The Company and its subsidiaries occupy office space in Australia, Bermuda, Canada, Chile, England, Ireland, Malaysia, Singapore, Switzerland, United Arab Emirates, and the United States. We renew and enter into leases in the ordinary course of business as required. The main operating locations of the Company and its primary leaseholders are described below. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations.
The summary Consolidated Statements of Comprehensive Income data for the years ended December 31, 2015, December 31, 2014, December 31, 2013, December 31, 2012 and December 31, 2011 and the summary Consolidated Balance Sheet data as of December 31, 2015, December 31, 2014, December 31, 2013, December 31, 2012 and December 31, 2011 are derived from our audited Consolidated Financial Statements. The Company was formed on October 19, 2005 and completed the acquisitions of Talbot, IPC, Flagstone and Western World on July 2, 2007, September 4, 2009, November 30, 2012 and October 2, 2014, respectively. Flagstone is included in the Company's consolidated results for the one month ended December 31, 2012 and for subsequent fiscal year ends. Western World is included in the Company's consolidated results from the October 2, 2014 date of acquisition.
The summary Consolidated Statements of Comprehensive Income data for the years ended December 31, 2014, 2013, 2012, and 2011 have been restated for the impact of the adoption of ASU 2015-02 “Consolidation.” For further details, refer to Note 2, "Basis of preparation and consolidation," to the Consolidated Financial Statements in Part II, Item 8.
The policy acquisition cost ratio is calculated by dividing policy acquisition costs by net premiums earned.
The following table sets forth summarized balance sheet data as of December 31, 2015, 2014, 2013, 2012 and 2011:
Book value per diluted common share is calculated based on total shareholders’ equity available to Validus plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise). Book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
The following is a discussion and analysis of the Company’s consolidated results of operations for the years ended December 31, 2015, 2014 and 2013 and the Company’s consolidated financial condition, liquidity and capital resources at December 31, 2015 and 2014. This discussion and analysis should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes thereto included elsewhere within this filing.
For a variety of reasons, the Company’s historical financial results may not accurately indicate future performance. See “Cautionary Note Regarding Forward-Looking Statements.” The Risk Factors set forth in Item 1A above present a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.
The Company conducts its operations worldwide through four operating segments which have been determined under U.S. GAAP segment reporting to be Validus Re, Talbot, Western World, and AlphaCat. Validus Re is a Bermuda-based reinsurance segment focused on treaty reinsurance. Talbot is a specialty insurance segment, primarily operating within the Lloyd's insurance market through Syndicate 1183. Western World is a U.S. based specialty excess and surplus lines insurance segment operating within the U.S. commercial market. AlphaCat is a Bermuda-based investment adviser, managing capital for third parties and the Company in insurance linked securities and other investments in the property catastrophe reinsurance space. The Company has a corporate function ("Corporate"), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance expenses. Corporate also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. The Company's corporate expenses, capital servicing and debt costs and investment results are presented separately within the non-segment discussion.
The following tables present a summary of the Validus Re and AlphaCat segments' January 2016 and 2015 renewals by line of business:
The Company believes that the primary financial indicator for evaluating performance and measuring the overall growth in value generated for shareholders is book value per diluted common share. Book value per diluted common share plus accumulated dividends, together with other important financial indicators, is shown below:
Book value per diluted common share plus accumulated dividends is considered by management to be the primary indicator of financial performance, as we believe growth in book value on a diluted basis, plus the dividends that have accumulated, ultimately translates into the return that a shareholder will receive. Book value per diluted common share plus accumulated dividends increased by $3.96, or 8.2%, from $48.53 at December 31, 2014 to $52.49 at December 31, 2015. Cash dividends per common share are an integral part of the value created for shareholders. The Company paid quarterly cash dividends of $0.32 (December 31, 2014: $0.30) per common share and common share equivalent during the year ended December 31, 2015. On February 2, 2016, the Company announced a quarterly cash dividend of $0.35 per common share, which represents an increase of $0.03 or 9.4% on the prior year quarterly cash dividend of $0.32, payable on March 31, 2016 to holders of record on March 15, 2016.
Return on average equity represents the return generated on common shareholders’ equity during the year. Return on average equity is calculated by dividing the net income available to Validus for the year by the average shareholders’ equity available to Validus during the year. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed. The return on average equity for the years ended December 31, 2015, 2014 and 2013 was 10.3%, 13.0% and 14.0% respectively.
Net operating return on average equity represents the operating return generated on common shareholders’ equity during the year. Net operating return on average equity is calculated by dividing the net operating income available to Validus for the year by the average shareholders’ equity available to Validus during the year. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances. The net operating return on average equity for the years ended December 31, 2015, 2014 and 2013 was 11.3%, 13.1% and 15.5% respectively. Net operating return on average equity is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
The decrease in gross premiums written for the three months ended December 31, 2015 was primarily due to the decreases in gross premiums written in the Validus Re and Talbot segments, offset by increases in gross premiums written in the Western World and AlphaCat segments.
Policy acquisition costs for the three months ended December 31, 2015 increased by $13.0 million or 14.5%, primarily as a result of increases in the Western World and Validus Re segments. Policy acquisition costs in the Western World segment for the three months ended December 31, 2015 were $14.3 million compared to $3.2 million for the three months ended December 31, 2014 primarily due to the impact of the acquisition fair value adjustments. Policy acquisition costs in the Validus Re segment for the three months ended December 31, 2015 were $37.5 million compared to $35.1 million for the three months ended December 31, 2014, an increase of $2.4 million or 6.7%. This increase was primarily driven by profit commissions and a large proportional contract in the specialty lines that carries higher acquisition costs.
Underwriting income for the three months ended December 31, 2015 decreased by $18.6 million or 13.5% primarily as a result of the changes in underwriting revenues and deductions as described above.
Net operating income available to Validus for the three months ended December 31, 2015 was $105.4 million compared to $121.9 million for the three months ended December 31, 2014, a decrease of $16.5 million, or 13.5%.
Net income available to Validus for the three months ended December 31, 2015 was $69.0 million compared to $125.9 million for the three months ended December 31, 2014, a decrease of $56.9 million, or 45.2%. The decrease in net income available to Validus was primarily due to an unfavorable movement in the change in unrealized losses of $32.8 million as a result of a rising interest rate environment as compared to the prior year quarter.
Full Year 2015 Summarized Consolidated Results of Operations and Financial Condition
Gross premiums written for the year ended December 31, 2015 were $2,557.5 million compared to $2,358.9 million for the year ended December 31, 2014, an increase of $198.6 million, or 8.4%.
Underwriting revenues for the year ended December 31, 2015 were $2,253.0 million compared to $1,996.5 million for the year ended December 31, 2014, an increase of $256.5 million or 12.8% due to the increase in gross premiums written described above and the subsequent impact on net premium earned.
The decrease in the loss ratio in the specialty lines of 6.1 percentage points was primarily due to a large number of losses below the non-notable loss threshold during the year ended December 31, 2014, primarily in the Talbot segment's political risk class. For further details of the movements in losses and the loss ratios incurred in the Company's segments, refer to the commentary below in the individual segment discussion.
Underwriting income for the year ended December 31, 2015 decreased by $66.5 million or 12.6% primarily as a result of the changes in underwriting revenues and deductions as described above.
Net operating income available to Validus for the year ended December 31, 2015 was $409.7 million compared to $480.8 million for the year ended December 31, 2014, a decrease of $71.0 million, or 14.8%.
Overview of the Results of Operations for Years Ended December 31, 2015 and December 31, 2014 compared to the Years Ended December 31, 2014 and December 31, 2013, respectively.
Other operating expenses and income, net, consists of net investment income, finance expenses, taxes, income (loss) from operating affiliates and (income) loss attributable to AlphaCat investors.
The Year Ended December 31, 2015 compared to the Year Ended December 31, 2014
The primary factors driving the decrease in net operating income available to Validus excluding the Western World segment were:
an increase in incurred current year losses, excluding notable and non-notable losses of $77.6 million; and
An increase in net premiums earned of $68.2 million, primarily due to new agriculture business written in the Validus Re segment.
The change in net operating income available to Validus, excluding the impact of Western World, for the year ended December 31, 2014 compared to the year ended December, 31 2013 is described in the following table:
The Year Ended December 31, 2014 compared to the Year Ended December 31, 2013
Net operating income available to Validus excluding the Western World segment for the year ended December 31, 2014 was $473.0 million compared to $589.0 million for the year ended December 31, 2013, a decrease of $116.0 million or 19.7%.
A decrease in net premiums earned of $178.7 million, primarily within the Validus Re segment, due to a reduction in gross premiums written, the timing of the purchase of retrocessional coverage and the effect of the Flagstone run-off business; offset by,
a decrease in incurred current year losses, excluding notable and non-notable losses of $46.2 million;
Management has determined that the Company operates in four reportable segments Validus Re, Talbot, Western World, and AlphaCat.
Gross premiums written for the three months ended December 31, 2015 were $14.3 million compared to $32.7 million for the three months ended December 31, 2014, a decrease of $18.4 million, or 56.2%. Gross premiums written for the three months ended December 31, 2015 included $15.6 million of property premiums, $(0.7) million of marine premiums and ($0.5) million of specialty premiums, compared to $14.0 million of property premiums, $15.3 million of marine premiums and $3.5 million of specialty premiums for the three months ended December 31, 2014. The decrease in the marine lines of $15.9 million was primarily driven by an $11.0 million commutation of a Flagstone contract with a Lloyd's counterparty which occurred during the three months ended December 31, 2014. The decrease in the specialty lines was due primarily to a $15.0 million reduction in crop reinsurance premium estimates, partially offset by new casualty business of $7.1 million which was written during the three months ended December 31, 2015.
The loss ratio for the three months ended December 31, 2015 was 43.3% compared to 25.8% for the three months ended December 31, 2014, an increase of 17.5 percentage points. The loss ratio for the three months ended December 31, 2015 included favorable loss reserve development on prior accident years of $22.6 million, benefiting the loss ratio by 9.7 percentage points. The favorable development on prior accident years from non-event and event specific reserves were $18.0 million and $4.6 million, respectively. The loss ratio for the three months ended December 31, 2014 included favorable loss reserve development on prior accident years of $30.8 million, benefiting the loss ratio by 13.3 percentage points. The increase in the loss ratio for the three months ended December 31, 2015 was primarily due to increased agriculture business, increased frequency of losses below the non-notable loss threshold and a reduced impact from favorable loss reserve development compared to the prior year quarter.
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income that is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
The decrease in the property lines net premiums earned of $39.2 million was as a result of lower gross premiums written during the year ended December 31, 2015 compared to the year ended December 31, 2014, offset by the earned impact of the reduction in reinsurance premiums ceded. The decrease in the marine lines net premiums earned of $19.7 million was due to lower gross premiums written during the year ended December 31, 2015, as well as the impact of adjustments to run off business. The increase in net premiums earned in the specialty lines of $131.8 million was primarily due to an increase in gross premiums written during the year ended December 31, 2015.
Other insurance related income for the year ended December 31, 2015 includes a recoverable for federal excise taxes of $2.3 million.
During the year ended December 31, 2015, the property lines incurred $23.3 million of losses and loss expenses from a third quarter notable loss event, Tianjin, which represented 5.4 percentage points of the property lines loss ratio. Net of $1.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $21.5 million.
The property lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2014.
During the year ended December 31, 2015, the marine lines incurred $12.5 million of losses and loss expenses from a third quarter notable loss event, Tianjin, which represented 8.5 percentage points of the marine lines loss ratio. Net of $1.3 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.2 million. In addition, losses and loss expenses from Pemex, a second quarter notable loss event, were $35.0 million which represented 23.7 percentage points of the marine lines loss ratio. Net of $8.4 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $26.6 million.
The acquisition cost ratio for the marine lines increased by 4.3 percentage points primarily due to premium adjustments to existing business. The 1.4 percentage point increase in the acquisition cost ratio for the specialty lines was driven by profit commissions and a large proportional contract that carries higher acquisition costs.
The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, other insurance related income, losses and loss expenses and policy acquisition costs.
The increase in general and administrative expenses of $3.7 million or 4.9% was due primarily to a greater retention of costs within the segment and an increase in staff costs related to overseas underwriting operations during the year ended December 31, 2015. This increase was partially offset by a reduction in office and infrastructure costs in the current year related to entities that are no longer in use as a result of efficiencies achieved through rationalization of historical Flagstone entities. Share compensation expenses were comparable for the years ended December 31, 2015 and 2014.
The increase in the combined ratio for the year ended December 31, 2015 of 13.8 percentage points compared to the year ended December 31, 2014 was due to the movement in the underlying ratios as discussed above.
The loss ratio for the three months ended December 31, 2015 was 38.7% compared to 53.6% for the three months ended December 31, 2014, a decrease of 14.9 percentage points. The loss ratio for the three months ended December 31, 2015 included favorable loss reserve development on prior accident years of $23.1 million, benefiting the loss ratio by 11.3 percentage points. The favorable development on prior accident years is primarily from non-event reserves in the amount of $19.3 million. Favorable development on prior accident years from event specific reserves was $3.8 million. The loss ratio for the three months ended December 31, 2014 included favorable loss reserve development on prior accident years of $42.0 million, benefiting the loss ratio by 19.0 percentage points.
Talbot gross premiums written for the year ended December 31, 2015 translated at 2014 exchange rates would have been $1,033.2 million, a decrease of $68.6 million on the prior year period.
Losses and loss expenses from a single notable loss event, Tripoli Airport, were $12.5 million for the year ended December 31, 2014, which represented 1.4 percentage points of the loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.7 million.
Losses and loss expenses from non-notable loss events for the year ended December 31, 2015 were $4.7 million compared to $4.8 million for the year ended December 31, 2014. The non-notable loss event for the year ended December 31, 2015 was the Chilean earthquake.
During the year ended December 31, 2015, the property lines incurred $3.3 million of losses and loss expenses from a third quarter notable loss event, Tianjin, which represented 1.5 percentage points of the property lines loss ratio. Net of $0.2 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $3.1 million. In addition, losses and loss expenses from Pemex, a second quarter notable loss event, were $0.4 million which represented 0.2 percentage points of the property lines loss ratio. Net of $0.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $0.3 million. The property lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2014.
The specialty lines incurred no losses and loss expenses from notable loss events during the year ended December 31, 2015. Losses and loss expenses from a single notable loss event, Tripoli Airport, were $12.3 million for the year ended December 31, 2014, which represented 4.0 percentage points of the loss ratio. Net of $0.8 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $11.5 million.
General and administrative expenses translated at 2014 exchange rates would have been $162.4 million, an increase of $11.6 million. This increase was primarily due to a greater retention of costs within the segment together with an increase in the performance bonus accrual. Share compensation expense ratios were comparable for the years ended December 31, 2015 and 2014.
The decrease in the combined ratio for the year ended December 31, 2015 of 4.0 percentage points compared to the year ended December 31, 2014 was due to the movement in the underlying ratios as discussed above.
The combined ratio for the three months ended December 31, 2015 was 94.3% compared to 89.7% for the three months ended December 31, 2014, an increase of 4.6 percentage points.
The property lines consist largely of commercial package property, program and brokerage business. During the three months ended March 31, 2015, Western World began writing brokerage property business. Gross premiums written in the brokerage property class totaled $12.0 million for the year ended December 31, 2015. During the three months ended December 31, 2014, Western World discontinued writing binding authority commercial auto business and a large bar and tavern program. The liability lines consist largely of commercial package liability, program and other liability business.
Net premiums earned were driven by the earnings pattern of net premiums written.
The liability lines current period loss ratio was 77.2% percentage points, representing attritional claims experienced during the period. The liability lines experienced favorable loss reserve development of $16.9 million during the year ended December 31, 2015 due to the amortization of the fair value adjustment as noted in the table footnote above and favorable development on attritional losses.
Upon closing the acquisition, an adjustment of $34,736 was made to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $21,822 during the year ended December 31, 2015 (2014: $12,914) benefiting the policy acquisition cost ratio by 8.4 percentage points (2014:17.7 percentage points).
On an annualized basis, the decrease in general and administrative expenses of $5.8 million was primarily due to the decrease in professional fees related to the acquisition of Western World and a decrease in retention and salary costs as compared to the prior year. These decreases were offset by an increase in staff costs related to new offices opened in Boston and in New York. The increase in share compensation expenses of $1.5 million was primarily due to a full year's expenses on issued grants for the year ended December 31, 2015 compared to only one month expense on issued grants during the prior year.
The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the years ended December 31, 2015 and 2014.
The combined ratio for the year ended December 31, 2015 reflects the underlying ratios highlighted above.
AlphaCat Direct includes direct investments from third party investors in AlphaCat Re.
Total expenses for the three months ended December 31, 2015 were $3.4 million, compared to $4.0 million for the three months ended December 31, 2014, a decrease of $0.6 million. Included within the expenses for the three months ended December 31, 2015 was $0.1 million of non-recurring finance expenses related to the raising of third party capital.
Income before investment income from AlphaCat Funds and Sidecars for the three months ended December 31, 2015 was $2.9 million, compared to $1.9 million for the three months ended December 31, 2014, an increase of $1.0 million.
Investment income from AlphaCat Funds and Sidecars for the three months ended December 31, 2015 was $5.9 million, compared to $7.4 million for the three months ended December 31, 2014, a decrease of $1.4 million.
Validus' share of AlphaCat's net income for the three months ended December 31, 2015 was $7.1 million, compared to $2.2 million for the three months ended December 31, 2014, an increase of $4.9 million. Excluding Validus' share of PaCRe's net loss, Validus' share of AlphaCat income for the three months ended December 31, 2015 was $8.8 million, compared to $9.3 million for the three months ended December 31, 2014, a decrease of $0.4 million.
There are no PaCRe assets under management as at January 1, 2016.
AlphaCat's assets under management were $2.4 billion as at January 1, 2016, compared to $1.9 billion as at January 1, 2015. Third party assets under management were $2.1 billion as at January 1, 2016, compared to $1.5 billion as at January 1, 2015. During the year ended December 31, 2015, a total of $1,171.7 million of capital was raised, of which $1,097.9 million was raised from third parties. During the year ended December 31, 2015, $755.7 million was returned to investors, of which $625.3 million was returned to third party investors. The amounts returned to investors included $470.3 million returned to PaCRe investors, which included $423.3 million to third parties, as this entity was off risk as of January 1, 2016.
The following table presents non-segment income and expense items on a consolidated basis for the three months ended December 31, 2015 and 2014:
Net investment income for the three months ended December 31, 2015 was $29.9 million compared to $28.4 million for the three months ended December 31, 2014, an increase of $1.4 million, or 5.1%.
General and administrative expenses for the three months ended December 31, 2015, were $24.2 million compared to $19.7 million for the three months ended December 31, 2014, an increase of $4.5 million or 23.0%.
The change in net unrealized losses on investments for the three months ended December 31, 2015 was $34.5 million compared to $1.5 million for the three months ended December 31, 2014, an unfavorable movement of $33.0 million.
The increase in managed net investment income for the year ended December 31, 2015 was $25.4 million or 26.5% and was primarily due to a change in asset allocation intended to improve yield. Managed net investment income from other investments includes distributed and undistributed net income from certain investments.
Corporate general and administrative expenses for the year ended December 31, 2015, excluding eliminations, were $75.7 million compared to $80.2 million for the year ended December 31, 2014, a decrease of $4.5 million or 5.6%. This decrease was due primarily to the retention of certain costs within the operating segments. Corporate general and administrative expenses are comprised of executive and board expenses, internal and external audit expenses and other costs relating to the Company as a whole.
As of December 31, 2015, the Company had pre-tax net operating loss carry forwards (“NOLs”) of approximately $651.6 million that are available to offset future taxable income. Some of the NOLs will begin expiring in 2018 and others are available to reduce future taxable income over an indefinite period of time. As of December 31, 2015, the Company had a gross deferred tax asset related to our NOLs of $167.9 million against which a full valuation allowance was provided.
The change in net unrealized losses on managed investments for the year ended December 31, 2015 was $32.0 million compared to $1.0 million for the year ended December 31, 2014, an unfavorable movement of $31.0 million. The unfavorable movement was primarily due to a rising interest rate environment during 2015 as compared to 2014.
The Company's reporting currency is the U.S. dollar. As a significant portion of the Company's operations are transacted in currencies other than the U.S. dollar, fluctuations in foreign exchange rates may affect year-to-year comparisons. The Company's largest foreign currency fluctuation exposure is to the following currencies, with the movement in each currency against the U.S. dollar for the years ended December 31, 2015, 2014 and 2013 shown in the table below:
The Company currently hedges foreign currency exposure by substantively balancing assets (primarily cash and premium receivables) with liabilities (primarily case reserves and event IBNR) for certain major non-U.S. dollar currencies, or by entering into forward foreign currency contracts. Consequently, the Company aims to have a limited exposure to foreign exchange fluctuations.
The operating results of an insurance or reinsurance company are also often measured by reference to its underwriting income and net operating income, which are non-GAAP financial measures. Underwriting income and net operating income available to Validus, as set out in the table below, is reconciled to net income available to Validus (the most directly comparable GAAP financial measure) by the addition or subtraction of certain Consolidated Statement of Comprehensive Income (Loss) line items, as illustrated below.
Underwriting income is the primary financial measure for the Company's insurance and reinsurance operating segments: Validus Re, Talbot and Western World. The results of the AlphaCat operating segment are presented on an asset manager basis, which is also non-GAAP. Refer to Part II, Item 8, Note 26. "Segment information," for a reconciliation of segmental income to net income available to Validus.
Net operating income available to Validus indicates the performance of the Company’s core underwriting function and includes net investment income, finance expenses, tax expense, income (loss) from operating affiliates and (income) attributable to AlphaCat investors and excludes net operating (income) attributable to noncontrolling interest and certain other revenues and expenses such as the reconciling items in the table above. The Company believes the reporting of net operating income available to Validus enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance business. This profitability is influenced significantly by earned premium growth, adequacy of the Company’s pricing and loss frequency and severity. Over time it is also influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance and its ability to manage its expense ratio, which it accomplishes through its management of acquisition costs and other underwriting expenses.
The following tables present reconciliations of book value per diluted common share to book value per common share, the most comparable U.S. GAAP financial measure, at December 31, 2015 and December 31, 2014.
Weighted average exercise price for those warrants and stock options that have an exercise price lower than book value per share.
Using the "as-if-converted" method, assuming all proceeds received upon exercise of warrants and stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
During the fourth quarter of 2015, the Company enhanced disclosures around the allocation of invested assets and the related returns between managed and non-managed cash and investments. Non-managed cash and investments represent assets held in support of consolidated AlphaCat VIEs, refer to Note 9, "Variable interest entities," to the Consolidated Financial Statements in Part II, Item 8 for further details. As such, prior period disclosures have been revised to conform to current period presentation.
At December 31, 2015, the Company's managed cash and investment portfolio totaled $6.4 billion, compared to $6.7 billion at December 31, 2014, a decrease of $0.2 billion, or 3.3%, primarily as a result of share repurchases under the Company's share repurchase program. Refer to Note 7, "Investments,” to the Consolidated Financial Statements in Part II, Item 8 for further details.
A significant portion of (re)insurance contracts written by the Company provide short-tail reinsurance coverage for losses resulting mainly from natural and man-made catastrophes, which could result in payment of a substantial amount of losses at short notice. Accordingly, the Company’s investment portfolio is primarily structured to provide liquidity, which means the investment portfolio contains a significant amount of relatively short-term fixed maturity investments. The Company’s IPS specifically requires certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, we structure our managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.
The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+. Further limits on asset classes and security types are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At December 31, 2015, the Company’s managed fixed maturity portfolio had an average credit quality rating of A+ (December 31, 2014: AA-).
The value of the Company’s managed fixed maturity portfolio will fluctuate with, among other factors, changes in the interest rate environment and in overall economic conditions. Additionally, the structure of the Company’s overall managed investment portfolio exposes the Company to other risks, including insolvency or reduced credit quality of corporate debt securities, prepayment, default and structural risks on asset-backed securities, mortgage-backed securities and bank loans and liquidity risks on certain other investments, including hedge funds, investment funds and private equity investments. For further details on market risks, refer to Part I,