Net income represents income from continuing operations for all periods presented.
The expense ratio is the ratio, expressed as a percentage, of other operating expenses to net earned premiums.
James River Group Holdings, Ltd. is a Bermuda-based insurance holding company. We own and operate a group of specialty insurance and reinsurance companies with the objective of generating compelling returns on tangible equity while limiting volatility. We seek to do this by earning profits from insurance underwriting while opportunistically investing our capital to grow tangible equity for our shareholders.
For the year ended December 31, 2015, 73.0% of our group-wide gross written premiums originated from the U.S. E&S lines market. We also have a specialty admitted insurance business in the United States. We intend to concentrate substantially all of our underwriting in casualty insurance and reinsurance, and for the year ended December 31, 2015, we derived 98.0% of our group-wide gross written premiums from casualty insurance and reinsurance. We focus on specialty markets in which our underwriters have particular expertise and where we have long-standing distribution relationships; maintaining a strong balance sheet by maintaining appropriate reserves; monitoring reinsurance recoverables carefully; managing our investment portfolio actively without taking undue risk; using technology to monitor trends in our business; responding rapidly to market opportunities and challenges; and actively managing our capital.
The Excess and Surplus Lines segment offers E&S commercial lines liability and property insurance in every U.S. state and the District of Columbia through James River Insurance and its wholly-owned subsidiary, James River Casualty. James River Insurance and James River Casualty are both non-admitted carriers. Non-admitted carriers writing in the E&S market are not bound by most of the rate and form regulations imposed on standard market companies, allowing them flexibility to change the coverage terms offered and the rate charged without the time constraints and financial costs associated with the rate and form filing process. In 2015, the average account in this segment generated annual gross written premiums of approximately $19,000. The Excess and Surplus Lines segment distributes primarily through wholesale insurance brokers. Members of our management team have participated in this market for over three decades and have long-standing relationships with the wholesale agents who place E&S lines accounts. The Excess and Surplus Lines segment produced 54.0% of our gross written premiums for the year ended December 31, 2015.
The Specialty Admitted Insurance segment focuses on niche classes within the standard insurance markets, such as workers’ compensation coverage for residential contractors, light manufacturing operations, transportation workers and healthcare workers in North Carolina, Virginia, South Carolina, and Tennessee. This segment has admitted licenses in 48 states and the District of Columbia. While this segment has historically focused on workers’ compensation business, we are growing our fronting business and our other commercial lines through our program business. We believe we can earn substantial fees in our program and fronting business by writing policies and then transferring all or a substantial portion of the underwriting risk position to other capital providers that pay us a fee for fronting or ceding the business to them. The Specialty Admitted Insurance segment distributes through a variety of sources, including independent retail agents, program administrators and MGAs. The Specialty Admitted Insurance segment produced 15.9% of our gross written premiums for the year ended December 31, 2015.
The Casualty Reinsurance segment consists of JRG Re, our Bermuda domiciled reinsurance subsidiary, which provides proportional and working layer casualty reinsurance to third parties and to our U.S.-based insurance subsidiaries. The Casualty Reinsurance segment’s underwriting results presented herein include only the results of reinsurance written with unaffiliated companies and do not include the
We have direct intercompany reinsurance agreements under which we cede 70% of the pooled net written premiums of our U.S. subsidiaries (after taking into account third-party reinsurance) to JRG Re. This business is ceded to JRG Re under a proportional, or quota-share, reinsurance treaty that provides for an arm’s length ceding commission. Notwithstanding the intercompany agreement, we exclude the effects of this agreement for the presentation of the Excess and Surplus Lines and Specialty Admitted Insurance reporting segments included herein. At December 31, 2015, approximately 67.4% of our cash and invested assets were held in Bermuda, which benefits from a favorable operating environment, including an absence of corporate income or investment taxes. We pay a 1% excise tax on premiums ceded to JRG Re by our U.S.-based insurance subsidiaries.
We identified the accounting estimates below as critical to the understanding of our financial position and results of operations. Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and which require us to exercise significant judgment. We use significant judgment concerning future results and developments in applying these critical accounting estimates and in preparing our consolidated financial statements. These judgments and estimates affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements. We evaluate our estimates regularly using information that we believe to be relevant. For a detailed discussion of our accounting policies, see the Notes to Consolidated Financial Statements included in this Form 10-K.
The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do not discount this reserve. We estimate the reserve using individual case-basis valuations of reported claims and statistical analyses. We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business we write and the limited operating experience of the Casualty Reinsurance segment and of the program and fronting business in the Specialty Admitted Insurance segment. In applying this judgement, we generally establish reserves that are above our internal actuaries’ estimate. As such, we seek to establish reserves that will ultimately prove to be adequate. If we have indications that claims frequency or severity exceeds our initial
expectations, we increase our reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends are more favorable than initially anticipated, we reduce our reserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends.
The Company’s gross reserve for losses and loss adjustment expenses at December 31, 2015 was $785.3 million. Of this amount, 68.0% relates to IBNR. The Company’s gross reserve for losses and loss adjustment expenses by segment are summarized as follows:
The Expected Loss Method multiplies earned premiums by an initial expected loss ratio.
The Paid Loss Development method is similar to the incurred loss development method, but it uses historical loss payment patterns to estimate future loss payment patterns. In this method, our actuaries apply historical loss payment patterns to develop paid loss development factors that are applied to current paid losses to calculate expected ultimate losses.
Different reserving methods are appropriate in different situations, and our actuaries use their judgment and experience to determine the weighting of the methods detailed above to use for each accident year and each line of business and, for our Casualty Reinsurance segment, on a contract by contract basis. For example, the current accident year has very little incurred and paid loss development data on which to base reserve projections. As a result, we rely heavily on the Expected Loss Method in estimating reserves for the current accident year. We generally set our initial expected loss ratio for the current accident year consistent with our pricing assumptions. We believe that this is a reasonable and appropriate reserving assumption for the current accident year since our pricing assumptions are actuarially driven and since we expect to make an acceptable return on the new business that we write. If actual loss emergence is better than our initial expected loss ratio assumptions, we will experience favorable development and if it is worse than our initial expected loss ratio assumptions, we will experience adverse development. Conversely, sufficient incurred and paid loss development is available for our oldest accident years, so more weight is
given to the Incurred Loss Development Method and the Paid Loss Development Method than the Expected Loss Method. The Bornhuetter-Ferguson Incurred Loss Development and Paid Loss Development Methods blend features of the Expected Loss Method and the Incurred and Paid Loss Development Methods. The Bornhuetter-Ferguson Methods are typically used for the more recent prior accident years.
We engage an independent internationally recognized actuarial consulting firm to review our reserves for losses and loss adjustment expenses twice each year, once prior to closing the third quarter and once for the closing of the fourth quarter. This independent actuarial consulting firm prepares its own estimate of our reserve for loss and loss adjustment expenses, and we compare their estimate to the reserve for losses and loss adjustment expenses reviewed and approved by the Reserve Committee in order to gain additional comfort on the adequacy of our reserves.
The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $60.6 million, reduce after-tax net income by $52.1 million, reduce shareholders’ equity by $52.1 million and reduce shareholders’ tangible equity by $52.1 million, in each case at or for the period ended December 31, 2015.
The impact of recording the net reserve for losses and loss adjustment expenses at the lowest value from the sensitivity analysis above would be to reduce losses and loss adjustment expenses incurred by $90.8 million, increase after-tax net income by $78.1 million, increase shareholders’ equity by $78.1 million, and increase tangible equity by $78.1 million, in each case at or for the year ended December 31, 2015. Such changes in the net reserve for losses and loss adjustment expenses would not have an immediate impact on our liquidity, but would affect cash flow and investment income in future periods as the incremental or reduced amount of losses are paid and investment assets adjusted to reflect the level of paid claims.
IBNR reserve estimates are inherently less precise than case reserve estimates. A 5% change in net IBNR reserves at December 31, 2015 would equate to a $22.2 million change in the reserve for losses and loss adjustment expenses at such date, a $20.5 million change in after-tax net income, a 3.0% change in shareholders’ equity and a 4.5% change in tangible equity, in each case at or for the year ended December 31, 2015.
A $16.3 million redundancy developed in 2015 on the reserve for losses and loss adjustment expenses held at December 31, 2014. This favorable reserve development included $25.4 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $17.3 million of favorable development from the 2014 accident year, and $10.5 million of favorable development from the 2013 accident year. This favorable development occurred because our actuarial studies at December 31, 2015 for the Excess and Surplus Lines segment indicated that our loss experience for our shorter-tailed general casualty division for the 2014 accident year is below our
A $27.4 million redundancy developed in 2014 on the reserve for losses and loss adjustment expenses held at December 31, 2013. This favorable reserve development included $27.3 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $7.9 million of favorable development from the 2011 accident year, $5.0 million of favorable development from the 2009 accident year, and $4.2 million of favorable development from the 2007 accident year. This favorable development occurred because our actuarial studies at December 31, 2014 for the Excess and Surplus Lines segment indicated that our loss experience on our mature casualty business continued to be below our initial expected ultimate loss ratios driven by favorable 2014 calendar year emergence (33.1% calendar year loss ratio compared to our expected calendar year loss ratio of 42.4%). Favorable reserve development in the Specialty Admitted Insurance segment was $5.9 million, and primarily came from accident years 2007 through 2012, as losses on our workers’ compensation business written prior to 2013 continued to develop more favorably than we had anticipated. In addition, $5.7 million of adverse development occured in the Casualty Reinsurance segment, with the majority of this adverse development coming from one reinsurance contract from the 2011 underwriting year that experienced higher loss development in 2014 than expected.
A $37.5 million net redundancy developed during the year ended December 31, 2013 on the reserve for losses and loss adjustment expenses held at December 31, 2012. This favorable reserve development included $40.7 million of favorable development in the Excess and Surplus Lines segment, including $11.7 million of favorable development on casualty lines from the 2009 accident year, $7.5 million of favorable development from the 2007 accident year and $5.7 million of favorable development from the 2008 accident year. This favorable development occurred because our actuarial studies at December 31, 2013 for the Excess and Surplus Lines segment indicated that our loss experience on our mature casualty business continued to be below our initial expected ultimate loss ratios. The $40.7 million of favorable reserve development for the Excess and Surplus Lines segment was driven by favorable 2013 calendar year emergence (42.0% calendar year loss ratio compared to our expected calendar year loss ratio of 50.0%), significant favorable indications within the 2009 accident year (which had $11.8 million of favorable net reserve development in 2012), and the impact of adjustments to our actuarial assumptions that gave more weight to our own patterns and experience. In addition, we saw a significant reduction in defense and cost containment costs per closed claim in 2013, as a result of a concerted effort by our claims staff to manage costs and consolidate service providers. Favorable reserve development on direct business written in the Specialty Admitted Insurance segment was $1.4 million, including favorable development of  $1.3 million from the 2012 accident year. The reserve strengthening in the Specialty Admitted Insurance segment at December 31, 2012 was in recognition of inadequate premium rate levels in 2012, 2011, and 2010, which ultimately proved to be redundant in 2013. In addition, $4.7 million of adverse development occurred in the Casualty Reinsurance segment, with $1.0 million of adverse development on assumed crop business from the 2012 and 2011 accident years and $3.7 million of adverse development on other assumed business, primarily from the 2011 accident year. We terminated all assumed crop business at December 31, 2012. Of the $3.7 million of adverse development on non-crop-related assumed business, $3.5 million related to the 2011 and 2012 contracts with one cedent.
We also determined that a credit allowance was needed at December 31, 2015 and 2014 on two loans issued by companies that produce and supply power to Puerto Rico. Accordingly, we established credit allowances totaling $414,000 and $752,000 at December 31, 2015 and 2014, respectively.
Bank loan participations are managed by a specialized outside investment manager and are generally stated at their outstanding unpaid principal balances net of unamortized premiums or discounts and net of any allowance for credit losses.
We maintain the allowance for credit losses at a level we believe is adequate to absorb estimated probable credit losses. Our periodic evaluation of the adequacy of the allowance is based on consultations and the advice of our specialized investment manager, known and inherent risks in the portfolio, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying collateral,
Investments for which external sources are not available or are determined by the investment manager not to be representative of fair value are recorded at fair value as determined by the investment manager. In determining the fair value of such investments, the investment manager considers one or more of the following factors: type of security held, convertibility or exchangeability of the security, redeemability of the security (including the timing of redemptions), application of industry accepted valuation models, recent trading activity, liquidity, estimates of liquidation value, purchase cost and prices received for securities with similar terms of the same issuer or similar issuers. At December 31, 2015, there were bank loan participations with an unpaid principal balance of  $5.3 million and a carrying value of  $4.6 million for which external sources were unavailable to determine fair value. At December 31, 2014, there were bank loan participations with an unpaid principal balance of  $14.1 million and a carrying value of  $12.7 million for which external sources were unavailable to determine fair value.
We review fair value prices provided by our outside investment managers for reasonableness by comparing the fair values provided by the managers to those provided by our investment custodian. We also review and monitor changes in unrealized gains and losses. We obtain an understanding of the methods,
At December 31, 2015, we have $181.8 million of goodwill and $39.5 million of net intangible assets on our consolidated balance sheet, primarily resulting from the acquisition of James River Group in December 2007.
undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group. That assessment is based on the carrying amount of the asset or asset group at the date it is tested for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds its fair value. Intangible assets for customer and broker relationships that have specific lives and are subject to amortization were reviewed for impairment during the fourth quarters of 2015, 2014 and 2013. There were no impairments recognized in 2015, 2014 or 2013.
Reinsurance premium estimates are reviewed by management periodically. Any adjustment to these estimates is recorded in the period in which it becomes known. The impact of any premium adjustments on net income is offset by corresponding changes to related policy acquisition costs and losses and loss adjustment expenses. For the years ended December 31, 2015, 2014 and 2013, these adjustments were immaterial.
The following table summarizes our results for the years ended December 31, 2015 and 2014:
We had an underwriting profit of  $27.6 million for the year ended December 31, 2015. This compares to an underwriting profit of  $26.7 million for the prior year. On a consolidated basis, the Company recognized $16.3 million of net favorable reserve development for the year ended December 31, 2015 and $27.4 million of favorable reserve development for the year ended December 31, 2014.
The results of operations include $4.5 million of net realized investment losses for the year ended December 31, 2015 and $1.3 million of net realized investment losses for the year ended December 31, 2014. Net realized investment losses in 2015 were primarily from the sale of fixed maturity securities and bank loan participations. We sold fixed maturity securities and bank loan participations in 2015 to fund the $47.8 million dividends to our common shareholders in 2015. Also included in net realized investment losses in 2015 are $3.9 million of impairment losses on two bank loans to oil and gas companies in the energy sector whose market values had declined significantly in response to declining energy prices. Net realized investment losses in 2014 include $2.0 million of impairment losses related to our $10.3 million investment exposure to fixed maturity securities and bank loan participations issued by entities in the Commonwealth of Puerto Rico.
Our income before taxes and net income for the years ended December 31, 2015 and 2014 reconcile to our net operating income as follows:
The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and other operating expenses to net earned premiums. Our combined ratio for the year ended December 31, 2015 was 94.0%. A combined ratio of less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. It included $16.3 million, or 3.5 percentage points, of net favorable reserve development on direct and assumed business underwritten by the Company on prior accident years, including $25.4 million of favorable reserve development from the Excess and Surplus Lines segment and $3.5 million of favorable reserve development from the Specialty Admitted Insurance segment partially offset by $12.6 million of adverse development from the Casualty Reinsurance segment.
All of the Company’s U.S. domiciled insurance subsidiaries are party to an intercompany pooling agreement that distributes the net underwriting results among the group companies based on their approximate level of statutory capital and surplus. Additionally, each of the Company’s U.S. domiciled insurance subsidiaries is a party to a quota share reinsurance agreement that cedes 70% of their premiums and losses to JRG Re. We report all segment information in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” prior to the effects of intercompany reinsurance, consistent with the manner in which we evaluate the operating performance of our reportable segments.
attaching” basis cover claims which attach to the underlying insurance policies written during the terms of such contracts. Premiums earned on such contracts usually extend beyond the original term of the reinsurance contract, typically resulting in recognition of premiums earned over a 24-month period in proportion to the level of underlying exposure.
Manufacturers and Contractors division (representing 25.4% of this segment’s 2015 business) which increased $6.3 million (or 8.7%) for the year ended December 31, 2015 over the prior year; and
For the Specialty Admitted Insurance segment (which represents 15.9% of our gross written premiums for the year ended December 31, 2015) during the year ended December 31, 2015, gross written premiums increased 53.2% compared to the prior year. Gross written premiums for 2015 included $55.0 million ($12.4 million on a net basis) from program and fronting business where there had been $29.3 million ($9.0 million on a net basis) of gross written premiums in 2014. We did not begin writing program and fronting business until the fourth quarter of 2013. We cede a significant portion of the specialty admitted program and fronting business to third-party reinsurers. As a result, neither our net written premiums nor level of assumed risk for this segment has increased at a rate which corresponds to the increase in our gross written premiums. Workers’ compensation gross written premiums also increased 19.4% for 2015 over 2014.
Expense Ratio. The expense ratio decreased from 26.8% in 2014 to 25.8% in 2015. The decrease in the expense ratio is primarily attributable to the increase in net earned premiums without a proportional increase in the total amount of operating expenses.
Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess and Surplus Lines segment increased 35.6%, from $35.1 million for the year ended December 31, 2014 to $47.6 million for the year ended December 31, 2015.
The Company invests selectively in private debt and equity opportunities. These investments comprise the Company’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bank holding companies. Equity interests in various renewable energy LLCs managed by an affiliate of the Company’s largest shareholder, the D.E. Shaw Affiliates, generated investment income of  $3.9 million and $5.2 million for the years ended December 31, 2015 and 2014, respectively. These investments had a carrying value of  $26.0 million at December 31, 2015. Investments in bridge loans for renewable energy projects, primarily with affiliates of D.E. Shaw, had investment income of  $3.1 million for the year ended December 31, 2015 compared to none in 2014. During 2015, the Company invested a total of  $36.3 million in these notes and received maturities and repayments totaling $30.8 million. The Company has invested in several limited partnerships that invest in concentrated portfolios of high yield bonds of companies undergoing financial stress, publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Losses from these partnerships were $1.5 million and $128,000 for the years ended December 31, 2015 and 2014, respectively. Together, these limited partnerships had a carrying value of  $17.5 million at December 31, 2015. Income from the Company’s investments in renewable energy LLCs and limited partnerships is recognized under the equity method of accounting. The Company also holds $4.5 million of subordinated notes issued by a bank holding company affiliated with the Chairman and Chief Executive Officer of the Company. Interest income from the notes was $343,000 for the years ended December 31, 2015 and 2014.
In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred. The Company previously held two municipal bonds issued by the Commonwealth of Puerto Rico. Puerto Rico’s weak economic conditions and heavy debt burden heightened the risk of default on the bonds and management concluded that the bonds, which had been downgraded to below investment grade, were other-than-temporarily impaired, at June 30, 2014. The Company recognized impairment losses of $660,000 and $1.4 million on these bonds for the years ended December 31, 2015, and 2014, respectively. The bonds were sold during the second quarter of 2015 and a net realized gain of  $22,000 was recognized on the sales.
The Company holds participations in two loans issued by companies that produce and supply power to Puerto Rico through power purchase agreements with Puerto Rico Electric Power Authority (“PREPA”), a public corporation and governmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength and ability to make timely payments has been impacted by the economic conditions in Puerto Rico, thus raising doubt about the companies’ ability to meet the debt obligations held by the Company. Management concluded that the loans were impaired at December 31, 2014 and established an allowance for credit losses on the loans of  $752,000. At December 31, 2015, the allowance for credit losses on these loans was $414,000. The loans had a carrying value of  $3.9 million at December 31, 2015 and unpaid principal of  $4.6 million.
During 2014 and 2015 we had a number of the Company’s bank loans to oil and gas companies in the energy sector. The market values of these loans have declined significantly in response to declining energy prices. In total, the Company had eight loans to oil and gas companies in the energy sector with a carrying value of  $15.8 million and a market value of  $11.7 million at December 31, 2015. Management concluded that two of these loans were impaired as of December 31, 2015, and accordingly, an allowance for credit losses of  $3.9 million was established on the loans. After recording this impairment, the loans had a carrying value of  $1.7 million at December 31, 2015 and unpaid principal of  $5.8 million. Management also concluded that one non-energy sector loan held at December 31, 2015 should be considered impaired and an allowance for credit losses of  $34,000 was established on the loan. After recording this impairment, the loan had a carrying value of  $689,000 at December 31, 2015 and unpaid principal of  $722,000. There was no allowance for credit losses on these loans at December 31, 2014.
At December 31, 2015, our portfolio of available-for-sale fixed maturity securities contained corporate fixed maturity securities with a fair value of  $363.2 million. A summary of these securities by industry segment is shown below as of December 31, 2015:
In addition to the $973.8 million of available-for-sale securities, the Company holds $191.7 million of bank loan participations, $5.0 million of fixed maturity securities classified as trading (which are held at our U.S. holding company), $19.3 million of short-term investments, and other invested assets of $54.5 million for a total invested asset balance at December 31, 2015 of  $1,244.3 million.
Other expenses for the years ended December 31, 2015 and 2014 were $730,000 and $16.0 million, respectively. In 2015, these expenses include $170,000 of severance expenses, $276,000 of expenses associated with a minority interest in a real estate limited partnership pursuant to which we were deemed to be an owner for accounting purposes, and $284,000 of legal, tax, and other professional services related to the formation of James River UK, the December 2015 dividend, and a securities registration statement. In 2014, other expenses included $14.9 million of expenses associated with our initial public offering, $600,000 of employee severance costs, $183,000 of due diligence expenses related to an acquisition that was not consummated, and $299,000 of expenses associated with a related party leasing agreement where we were deemed to be the owner for accounting purposes.
Our effective tax rate fluctuates from period to period based on the relative mix of income reported by country and the respective tax rates imposed by each tax jurisdiction. For U.S.-sourced income, our U.S. federal income tax expense differs from the amounts computed by applying the federal statutory income tax rate to income before taxes due primarily to interest income on tax-advantaged state and municipal securities (state and municipal securities represented 10.6% and 12.0% of our available-for-sale securities at December 31, 2015 and 2014, respectively), dividends received income, and tax credits on certain renewable energy investments. Income taxes for 2015 included $2.5 million of U.S. withholding taxes on an intercompany dividend paid from the U.S. holding company to our U.K. intermediate holding company. For the years ended December 31, 2015 and 2014, our effective tax rate was 10.5% and 2.1%, respectively. Our 2014 effective tax rate was reduced by certain energy tax credits received on some of our equity investments in companies involved in the production of alternative energy (included in “Other Invested Assets” in our Consolidated Balance Sheets).
We had an underwriting profit of  $26.7 million for the year ended December 31, 2014. This compares to an underwriting profit of  $28.8 million for the prior year. On a consolidated basis, the Company recognized $27.4 million of net favorable reserve development for the year ended December 31, 2014 and $37.5 million of favorable reserve development for the year ended December 31, 2013.
The results of operations include $1.3 million of net realized investment losses for the year ended December 31, 2014 and $12.6 million of net realized investment gains for the year ended December 31, 2013. Net realized investment losses in 2014 include $2.0 million of impairment losses related to our investment exposure to fixed maturity securities and bank loan participations issued by entities in the Commonwealth of Puerto Rico. Net realized investment losses in 2013 were primarily from the sale of fixed maturity securities and bank loan participations. We sold securities in 2013 to fund the $110.8 million repurchase of our common shares and to shorten the duration of our portfolio to reduce our exposure to interest rate risk.
The results of operations for the years ended December 31, 2014 and 2013 also include $1.1 million and $677,000, respectively, of other expenses. Other expenses for 2014 and 2013 include $183,000 and $392,000, respectively, of due diligence costs for various merger and acquisition activities which were not consummated. Other expenses for 2014 and 2013 also include $299,000 and $285,000, respectively, of expenses associated with a related party leasing arrangement. Other expenses for 2014 also include $600,000 of employee severance costs.
Our combined ratio for the year ended December 31, 2014 was 93.3%. It included $27.4 million, or 6.9 percentage points, of net favorable reserve development on direct and assumed business underwritten by the Company on prior accident years, including $27.3 million of favorable reserve development from the Excess and Surplus Lines segment and $5.9 million of favorable reserve development from the Specialty Admitted Insurance segment partially offset by $5.7 million of adverse development from the Casualty Reinsurance segment.
written premiums in 2013, as we did not begin writing program and fronting business until the fourth quarter of 2013. We cede a significant portion of the specialty admitted program and fronting business to third-party reinsurers. As a result, neither our net written premiums nor level of assumed risk for this segment has increased at a rate which corresponds to the increase in our gross written premiums. Workers’ compensation gross written premiums also increased 50.4% for 2014 over 2013.
The net premium retention for the Company decreased from 88.2% to 86.8% for the years ended December 31, 2013 and 2014, respectively. The decrease in retention is due primarily to the Specialty Admitted Insurance segment, which saw a decline in its net premium retention from 88.2% for the year ended December 31, 2013 to 61.0% for the year ended December 31, 2014. The decrease is driven by the segment’s program and fronting business, which we began writing in the fourth quarter of 2013. Program and fronting business generally has a much lower net premium retention than our workers’ compensation business which we write on an admitted basis. For the year ended December 31, 2014, the net retention on the segment’s program and fronting business was 30.7%, while the net retention on the workers’ compensation business was 90.5%. This compares to net retention on the workers’ compensation business of 88.7% for year ended December 31, 2013. There was only $566,000 of program and fronting business premiums written in this segment during 2013.
Underwriting profit for the year ended December 31, 2014 includes fee income of  $833,000.
Combined Ratio. The combined ratio of the Excess and Surplus Lines segment for the year ended December 31, 2014 was 82.1%, comprised of a loss ratio of 55.2% and an expense ratio of 26.8%. The combined ratio for the year ended December 31, 2013 was 69.3%, comprised of a loss ratio of 40.4% and an expense ratio of 28.9%.
Combined Ratio. The combined ratio of the Specialty Admitted Insurance segment for the year ended December 31, 2014 was 99.9%, comprised of a loss ratio of 53.4% and an expense ratio of 46.5%. This compares to the combined ratio in the prior year of 121.6%, comprised of a loss ratio of 67.4% and an expense ratio of 54.2%. The substantial improvement in the loss ratio for the year ended December 31, 2014 reflects a significant increase in premium rates, more selectivity in accounts and classes of business we underwrite, and the effects of a ground-up review of our agency network - all of which began in the third quarter of 2012.
Expense Ratio. The expense ratio of 46.5% for the year ended December 31, 2014 decreased from 54.2% in the prior year. The high expense ratio in this segment for both periods relates to infrastructure and personnel costs associated with the ramp up of this segment’s program and fronting business. The gross written premiums on this program and fronting business were $29.3 million for the year ended December 31, 2014 (during the prior year there had been only $566,000). Many of the infrastructure and personnel costs necessary to produce and administer this business (by necessity) precede the production and earning of these premiums.
Underwriting Loss. As a result of the items discussed above, the underwriting results improved from an underwriting loss of  $3.9 million for the year ended December 31, 2013 to an underwriting gain of $33,000 for the year ended December 31, 2014.
Loss Ratio. The loss ratio for the year ended December 31, 2014 of 66.3% included $5.7 million, or 3.3 percentage points, of adverse reserve development in our loss estimates for prior accident years. The loss ratio for the year ended December 31, 2013 of 68.4% included $4.7 million, or 2.8 percentage points, of net adverse reserve development in our loss estimates for the prior accident years.
Underwriting Results. As a result of the items discussed above, the underwriting results for the Casualty Reinsurance segment improved from an underwriting loss of  $2.6 million for the year ended December 31, 2013 to an underwriting profit of  $667,000 for the year ended December 31, 2014.
For the years ended December 31, 2014 and 2013, the total operating expenses of the Corporate and Other segment were $9.1 million and $8.3 million, respectively. The variance from the prior year principally relates to share-based compensation related expenses.
Net investment income from the Company’s renewable energy investments, included in “other invested assets” above, was $5.2 million and $4.3 million for the years ended December 31, 2014 and 2013, respectively. These investments are interests in certain limited liability companies that are managed by an affiliate of our largest shareholders, the D.E. Shaw Affiliates, and together, the carrying value of these investments was $25.1 million at December 31, 2014. Our interests in these companies are classified as “other invested assets” and the equity method is being used to account for the investments.
In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred. In connection with this review, the Company wrote down two municipal bonds issued by Puerto Rico that were other than temporarily impaired at June 30, 2014. Puerto Rico’s weak economic conditions and heavy debt burden, combined with the passage of new legislation that allows public corporations to defer or reduce payments on outstanding debt, has heightened the risk of default on these bonds. The Company recognized impairment losses of  $1.4 million on the bonds for the year ended December 31, 2014. The impaired securities have a carrying value of  $3.4 million and a fair value of  $3.2 million at December 31, 2014 after the impairment noted above. We determined that the securities had not experienced an other than temporary impairment at December 31, 2014, as we deemed the small decline in value since June 30, 2014 to be temporary.
For the year ended December 31, 2013, the Company determined that no other-than-temporary impairment had occurred on any of its fixed maturity securities. We concluded that one of the equity securities with an unrealized loss at December 31, 2013 experienced an other-than-temporary impairment, and accordingly, the Company recorded an impairment loss of  $804,000 in 2013. For our portfolio of bank loan participations, we recognized an impairment loss of  $121,000 on one loan for the year ended December 31, 2013.
At December 31, 2014, our available-for-sale investment portfolio of fixed maturity and equity securities had net unrealized gains of  $22.6 million representing 2.8% of the cost or amortized cost of the portfolio. Additionally, at December 31, 2014, 85.8% of our fixed maturity security portfolio was rated “A-” or better by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized statistical rating organization at December 31, 2014 had an aggregate fair value of  $37.7 million and an aggregate unrealized loss of  $918,000.
At December 31, 2014, the Company held one security with a fair value of  $26,000 in securitizations of alternative-A mortgages which is performing and rated “investment grade” by the established ratings agencies. The Company has no investments in sub-prime mortgages or collateralized debt obligations at December 31, 2014.
Our effective tax rate fluctuates from period to period based on the relative mix of income reported by country and the respective tax rates imposed by each tax jurisdiction. For U.S.-sourced income, our U.S. federal income tax expense differs from the amounts computed by applying the federal statutory income tax rate to income before taxes due primarily to interest income on tax-advantaged state and municipal securities (state and municipal securities represented 12.0% and 10.4% of our available-for-sale securities at December 31, 2014 and 2013, respectively), dividends received income, and tax credits on certain renewable energy investments. For the years ended December 31, 2014 and 2013, our U.S. federal income tax provision was 2.1% and 12.6%, respectively, of income before taxes. The lower effective tax rate in 2014 reflects lower U.S. pre-tax income in 2014 resulting from initial public offering costs associated with the conversion of a previous equity plan, the majority of which related to U.S. domiciled employees. In addition, our 2014 effective tax rate was reduced by certain energy tax credits received on some of our equity investments in companies involved in the production of alternative energy (included in “Other Invested Assets” in our Consolidated Balance Sheets).
The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws and regulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or other distributions that they may declare or pay within any 12-month period without advance regulatory approval. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10.0% of statutory surplus at the end of the preceding year. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the
payment of dividends calculated under any applicable formula. See Item 1 - U.S. Insurance Regulation - State Regulation” for additional information. Pursuant to Bermuda regulations, the maximum amount of dividend and return of capital available to be paid by a reinsurer is determined pursuant to a formula. See Item 1 “Regulation - Bermuda Insurance Regulation - Restrictions on Dividends and Distributions” for additional information. Under this formula, the maximum amount of dividends and return on capital available to us from JRG Re in 2016 is calculated to be approximately $89.4 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations which we believe may decrease this available dividend amount. Additionally, the maximum amount of dividends available to the U.S. holding company from our U.S. insurance subsidiaries during 2016 without regulatory approval is $19.8 million.
In May 2004, we issued $15.0 million of senior debt due April 29, 2034, with net proceeds to us of $14.5 million. The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to the 3-month LIBOR plus 3.85%. This senior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of this senior debt contain certain covenants, with which we are in compliance and which, among other things, restrict our ability to assume senior indebtedness secured by our U.S. holding company’s common stock or its subsidiaries’ capital stock or to issue shares of its subsidiaries’ capital stock.
A $62.5 million unsecured revolving facility to meet the working capital needs of the Company. All unpaid principal on the revolver is due at maturity. Interest accrues quarterly and is payable in arrears at 3-month LIBOR plus a margin, which is subject to change depending upon our total outstanding debt to capitalization.
On September 24, 2014, we closed on an amendment to the senior revolving credit facility which, among other things, included an increase in the size of the unsecured revolving facility from $62.5 million to $112.5 million and extended the maturity date from June 5, 2016 to September 24, 2019. The amendment also reduced the interest rate applicable to borrowings under the revolver such that the current LIBOR margin dropped from 2.25% to 2.00%. On May 20, 2015, under a provision of the credit agreement, we requested, and the lenders subsequently agreed, to increase the secured revolving facility by $40.0 million to a total capacity of  $102.5 million. At December 31, 2015, the Company had $35.1 million of letters of credit issued under the $102.5 million secured facility and a drawn balance of  $73.3 million outstanding on the $112.5 million unsecured facility.
We sold trust preferred securities through five Delaware statutory trusts sponsored and wholly-owned by the Company or its subsidiaries. Each trust used the net proceeds from the sale of its trust preferred securities to purchase our floating-rate junior subordinated debt.
All of the junior subordinated debt is redeemable at 100.0% of the unpaid principal amount at our option.
The junior subordinated debt contains certain covenants with which we are in compliance as of December 31, 2015. All of these securities are currently redeemable at par.
The following is a summary of our ceded reinsurance in place as of December 31, 2015:
On July 1, 2015, we renewed a clash and contingency reinsurance treaty to cover both the Excess and Surplus Lines and Specialty Admitted Insurance segments in the event of a claims incident involving more than one of our insureds. The treaty covers $6.0 million in excess of a $2.5 million retention for loss occurrences within the treaty term. This coverage has two reinstatements in the event we exhaust any of the coverage.
In our Excess and Surplus Lines segment, we write a small book of excess property insurance but we do not write primary property insurance. We use catastrophe modeling software to analyze the risk of severe losses from hurricanes and earthquakes on our exposure. We utilize the model in our risk selection, pricing, and to manage our overall portfolio probable maximum loss (“PML”) accumulations. A PML is an estimate of the amount we would expect to pay in any one catastrophe event within a given annual probability of occurrence (i.e. a return period or loss exceedance probability). Based upon our modeling, a $45.0 million gross catastrophe loss would exceed our 1,000 year PML. In the event of a $45.0 million gross property catastrophe loss to the Company, we estimate our pre-tax cost at approximately $8.1 million, including reinstatement premiums and net retentions. In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits.
Our Specialty Admitted Insurance segment enters into reinsurance contracts to limit our exposure to potential losses arising from large risks, to protect against the aggregation of several risks in a common loss occurrence, to provide additional capacity for growth and to support new program and fronting business
initiatives. This segment purchases reinsurance for at least 50% of the exposed limits on specialty admitted property-casualty business. On a program-by-program basis, the Specialty Admitted Insurance segment:
purchases property catastrophe reinsurance for $4.0 million in excess of $1.0 million to manage its incidental property exposure to an approximate 1,000 year PML; and
In our Casualty Reinsurance segment, we also have limited property catastrophe exposure. We believe that this exposure would not exceed $1.0 million on any one event.
At December 31, 2015, we had reinsurance recoverables on unpaid losses of  $131.8 million and reinsurance recoverables on paid losses of  $11.3 million. At December 31, 2014, we had reinsurance recoverables on unpaid losses of  $127.3 million and reinsurance recoverables on paid losses of  $1.7 million. All material reinsurance recoverable amounts are from companies with A.M. Best ratings of  “A-” or better, or collateral has been posted by the reinsurer for our benefit.
These reinsurers are unrated. All material reinsurance recoverable amounts from these reinsurers are collateralized.
On April 3, 2013, the Company repurchased 7,500,000 common shares for a total purchase price of $110.8 million.
The A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A-” (Excellent), with a “positive outlook.” This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and
The financial strength ratings assigned by A.M. Best have an impact on the ability of our regulated subsidiaries to attract and retain agents and brokers and on the risk profiles of the submissions for insurance that our subsidiaries receive. The “A-” (Excellent), with a “positive outlook” ratings assigned to our insurance and reinsurance subsidiaries are consistent with our business plans and we believe allow our subsidiaries to actively pursue relationships with the agents and brokers identified in their marketing plans.
For the years ended December 31, 2015, 2014 and 2013, the Company recognized $3.7 million, $589,000 and $647,000, respectively, of share-based compensation expense. The amount of unrecognized share-based compensation expense to be recognized over the remaining weighted-average service period of 2.4 years at December 31, 2015 is $7.5 million. In 2015, 1,047,500 options were exercised at a weighted average exercise price of  $15.66 per share. There were no option exercises during the years ended December 31, 2014 or 2013. The Company granted 10,627 non-qualified share options at an exercise price of  $24.32 per option during 2015. The Company granted 993,518 non-qualified share options in conjunction with its initial public offering during December 2014, each with an exercise price of  $21.00 per option. The Company also granted 340,474 restricted stock units (“RSUs”) in December 2014. The RSUs vest over one to five years. The Company granted 50,000 non-qualified share options during the year ended December 31, 2013 at exercise prices ranging from $15.65 to $18.01 per option. In addition, 55,000 and 171,250 fully vested options with exercise prices of  $15.65 lapsed or were forfeited during 2014 and 2013, respectively.
The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2015:
The reserve for losses and loss adjustment expenses represent management’s estimate of the ultimate cost of settling losses. As more fully discussed in “- Critical Accounting Policies - Reserves for Losses and Loss Adjustment Expenses” above, the estimation of losses is based on various complex and subjective judgments. Actual losses paid may differ, perhaps significantly, from the reserve estimates reflected in our consolidated financial statements. Similarly, the timing of payment of our estimated losses is not fixed and there may be significant changes in actual payment activity. The assumptions used in estimating the likely payments due by period are based on our historical claims payment experience and industry payment patterns, but due to the inherent uncertainty in the process of estimating the timing of such payments, there is a risk that the amounts paid in any such period can be significantly different from the amounts disclosed above.
Financing obligations represent obligations for a build-to-suit lease relating to an investment by the Company for a minority interest in a real estate limited partnership pursuant to which we were deemed to be an owner for accounting purposes. At the termination of the lease, no payment will be required for the Company to settle the obligation. Instead, the Company will surrender the building that is the subject of the lease at lease termination.
Interest on debt obligations was calculated using the LIBOR rate as of December 31, 2015 with the assumption that interest rates would remain flat over the remainder of the period that the debt was outstanding.
We define tangible equity as the sum of shareholders’ equity less goodwill and intangible assets (net of amortization). Our definition of tangible equity may not be comparable to that of other companies, and it should not be viewed as a substitute for shareholders’ equity calculated in accordance with GAAP. We use tangible equity internally to evaluate the strength of our balance sheet and to compare returns relative to this measure. The following table reconciles shareholders’ equity to tangible equity as of December 31, 2015, 2014 and 2013: