Selected consolidated statement of operations data, ending consolidated balance sheet data and share data at December 31, 2016, 2015, 2014 and 2013 for the years ended December 31, 2016, 2015, and 2014, and for the period from June 24, 2013 to December 31, 2013 follows. These historical results are not necessarily indicative of results to be expected from any future period.
(b) We incurred no expenses in 2013 other than $0.7 million of general and administrative expenses during the period from June 24, 2013 to December 31, 2013.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2016, 2015 and 2014, and our financial condition as of December 31, 2016 and 2015. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this report.
The Manager monitors our net exposure to any one catastrophe loss event in any single zone within certain broadly defined major catastrophe zones. Our January 1, 2017 projected net exposures by zone were in compliance with our underwriting guidelines. Namely, our projected net exposure to any one zone was below 50% of our projected shareholders’ equity at December 31, 2016.
Our single event loss estimates represent snapshots as of January 1, 2017. The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, losses incurred, the expiration of existing policies, and changes in our ceded reinsurance and derivative protections.
Our consolidated results of operations for the years ended December 31, 2016, 2015 and 2014 were as follows:
The decrease in reinsurance premiums written in 2016 compared to 2014 was the result of rate decreases on the business we write over the intervening period. See "Reinsurance Premiums and Acquisition Costs" in Note 1 of the Notes to Consolidated Financial Statements.
During 2016, 2015 and 2014 we earned $43.6 million, $38.3 million and $43.9 million of reinsurance premiums, respectively. Our reinsurance premiums earned are primarily a function of the amount and timing of reinsurance premiums previously written.
During 2016, our in-force derivative contracts included the 2016 Inward ILW Swap and the 2016 Outward ILW Swaps. During 2015, our in-force derivative contracts included the 2015 Inward ILW Swap and the 2015 Outward ILW Swap. During 2014, our in-force derivative contracts included the 2013 Inward ILW Swap and the 2014 Outward ILW Swap. Through 2016, 2015 and 2014, we were not aware of any industry loss events occurring that would have triggered a payment obligation, or receipt, under any of these derivative instruments.
During the years ended December 31, 2016 and 2015 we recognized $1.0 million and $0.2 million, respectively, of net loss from derivative instruments. During the year ended December 31, 2014, we recognized $0.7 million of net income from derivative instruments. The increase in net loss from derivative instruments in 2016 compared to 2015 and 2014 resulted from us entering into a higher number of outwards ILW swaps in order to purchase protection against natural catastrophes across multiple geographic zones and the consequent increase in fixed payments.
During 2016 we established $13.7 million of loss and LAE reserves for estimated losses incurred during the year primarily driven by the catastrophe events summarized in the following table together with reported attritional losses and incurred but not reported ("IBNR") reserves.
(1) Other loss events for the year ended December 31, 2016 included the Texas hailstorm, Japanese earthquake, Netherlands hail events, Typhoon Meranti and New Zealand earthquake for which the losses were individually below $1.0 million.
The following table summarizes our general and administrative expenses for the years ended December 31, 2016 , 2015 and 2014.
Our public company expenses incurred during the years presented consisted of director fees, corporate insurance premiums, audit fees, share-based compensation and other expenses associated with being a publicly traded company. The modest decrease in these expenses during the year ended December 31, 2016, versus those of 2015, is due to higher legal and professional fees in the prior year in connection with the May 2015 amendment and renewal of the 2014 Credit Agreement. See "Liquidity" below.
During 2016 , 2015 and 2014, we incurred interest expense on our borrowings under the Credit Agreements of less than $0.1 million, $0.1 million and less than $0.1 million, respectively. See "Liquidity" below.
As of December 31, 2016 and 2015, the Company held $4.7 million and $6.1 million of cash and cash equivalents of which: (i) $3.1 million and $5.1 million, respectively, was pledged to trust accounts established for the benefit of third parties; (ii) less than $0.1 million and less than $0.1 million, respectively, was pledged to trust accounts established for the benefit of Blue Water Re (in support of the BW Retrocessional Agreement); and (iii) $1.6 million and $1.0 million represented unencumbered cash on hand, respectively.
On May 6, 2016, the Company entered into the 2016 Credit Facility with Endurance Investment Holdings Ltd. (the "Lender"), a wholly-owned subsidiary of Endurance. The 2016 Credit Facility provides the Company with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. The 2016 Credit Facility replaces the 2014 Credit Agreement (together the "Credit Agreements") and related Guarantee Agreement which expired on April 29, 2016. Borrowings under the 2016 Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. A one-time fee of $20,000 was due to the Lender in connection with establishing the 2016 Credit Facility. The 2016 Credit Facility contains covenants that limit the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If the Company fails to comply with any of these covenants, the Lender could revoke the facility and exercise remedies against the Company. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with the Manager by the Company, the Lender has the right to terminate the 2016 Credit Facility. As of December 31, 2016, the Company was in compliance with all of its respective covenants associated with the 2016 Credit Facility.
On May 1, 2015, we renewed and amended our 364-day Credit Agreement (the "2014 Credit Agreement") which permitted us to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes.
The 2014 Credit Agreement, which expired on April 29, 2016, contained covenants that limited the Company’s ability to, among other things, grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. The 2014 Credit Agreement also contained covenants that required: (i) the Company to maintain a debt to total capitalization ratio of less than or equal to 22.5%; (ii) the Company to maintain a consolidated tangible net worth of no less than 70% of its consolidated tangible net worth as of May 2, 2014 (the original closing date of the 2014 Credit Agreement); (iii) Endurance to maintain a debt to total capitalization ratio of less than 35.0%; (iv) Endurance to maintain a consolidated tangible net worth of no less than $1.8 billion; and (v) each of Endurance’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best to maintain a rating of at least "B++." If the Company or Endurance were to fail to comply with any of these covenants, the lender could have revoked the facility and exercised remedies against the Company or Endurance.
We do not consider any short-term borrowings outstanding under the Credit Agreements to be a component of our capital structure.
The issuance of any new debt, equity or hybrid securities might be on terms and conditions that are unfavorable to our shareholders. Any new issuances of equity or hybrid securities could include the issuance of securities with rights, preferences and privileges that are senior or otherwise superior to those of Common Shares and could be dilutive to our existing shareholders. Any new debt securities may contain terms that materially restrict our operations, including our ability to distribute cash to our shareholders. In addition, if we cannot obtain adequate capital on favorable terms, or at all, our business could be adversely affected.
The Company's contractual obligations as of December 31, 2016 are summarized as follows:
The Company expects to fund the obligations noted in the table above through scheduled releases of funds currently held as collateral.
The Company and its operating subsidiaries have entered into the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement with the Manager.
As of December 31, 2016, our total shareholders’ equity was $183.3 million. Assuming that our average total shareholders’ equity remains at this level in future periods, we would expect to pay the Manager a Management Fee of approximately $2.7 million per year pursuant to this agreement.
As of December 31, 2016, if we were to terminate either the Investment Management Agreement or the Underwriting and Insurance Management Agreement, we would be required to pay the Manager a one-time termination fee of approximately $9.2 million.
As of December 31, 2016, we were not subject to any off-balance sheet arrangements that we believe are material to our investors.
We experienced a net decrease in our cash and cash equivalents of $1.4 million, $5.4 million and $162.3 million during 2016, 2015 and 2014 respectively.
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported and disclosed amounts of our assets and liabilities as of the balance sheet dates and the reported amounts of our revenues and expenses during the reporting periods. We believe the items that require the most subjective and complex estimates are: (1) our loss and LAE reserves; (2) our written and earned reinsurance premiums; and (3) the implications of being an emerging growth company under the JOBS Act. Our accounting policies for these items are of critical importance to our consolidated financial statements.
To the extent we rely on industry data to aid us in our reserve estimates, there is a risk that the data may not match our risk profile or that the industry’s overall reserving practices differ from our own and those of our cedants. In addition, reserving may prove to be especially difficult should a significant loss take place near the end of a reporting period, particularly if the loss involves a catastrophic event. These factors further contribute to the degree of uncertainty in our reserving process.
GAAP does not permit us to record or carry contingency reserves for catastrophe losses that are expected to occur in the future. Therefore, during periods in which significant catastrophe loss events occur, our underwriting results are likely to be adverse, and during periods in which significant catastrophe loss events do not occur, our underwriting results are likely to be favorable.
All of our reinsurance contracts are currently being written on a losses-occurring basis, which means that all loss events occurring during the period of the contract are covered, regardless of the inception dates of the underlying policies. Any loss events occurring after the expiration of a losses-occurring contract are not covered.
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; or (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of our CEO’s compensation to median employee compensation.
We will continue to be an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of the IPO; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (iv) the date on which we are deemed to be a "large accelerated filer," as defined under the Exchange Act.