surviving as a wholly owned subsidiary of The Hartford (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $70.00 in cash per common share. At a special meeting of stockholders of the Company held on November 16, 2018, the Company’s stockholders approved by the requisite vote a proposal to adopt the Merger Agreement. The Merger is expected to close in the first half of 2019, but remains subject to the receipt of regulatory approvals and other customary closing conditions.
(2) - As a result of the enactment of the Tax Act, we revalued our deferred tax assets as of December 31, 2017, resulting in a reduction in our deferred tax assets of $16.6 million, of which $17.1 million was recorded in 2017 and $(0.5) million was recorded in 2018. We also incurred a one-time payment of $1.3 million due to tax on previously untaxed accumulated and current earnings and profits on certain foreign subsidiaries, of which $2.6 million was recorded in 2017 and $(1.3) million was recorded in 2018.
The decrease in the Underwriting Loss was partially offset by $76.2 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2018 compared to $34.3 million of Net Prior AY Reserve Strengthening, for the same period in 2017, an increase in Other Operating Expenses primarily due to an increase in employee expenses, professional service fees, and information technology costs associated with new business initiatives and expansion of our global platform. Also partially offsetting the decrease in the Underwriting Loss was an increase in the Commission Expense driven by all of our reporting segments.
This was partially offset by increased premiums earned across all of our reporting segments with lower non-catastrophe Net Current AY Losses and LAE ratios.
For the year ended December 31, 2018, our Net Prior AY Losses and LAE Ratio increased 2.7 points as compared to the same period in 2017 primarily driven by:
For the year ended December 31, 2018, our Net Current AY losses and LAE Ratio decreased 5.1 points as compared to the same period in 2017 primarily driven by a reduced level of catastrophe losses. After adjusting for net catastrophe losses net of RRPs, our Net Current AY Losses and LAE Ratio increased 0.1 points as compared to the same period in 2017 primarily due to unfavorable performance within certain key divisions of our U.S. and Int’l Insurance reporting segments.
The year ended December 31, 2016 recognized $28.5 million of Net Prior AY Reserve Releases. These releases were primarily in our Int’l Insurance reporting segment due to favorable loss emergence.
For the year ended December 31, 2017, our Net Current AY losses and LAE Ratio increased 2.0 points as compared to the same period in 2016 primarily driven by an increased level of catastrophe losses. After adjusting for net catastrophe losses inclusive of net RRPs, our Net Current AY Losses and LAE Ratio decreased 3.5 points as compared to the same period in 2016 primarily due to decreased large loss activity in our Int’l Insurance reporting segment and changes in product mix in our U.S. and Int’l Insurance reporting segments.
The increase in total Net Investment Income for all years presented as compared to the prior years was primarily due to growth of invested assets coupled with an increase in pretax yields, driven in part by an increased allocation to higher yielding preferred stocks, as well as increases in the yield curve resulting from Federal Reserve policy. The annualized pre-tax yields, excluding Net Realized and Unrealized Gains and Losses and Other than Temporary Impairment (“OTTI”) losses recognized in earnings, on a consolidated basis were 2.9%, 2.7% and 2.6%, respectively, for the years ended December 31, 2018, 2017 and 2016.
Net Realized Gains and Losses, excluding OTTI Losses Recognized in Earnings, for the periods indicated were as follows:
Net Realized Gains of $3.0 million for the year ended December 31, 2018 are primarily due to the sale of Corporate and Municipal bonds and Preferred stocks as part of the normal ongoing management of our investment portfolio. Net Realized Gains of $45.1 million for the year ended December 31, 2017 were primarily due to the liquidation of our actively managed Common Stock Equity Securities portfolio in December 2017 as we reassessed our common equity strategy. The remaining Net Realized Gains and Losses for 2017 relate to the ongoing management of our Fixed Maturities and Short-Term Investments portfolios. Net Realized Gains of $9.2 million for the year ended December 31, 2016 were primarily due to the sale of Equity Securities.
Net Unrealized Gains and Losses on Investments at Fair Value through Net Income
For the year ended December 31, 2018, our Company had $33.3 million of Net Unrealized Losses on our Equity Securities, which were recognized in Net Income pursuant to ASU 2016-01, which we adopted effective January 1, 2018.
Other Income (Loss) for the years ended December 31, 2018, 2017 and 2016 was $4.9 million, ($4.3) million and $8.6 million, respectively. Other Income (Loss) primarily consists of realized and unrealized foreign exchange gains and losses.
The gain in 2018 was mostly driven by the re-measurement of net insurance related liabilities impacted by the strengthening of the USD against the GBP, EUR and CAD, as well as revenue from the sale of renewal rights for our Company’s fixed-premium protection and indemnity business during the first quarter.
The gain in 2016 was mostly driven by the re-measurement of net insurance related liabilities impacted by the strengthening of the USD against the GBP and CAD.
See Note 1 Organizations & Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein for additional information regarding the foreign currency adjustment.
Merger Transaction Costs for the year ended December 31, 2018 were $4.0 million. These costs represent expenses incurred that are associated with the Merger and are unrelated to our ongoing operations.
We recorded an effective tax rate of 29.5%, 45.9% and 29.6% for December 31, 2018, 2017 and 2016, respectively. Our 2018 effective tax rate is in excess of the Federal statutory income tax rate of 21%, mostly due to an additional tax expense accrued in connection with an internal study of foreign taxes paid, prompted by an IRS audit which increased our effective income tax rate by 14.5 points. This impact was offset by reductions in valuation allowance and transition tax. Our 2017 effective tax rate was increased by 26.4 points due to the net one-time charge related to the Tax Act. Conversely, the rates for 2018 and 2017 benefited by 3.5 points and 6.7 points, respectively, related to stock compensation, which is now recorded in earnings as income tax benefit or expense, effective with the 2017 adoption of accounting standards update 2016-09. In addition, our effective tax rate for each of the years benefitted due to tax-exempt investment income and dividends received deduction by 8.4 points in 2018, 11.5 points in 2017, and 6.1 points in 2016. See Note 11 Income Taxes, in the Notes to Consolidated Financial Statements, for further details. Future changes in tax laws could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. See the risk factor Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or affect pricing of some of our products in Item 1A - Risk Factors for additional information regarding the impact of the Tax Act.
The following tables summarize our Consolidated Financial Results by reporting segment for the years ended December 31, 2018, 2017 and 2016:
The following tables summarize our financial results by operating segment for our U.S. Insurance reporting segment for the years ended December 31, 2018, 2017 and 2016:
The decrease in our Marine operating segment was driven by a decrease in our Craft product due to the nonrenewal of an underperforming program, partially offset by increases in our Inland Marine and Cargo products driven by new business and an increased level of renewals.
The increase in our P&C operating segment was driven by increases in our Excess Casualty, Auto, and Environmental divisions, as well as our Property product, primarily due to new business production and an increased level of renewals, and to a lesser extent, improvement on rates across certain divisions. This was partially offset by a reduction in our Primary Casualty division driven by the decision to reduce exposure in certain products within this division including the Premises product.
Average renewal premium rates for our U.S. Insurance reporting segment for the year ended December 31, 2018 increased 2.6% compared to the same period in 2017, driven by increases of 3.2%, 1.7% and 1.1% within our P&C, Professional Liability and Marine operating segments, respectively.
Gross Written Premiums increased $68.9 million for the year ended December 31, 2017 as compared to the same period in 2016 driven by an $82.0 million increase in our P&C operating segment, partially offset by a decrease in our Marine operating segment of $13.2 million.
The increase in our P&C operating segment was primarily driven by increases in our Excess Casualty, Other P&C, Auto and Environmental divisions, partially offset by a decrease in our Primary Casualty division. The increase in our Excess Casualty division was primarily attributable to new business resulting from increases in construction project coverage. The increase in our Other P&C division was driven by new business production and an increase in rates in our Property product, as well as the transfer of the management of our Custom Bonds product from the Marine operating segment to our Surety product in our Other P&C division. The increase in our Auto division was due to new business production and strong rates on renewals. The increase in our Environmental division was attributable to new business with increased opportunities in the market. The decrease in our Primary Casualty division was driven by the nonrenewal of underperforming accounts.
Ceded Written Premiums were $283.0 million, resulting in a retention ratio of 73.9% of Net Written Premiums to Gross Written Premiums, for the year ended December 31, 2018, compared to Ceded Written Premiums of $267.0 million, resulting in a retention ratio of 73.0%, for the same period in 2017. The increase in the retention ratio was driven by our Marine and Professional Liability operating segments, partially offset by a decrease in the retention ratio for our P&C operating segment.
The increase in our Marine operating segment’s retention ratio was primarily driven by a reduction in proportional reinsurance in our Craft product related to business that was not renewed which had higher proportional cessions, as well as the impact of ceded RRPs in the prior year related to Hurricane Irma and other large loss events.
The increase in our Professional Liability operating segment’s retention ratio was primarily the result of changes in the mix of business with an increase in premiums not subject to proportional reinsurance coverage within our D&O division.
The decrease in our Marine operating segment’s retention ratio was driven by changes in the business mix and the impact of an increase in ceded RRP’s due in part to Hurricane Irma and other large loss events.
The decrease in our P&C operating segment’s retention ratio was primarily the result of increased proportional reinsurance on our Property product purchased during the second quarter of 2017, and to a lesser extent, changes in the mix of business.
Net Earned Premiums increased $63.0 million for the year ended December 31, 2018, as compared to the same period in 2017 mainly driven by growth in our P&C and Professional Liability operating segments, as well as the impact of ceded RRPs in the prior year related to Hurricane Irma and other large loss events and a reduction in premiums subject to proportional reinsurance coverage within our D&O division. These increases were partially offset by a reduction in the amount of premiums written in our Marine operating segment.
For the year ended December 31, 2018, our Net Prior AY Losses and LAE Ratio increased 0.1 points as compared to the same period in 2017 primarily driven by:
Our P&C operating segment recognized $10.3 million of Net Prior AY Reserve Strengthening primarily driven by our Primary Casualty division with $46.1 million of loss development mostly in our Premises line. This strengthening was offset by $34.7 million of Net Prior AY Reserve Releases on our Excess Casualty division due to better than expected loss emergence and $1.1 million of net catastrophe loss release primarily related to the Hurricane events that occurred in the third quarter of 2017. This compares to $1.6 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 primarily related to large loss activity within our Primary Casualty division, partially offset by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions.
Our Marine operating segment recognized $0.8 million of Net Prior AY Reserve Releases including $1.6 million of net catastrophe loss release primarily related to the Hurricane events that occurred in the third quarter of 2017, partially offset by reserve strengthening due to worse than expected loss emergence in our Craft product. This compares to $1.7 million of Net Prior AY Reserve Strengthening for the same period in 2017 due to unfavorable development on large loss activity within our Cargo product line.
unfavorable performance within certain key divisions within the P&C operating segment.
These increases in the Net Current AY Losses and LAE Ratio were partially offset by:
For the year ended December 31, 2017, our Net Prior AY Losses and LAE Ratio increased 2.7 points as compared to the same period in 2016 primarily driven by:
Our Professional Liability operating segment recognized $13.4 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 mostly related to large loss activity within our D&O division. This compares to $6.0 million of Net Prior AY Reserve Strengthening primarily within our D&O division due to unfavorable development on large claims and bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.
Our P&C operating segment recognized $1.6 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017, primarily due to large loss activity within our Primary Casualty division, partially offset by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions. This compares to $2.8 million of Net Prior AY Reserve Strengthening for the same period in 2016.
favorable performance within our Excess Casualty and Auto divisions of our P&C operating segment; and
Our P&C operating segment’s Commission Expense Ratio decreased primarily due to changes in the mix of business with an increase in Property business which generates greater ceding commission income related to a large proportional reinsurance program.
Our Professional Liability operating segment’s Commission Expense Ratio increased due to the reduction in proportional reinsurance and related ceding commission benefits.
Other Operating Expenses for the year ended December 31, 2018 increased $13.4 million, as compared to the same period in 2017, primarily due to an increase in costs associated with new business initiatives, including applicable support and information technology expenses, and higher professional service fees.
The following tables summarize our financial results by operating segment for our Int’l Insurance reporting segment for the years ended December 31, 2018, 2017 and 2016:
Gross Written Premiums increased $29.6 million for the year ended December 31, 2018 compared to the same period in 2017, driven by increases in our Professional Liability and P&C operating segments of $34.4 million and $12.4 million, respectively, partially offset by a decrease in our Marine operating segment of $17.2 million.
The decrease in our Marine operating segment was due to decreases in our Transport, Hull, Marine Liability, and Protection & Indemnity products. These decreases were partially offset by additional premium from the NICE Group business acquired in the second quarter of 2018. The decrease in our Transport and Marine Liability product was primarily driven by declined renewals of several large binding authorities. The decrease in our Hull product was primarily related to the timing of certain construction driven contracts and non-renewals. The decrease in our Protection and Indemnity product was as a result of our decision to sell the renewal rights to our fixed-premium protection and indemnity business.
The increase in our Professional Liability operating segment was driven by rate improvement and growth in new business within our D&O division, as well as additional growth across all divisions within this operating segment.
Average renewal premium rates for our Int’l Insurance reporting segment for the year ended December 31, 2018 increased 4.3% compared to the same period in 2017, driven by increases of 6.4%, 3.5% and 3.1% in our Professional Liability, Marine, and P&C operating segments, respectively.
The increase in our Professional Liability operating segment was primarily driven by new business production in our E&O division, Financial Institutions business in our D&O division and Other Professional Liability division.
Ceded Written Premiums were $147.4 million, resulting in a retention ratio of 72.2% of Net Written Premiums to Gross Written Premiums, for the year ended December 31, 2018, compared to Ceded Written Premiums of $165.3 million, resulting in a retention ratio of 67.0%, for the same period in 2017. The increase in the retention ratio was driven by the P&C and Professional Liability operating segments, partially offset by a decrease in our Marine operating segment.
The Marine operating segment’s decrease was driven by our Protection & Indemnity product due to our renewal rights agreement with Thomas Miller in 2018 that included a 100% cession of our business through August 31, 2018.
The increase in our Professional Liability operating segment’s retention ratio was primarily attributable to a reduction in proportional reinsurance.
The decrease in our Marine operating segment’s Net Earned Premium was due to decreased production, including the impact of our Protection & Indemnity renewal rights agreement with Thomas Miller, partially offset by additional earned premium of $2.2 million from the NICE Group business acquired in the second quarter of 2018, as well as a lower level of ceded RRPs as 2017 was impacted by the Hurricane events.
The increase in our Marine operating segment’s Net Earned Premium was primarily driven by growth in this segment along with an increased ceded premium estimate booked in the prior year impacting our Protection & Indemnity product. These increases in Net Earned Premiums were partially offset by an increase in ceded RRPs related to Hurricanes Irma and Harvey.
The decrease in our P&C operating segment’s Net Earned Premium was primarily due to lower premium volume and increased cessions related to strategic actions taken to exit our North American Property business and an increase in ceded RRPs related to Hurricanes Irma, Maria and Harvey. This decrease was partially offset by growth in our Political Violence & Terrorism and General Liability products.
The following tables present the current and prior accident year changes in our Net Losses and LAE Ratio for the years ended December 31, 2018, 2017 and 2016:
After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio increased 3.0 points as compared to the same period in 2017 primarily due to:
an increase in large loss activity in our Marine and Professional Liability operating segments for the year ended December 31, 2018 compared to the same period in 2017;
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 10.8 points as compared to the same period in 2016 driven by:
For the year ended December 31, 2017, our Net Prior AY Losses and LAE Ratio increased 12.5 points as compared to the same period in 2016 primarily driven by:
Our Marine operating segment for the year ended December 31, 2017 recognized $6.5 million of Net Prior AY Reserve Strengthening due to adverse loss development primarily related to our Cargo, Specie and Protection & Indemnity products. This compares to $22.1 million of Net Prior AY Reserve Releases due to better than expected loss emergence for the same period in 2016.
The decrease in the Net Current AY Losses and LAE Ratio were partially offset by:
Our Commission Expense Ratio for the year ended December 31, 2018 increased 0.6 points as compared to the same period in 2017. The increase was driven by our Marine operating segment, partially offset by a decrease in our P&C operating segment.
Our Marine operating segment’s Commission Expense Ratio increased due to higher profit commissions compared to the prior year and the inclusion of the NICE Group, which had a higher Commission Expense Ratio.
The increase in our Professional Liability operating segment’s Commission Expense Ratio was due to increased gross costs and changes in the mix of business as a result of increased growth in our Warranties and Indemnity product, which attracts a higher commission rate.
Other Operating Expenses for the year ended December 31, 2018 increased $10.4 million as compared to the same period in 2017 primarily due to increased professional fees and expenses related to the NICE Group in the current year.
Net Earned Premiums for the year ended December 31, 2018 increased $67.1 million, as compared to the same period in 2017, primarily due to growth in our A&H, P&C, and Specialty Casualty products. Net RRP benefit of $6.1 million primarily related to Typhoons Jebi and Trami, Hurricane Michael and California Camp Fire, were comparable to prior year.
The Net Losses and LAE Reserves as of December 31, 2018, 2017 and 2016 are as follows:
The following table presents the current and prior accident year changes in our Net Losses and LAE Ratio for the years ended December 31, 2018, 2017 and 2016:
For the year ended December 31, 2018, our Net Current AY Losses and LAE Ratio decreased 20.4 points as compared to the same period in 2017, primarily driven by a decrease in catastrophe losses. During the year ended December 31, 2018, we recognized $20.9 million of net catastrophe losses net of assumed RRPs mostly related to Typhoon Jebi, Hurricane Michael, Typhoon Trami, the California Camp Fire, and Hurricane Florence. This compared to $40.7 million of net catastrophe losses net of RRPs from the Hurricane events, the Puebla, Mexico Earthquake, and other CAT events.
After adjusting for these net catastrophe losses net of RRPs, our Net Current AY Losses and LAE Ratio decreased 5.9 points as compared to the same period in 2017 primarily related to our A&H product due to lower claims development on accident year 2018.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 20.3 points as compared to the same period in 2016 driven by:
For the year ended December 31, 2017, our Net Prior AY Losses and LAE Ratio increased 2.9 points as compared to the same period in 2016. Our GlobalRe reporting segment for the year ended December 31, 2017 recognized $2.8 million of Net Prior AY Reserve Strengthening mostly related to the settlement of a large A&H claim and unfavorable loss emergence within our P&C product, partially offset by favorable loss emergence across our Agriculture and Marine products. This compares to $2.2 million of Net Prior AY Reserve Releases for the same period in 2016 related to our A&H product.
Other Operating Expenses for the year ended December 31, 2018 increased $4.1 million, as compared to the same period in 2017, primarily due to increases in employee expenses and indirect expenses. Although Other Operating Expenses increased, the Other Operating Expense Ratio decreased 1.4 points for the year ended December 31, 2018, as compared to the same period in 2017. An increase in Net Earned Premiums offset the increase in Other Operating Expenses for the year driving the decrease in this ratio compared to the same period in 2017.
Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of December 31, 2018 and 2017, our capital resources were as follows:
NIIC, our wholly-owned UK Insurance company, may pay dividends out of its statutory profits subject to the restrictions imposed under UK Company law and European Insurance regulation (Solvency II). As of December 31, 2018, the maximum amount available for the payment of dividends by NIIC without prior regulatory approval is $20.3 million. In addition, NIIC must provide at least 14 days’ notice to the Prudential Regulatory Authority prior to agreeing to make any material dividend payment to any of its affiliated entities that are domiciled outside of the European Economic Area.
On October 4, 2013, we completed a public debt offering for $265.0 million of 5.75% Senior notes due on October 15, 2023 and received net proceeds of $263.3 million. The effective interest rate related to the net proceeds received from the 5.75% Senior notes is approximately 5.86%. Interest is payable on the 5.75% Senior notes each April 15 and October 15. The terms of the 5.75% Senior notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of December 31, 2018, our Company was in compliance with all such covenants.
On November 4, 2016, NUAL entered into an Australian Dollar credit facility, which was subsequently amended on October 30, 2017, with Barclays Bank PLC. Letter of Credit commissions are payable under this facility at a rate of 1.55% per annum. The facility may be cancelled by either party after providing written notice. This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd’s. As of December 31, 2018, letters of credit with an aggregate face amount of 24.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.
On November 7, 2018, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent for a syndicate of lenders (the “Club Facility”), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd’s. The Club Facility has two tranches with one tranche extending a $165.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2019 UWY, we amended the $25.0 million credit facility with ING Bank N.V., London Branch dated November 20, 2015, on November 7, 2016 and again on January 23, 2019 to extend the term for an additional two years (the “Bilateral Facility”). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd’s for the 2019 UWY, as well as open prior UWYs.
The Bilateral and Club Facilities contain customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. These credit facilities also provide for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. During the first quarter of 2018, the Company reclassified certain overseas deposits from Short-Term Investments to Other Invested Assets. Refer to Note 1 Organization & Summary of Significant Accounting Policies in the Notes to Interim Consolidated Financial Statements. Although the nature of the investments did not change, this reclassification caused the Company to exceed a covenant of our Club Facility that sets a limitation on other investments as a percentage of total investments. During the second quarter of 2018, our Company received a waiver of compliance with respect to this covenant, which was subsequently amended to increase the percentage of other investments permitted. As of December 31, 2018, our Company was in compliance with all covenants.
We generally maintain the ability to issue certain classes of debt and equity securities via a universal shelf registration statement filed with the SEC, which is renewed every three years. The shelf registration provides us the means to access the debt and equity markets relatively quickly. Our current shelf registration, which was filed on April 13, 2018 with the SEC, expires in 2021. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to our Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, in general, we expect to collect our paid reinsurance recoverables under the terms described above.
Net cash used in financing activities was $14.8 million for the year ended December 31, 2018 compared to $18.4 million for the same period in 2017. The change in cash used in financing activities is primarily related to a reduction in tax withholding payments on vested stock compensation in 2018 as compared with 2017. To a lesser extent 2018 financing cash flows were impacted by an increase in the quarterly stockholder dividend in 2018 as compared with 2017.
Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of the principal and interest for our senior debt. It is possible that, in the future, one or more of the rating agencies may reduce our existing debt ratings. If one or more of our debt ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted.
The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amounts in the above table exclude reinsurance recoveries of $820.2 million. See “Business - Loss Reserves” included herein.
Our portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. The primary objectives are to maximize total investment return in the context of preserving and enhancing stockholder value and the statutory surplus of our regulated insurance companies. As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. As of December 31, 2018, the tax-exempt portion of our Fixed Maturities portfolio was approximately 16.5%. Additionally, 84.8% of our Equity Securities portfolio is invested in tax efficient securities which qualify for the dividends received deduction. Our investments are subject to the oversight of the respective insurance companies’ Boards of Directors and the Finance Committee of the Parent Company’s Board of Directors.
The following table summarizes the composition of our investments at fair value:
(1) - Cash that was misclassified within Short-Term Investments in 2017 was reclassified, representing an immaterial correction. Refer to Note 1 Organization & Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, for further information.
The following table sets forth our U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds, as well as our State, Municipality and Political Subdivision Bond holdings by type:
The following table sets forth our Agency Residential Mortgage-Backed Securities (“AMBS”) issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) and the quality category (Prime, Alternative A-paper (“Alt-A”) and Other) for Residential Mortgage -Backed Securities (“RMBS”):
We analyze our mortgage-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by FNMA, FHLMC and GNMA, which are federal government sponsored entities, and non-FNMA and non-FHLMC securities broken out by prime, Alt-A and other collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under a Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers, which have a risk potential greater than prime but less than subprime. Such prime and Alt-A categories are as defined by S&P.
Details of the collateral of our Asset-Backed Securities portfolio as of December 31, 2018 are presented below:
Details of our Corporate Exposures portfolio as of December 31, 2018 are presented below:
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell Fixed Maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis. Upon adoption of ASU-2016-01 as of January 1, 2018, the changes in the fair value of Equity Securities are recognized through Net Income. We may realize investment losses to the extent our liquidity needs require the disposition of Fixed Maturity Securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.
Our Company monitors the development of paid and reported claims activities in relation to the estimate of ultimate losses established for loss events. Actual losses from such loss events may differ materially from the estimated losses generally due to the receipt of additional information from insureds or brokers, inflation in repair costs due to the limited availability of labor and materials or the attribution of losses to coverages, which our Company assumed we would not have exposure to.
Our Company has significant natural catastrophe exposures throughout the world. We estimate that the largest exposure to loss from a 1 in 250 year single natural catastrophe event comes from an earthquake on the west coast of the U.S. As of December 31, 2018, our Company estimates that the probable maximum pre-tax gross and net loss exposure from such an earthquake event would be approximately $191.0 million and $46.0 million, respectively, including the cost of RRPs.
For the year ended December 31, 2018, the Company incurred net catastrophe losses and LAE of $28.7 million primarily related to Typhoon Jebi, Hurricane Michael, Hurricane Florence, the California Camp Fire, and Typhoon Trami. These catastrophe events generated losses in all three of our reporting segments. As of December 31, 2018, the total net reserves for these catastrophe events totaled $26.6 million, including $2.1 million in additional assumed RRPs.
Our estimated net losses in relation to these events were derived from ground-up analysis of our in-force contracts providing coverage in the affected regions. These analyses include information from brokers or customers and also consider catastrophe modeling analyses, underwriters’ review of certain contracts and industry and/or statistical estimates. Our estimates remain subject to change as additional data becomes available.
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricanes Harvey, Irma and Maria for the years ended December 31, 2018 and 2017:
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for the Alberta Wildfires for the years ended December 31, 2018, 2017 and 2016:
The Alberta wildfires impacted 2016 with a total estimated net loss for the year of $11.7 million and $1.8 million in additional RRP and 2017 with a net loss and RPP decrease of $2.6 million and $0.6 million, respectively. At December 31, 2018, there was an overall net loss and RRP decrease of $0.1 million.
The data distribution as of December 31, 2018 as measured by net case reserves outstanding is as follows:
Substantially all of our business is placed through agents and brokers. Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date. Assumed and ceded RRPs are written and fully earned in the period in which the loss event, which caused the reinstatement premium, occurred.
We recognize deferred tax assets and liabilities, which primarily result from temporary differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of our assets and liabilities. At each balance sheet date, we assess the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction, principally derived from available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. We regularly review our deferred tax assets for recoverability, taking into consideration our history of earnings, expectations for future earnings, taxable income in carryback years and the expected timing of the reversals of existing temporary differences. When we believe it is more likely than not that a deferred tax asset will not be realized, we establish a valuation allowance for that deferred tax asset. Our valuation allowance as of December 31, 2018 is $4.4 million.
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determine the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Refer to Note 5, Fair Value, in the Notes to Consolidated Financial Statements for additional information.
In performing this impairment assessment, our Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.
Similar to goodwill, in performing the impairment assessment of intangible assets, the Company may first assess qualitative factors to determine whether it is more likely than not that an intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test.
As at December 31, 2018 neither the Company’s initial valuation nor its subsequent valuations have indicated any impairment of the Company’s goodwill and intangible assets of $16.8 million and $10.3 million, respectively. For further details, refer to Note 6 Goodwill and Intangible Assets in the Interim Consolidated Financial Statements.