Our executive and administrative office is located at 400 Atlantic Street, Stamford, CT. The lease for this space expires in October 2023. Our underwriting operations are in various locations with non-cancelable operating leases including:
Underwriting profit (loss) represents one measure of the pretax profitability of our insurance operations and is derived by subtracting Net losses and LAE, Commission expenses and Other operating expenses from Net earned premiums and Other underwriting income (expense). This information is available in total and by segment in Note 2 - Segment Information in the Notes to Consolidated Financial Statements. The nearest comparable GAAP measure is Income before income taxes which, in addition to Underwriting profit (loss), includes Net investment income, Other than temporary impairment (“OTTI”) loss, Net realized gains (losses) on investments, Interest expense and Other income (loss).
During the first quarter of 2015, we realigned our reporting segments from Insurance Companies, Lloyd’s Operations and Corporate to U.S. Insurance, Int’l Insurance, GlobalRe and Corporate. The new segment presentation reflects an increase in the level of importance that our Chief Operating Decision Maker now places on the results of the underlying operating segments when aggregated and reported in alignment with the products and services offered to the marketplace versus when aggregated and reported in alignment with our legal entity structure. Over the past few years, we have been monitoring the growth and stability of our assumed reinsurance business and in 2015 determined that assumed reinsurance has become a stable and significant component of our Company. We are also increasing our focus on additional international insurance markets by establishing underwriting offices in Continental Europe. The offices were fully operational during our January 2015 renewal season. These changes were all considered in conjunction with establishing our operating and reportable segments.
The following table presents a summary of our consolidated financial results for the years ended December 31 2015, 2014 and 2013:
Underwriting profit was $58.1 million for the year ended December 31, 2015 driven by $26.3 million, $5.7 million, and $26.1 million Underwriting profit for our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments, respectively. Underwriting profit was $68.9 million for the year ended December 31, 2014 driven by $29.1 million, $18.7 million, and $21.1 million Underwriting profit for our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments, respectively. Underwriting profit was $43.9 million for the year
ended December 31, 2013 driven by $14.5 million and $30.2 million Underwriting profit for our U.S. Insurance and Int’l Insurance reporting segments, respectively, and $0.8 million Underwriting loss for our GlobalRe reporting segment. For additional information on the drivers of Underwriting profit see the U.S. Insurance, Int’l Insurance and GlobalRe reporting segment results sections included herein.
For the year ended December 31, 2015, we recorded $64.7 million of AY reserve releases primarily driven by $29.3 million, $26.2 million and $9.1 million of reserve releases from our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments, respectively, mostly due to favorable loss emergence. The favorable prior AY reserve releases were partially offset by $48.5 million of current AY losses related to large loss activity. The loss ratio was also unfavorably impacted by $0.6 million of RRPs.
The increase in total investment income for all years presented as compared to the prior years was primarily due to growth of invested assets. The annualized pre-tax yields, excluding Net realized gains and losses and OTTI losses recognized in earnings, for the years ended December 31, 2015, 2014 and 2013 on a consolidated basis were 2.4%, 2.3% and 2.4%, respectively.
Interest expense was $15.4 million, $15.4 million and $10.5 million for the years ended December 31, 2015, 2014 and 2013, respectively, relating to our $265.0 million principal amount of the Senior notes. The effective interest rate related to the Senior notes, based on the proceeds net of discount and all issuance costs, approximates 5.86%.
Other income (loss) for the years ended December 31, 2015, 2014 and 2013 was a $0.6 million loss, a $10.1 million gain and zero, respectively. Other income (loss) primarily consists of realized and unrealized foreign exchange gains and losses mostly driven by the strengthening of the USD against the British pound sterling (“GBP”), Canadian dollar (“CAD”) and Euro (“EUR”). 2014 was impacted by a $10.0 million foreign currency translation gain in connection with a change in the functional currency of the Syndicate that took place in the first quarter of 2014. See Note 1 - Organizations & Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein for additional information regarding the foreign currency adjustment.
We recorded an effective tax rate of 31.0%, 32.2% and 31.2% for December 31, 2015, 2014 and 2013, respectively. Our Effective tax rate for each of the years differs from the federal tax rate of 35.0% principally due to tax-exempt investment income and dividends received deduction.
The following tables summarize our consolidated financial results by reporting segment for the years ended December 31, 2015, 2014 and 2013:
The following tables summarize our financial results by operating segment for our U.S. Insurance reporting segment for the years ended December 31, 2015, 2014 and 2013:
Gross written premiums increased $58.7 million for the year ended December 31, 2015 compared to the same period in 2014 due to strong new business production and improving market conditions in our U.S. P&C operating segment, which increased $53.6 million. Our Excess Casualty and Primary Casualty divisions increased $23.5 million and $15.9 million, respectively, as a result of continued improvement within the construction market. In addition, our Environmental division increased $8.5 million due to strong new business production.
For the year ended December 31, 2015, average renewal rates for our U.S. Insurance reporting segment decreased 1.3% as compared to the same period in 2014, with decreases in our U.S. Marine, U.S. P&C and U.S. Professional Liability operating segments of 0.7%, 1.5% and 1.4%, respectively. This was offset by new business production achieved through our continued investment in our underwriting teams in addition to improved market conditions across key businesses.
For the year ended December 31, 2014, average renewal rates for our U.S. Insurance reporting segment increased 1.1% as compared to the same period in 2013, driven by increases in our U.S. P&C and U.S. Marine operating segments of 1.8% and 1.5%, respectively, partially offset by a decrease of 2.0% in our U.S. Professional Liability operating segment. The overall increase in our U.S. Insurance reporting segment average renewal rates coupled with new premium in our U.S. P&C operating segment are the primary drivers for the Gross written premium growth year over year.
Ceded written premiums increased $13.8 million for the year ended December 31, 2015 compared to the same period in 2014, mostly due to growth in Gross written premiums. The impact of the implementation of additional proportional reinsurance programs in U.S. Marine and U.S. Professional Liability operating segments during the second half of 2014 and the first quarter of 2015 were almost completely offset by a reduction in proportional reinsurance in the second half of 2015 that primarily supports Excess Casualty and Environmental casualty risks within our U.S. P&C operating segment.
Ceded written premiums decreased $24.8 million for the year ended December 31, 2014 compared to the same period in 2013, mostly due to a change in reinsurance program supporting certain casualty risks which combined a reduced level of proportional reinsurance with an additional excess of loss cover impacting our U.S. P&C operating segment, partially offset by the impact of implementing additional proportional reinsurance programs in our U.S. Marine and U.S. Professional Liability operating segments in the second half of 2014.
For the year ended December 31, 2014, RRPs of $1.8 million increased $0.2 million as compared to prior year of $1.6 million.
Please refer to Reserves for losses & LAE - Superstorm Sandy and Hurricane Joaquin, Gustav and Ike, for more information.
Net earned premiums increased $51.5 million for the year ended December 31, 2015 compared to the same period in 2014 primarily due to growth in Gross written premiums and a reduced level of proportional reinsurance that supports certain casualty risks in the second half of 2015 within our U.S. P&C operating segment. This was partially offset by decreases in Net earned premium in both our U.S. Marine and U.S. Professional Liability operating segments which were impacted by the implementation of additional reinsurance programs in the second half of 2014 and first quarter of 2015, as well as, a $3.6 million increase in RRPs from 2014.
Net earned premiums increased $66.6 million for the year ended December 31, 2014 compared to the same period in 2013 mostly due to growth in Gross written premiums and a reduction in our proportional reinsurance program that covers certain casualty risks in the first quarter of 2014 within our U.S. P&C operating segment. This was partially offset by decreases in our U.S. Marine operating segment, which was impacted by the implementation of proportional reinsurance programs in the second half of 2014, and our U.S. Professional Liability operating segment, which was impacted by an overall decline in Gross written premiums due to our decision to exit a line of business and program terminations as well as the implementation of a proportional reinsurance program in the fourth quarter of 2014.
The following tables present the impact of reserve development and RRPs on our Net losses and LAE ratio for the years ended December 31, 2015, 2014 and 2013:
For the year ended December 31, 2015, our U.S. Insurance reporting segment recorded $29.3 million of net prior AY reserve releases driven by $24.8 million, $3.8 million and $0.7 million of reserve releases from our U.S. Marine, U.S. Professional Liability and U.S.
For the year ended December 31, 2013, our U.S. Insurance reporting segment recorded $11.0 million of net prior AY reserve strengthening primarily driven by $12.9 million in our U.S. P&C operating segment, due to unfavorable loss activity in our Primary Casualty division and $11.8 million in our U.S. Professional Liability operating segment due to specific large claims in our E&O and D&O divisions. This strengthening was partially offset by $13.7 million of prior AY reserve releases in our U.S. Marine operating segment due to favorable loss emergence. The loss ratio was also unfavorably impacted by $1.5 million of RRPs recorded during the year, mostly in our U.S. Marine operating segment.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to the mix of business earned.
The Commission expense ratio of 9.9% for the year ended December 31, 2014 was flat compared to the same period in 2013. Our U.S. P&C operating segment increased 2.5 points due to a reduction in our proportional reinsurance program that covers certain casualty risks, offset by decreases in our U.S. Marine and U.S. Professional Liability operating segments of 1.6 points and 2.2 points, respectively, due to implementations of proportional reinsurance programs.
The following tables summarize our financial results by operating segment for our Int’l Insurance reporting segment for the years ended December 31, 2015, 2014 and 2013:
Gross written premiums decreased $13.0 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to decreases in our Int’l P&C and Int’l Marine operating segments of $27.6 million and $6.9 million, respectively. Our Int’l P&C operating segment was impacted by severe market conditions in our Energy & Engineering division and decreased $54.7 million as compared to the same period in 2014, partially offset by growth in our Property division of $21.7 million from new business production. The decrease in our Int’l Marine operating segment is due to declines in rates coupled with lower renewal activity. The decline in Gross written premiums was partially offset by an increase of $21.3 million in our Int’l Professional Liability operating segment, driven by new business production in our E&O division.
Gross written premiums decreased $6.6 million for the year ended December 31, 2014 compared to the same period in 2013, primarily due to decreases in our Int’l P&C and Int’l Marine operating segments of $22.5 million and $2.1 million, respectively. Our Int’l P&C operating segment was impacted by severe market conditions as our Energy & Engineering division decreased $21.1 million from the same period in 2013. The decrease in our Int’l Marine operating segment was due to the re-underwriting of several products, as well as difficult market conditions, partially offset by growth in new business in our Transport and Hull products. The decline in Gross written premiums was partially offset by an increase of $18.0 million in our Int’l Professional Liability operating segment, primarily due to new business growth including $1.0 million from offices going into operation in September 2014.
Ceded written premiums decreased $37.9 million for the year ended December 31, 2015 compared to the same period in 2014, driven by decreases in our Int’l P&C and Int’l Marine operating segments of $30.4 million and $11.3 million, respectively. The decrease in both operating segments is primarily driven by an overall decline in Gross written premiums which attract proportional reinsurance as well as a reduction in proportional reinsurance programs. The decrease was partially offset by an increase of $3.7 million in our Int’l Professional Liability operating segment due to higher Gross written premiums with attached proportional reinsurance.
Ceded written premiums decreased $25.9 million for the year ended December 31, 2014 compared to the same period in 2013, driven by decreases in our Int’l P&C and Int’l Marine operating segments of $22.0 million and $3.1 million, respectively. This was due to decreases in Gross written premiums coupled with retaining more business in our proportional reinsurance programs.
Net earned premiums increased $16.5 million for the year ended December 31, 2015 as compared to the same period in 2014. This was driven by increases in our Int’l Professional Liability operating segment of $15.5 million due to growth in new business in our E&O division and increases in our Int’l Marine operating segment of $8.2 million, due to a $9.7 million decrease in RRPs. These increases were partially offset by a decrease in our Int’l P&C operating segment due to the decreases in Gross written premiums.
The following tables present the impact of changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2015, 2014 and 2013:
For the year ended December 31, 2014, our Int’l Insurance reporting segment recorded $38.3 million of net prior AY reserve releases primarily driven by our Int’l Marine operating segment of $31.7 million, our Int’l P&C operating segment of $3.8 million and our Int’l Professional Liability operating segment of $2.7 million, due to favorable loss emergence from prior years. These releases were partially offset by $19.2 million of current AY reserve strengthening within our Int’l Marine operating segment due to large loss activity in the current AY.
The commission expense ratio for the year ended December 31, 2014 decreased 0.2 points as compared to the same period in 2013 due to mix of business earned as we have increased Gross written premiums in our Int’l Professional Liability operating segment which carries a lower commission ratio. This was partially offset by reductions to our proportional reinsurance programs, therefore generating less ceding commission income.
The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2015, 2014 and 2013:
Ceded written premiums increased $1.6 million for the year ended December 31, 2015, compared to the same period in 2014, primarily due to two additional retrocessional treaties written in 2015 for our Surety product, as well as increased renewal cost for a retrocessional treaty, which covers our P&C product.
Net earned premiums decreased $19.8 million for the year ended December 31, 2015, compared to the same period in 2014, primarily due to the nonrenewal of business in our Agriculture and Marine products and less assumed RRPs than in prior year. The decline in Net earned premium was partially offset by growth in our A&H and P&C products.
For the year ended December 31, 2015, our GlobalRe reporting segment recorded $9.1 million of net prior AY reserve releases primarily driven by $5.2 million, $2.8 million and $2.0 million of reserve releases from our Marine, P&C and A&H products, respectively, due to lower than anticipated loss activity. In addition, $0.8 million of RRPs received reduced our Net losses and LAE ratio, primarily driven by our Marine product. The prior AY reserve releases were partially offset by $2.8 million current year strengthening in our Marine product, related to two large losses in 2015.
The Commission expense ratio increased 0.6 points for the year ended December 31, 2014 compared to the same period in 2013, due to an increase in profit commission expenses in our P&C product.
Other operating expenses increased $4.4 million for the year ended December 31, 2014, compared to the same period in 2013 due to investment in our underwriting teams and support staff and IT expenses to support business growth and initiatives.
Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of December 31, 2015 and 2014, our capital resources were as follows:
Each of the November 20, 2015 and November 24, 2014 credit facilities contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. These credit facilities also provide for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. As of December 31, 2015, our Company was in compliance with all covenants.
Net cash provided by financing activities was $1.4 million for the year ended December 31, 2015 compared to $1.2 million for the comparable period in 2014. The fluctuation in cash provided by financing activities is primarily the result of transactions in our employee stock purchase plan.
Obligation includes rent and rent items. Rent items are estimates based on the lease agreement due to uncontrollable fluctuations of actual costs.
qualify for the dividends received deduction. Our investments are subject to the oversight of the respective insurance companies’ Boards of Directors and the Finance Committee of the Parent Company’s Board of Directors.
The following table sets forth the amount of our fixed maturities as of December 31, 2015 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The total rating is the weighted average quality rating for the fixed maturities portfolio as a whole.
The following table sets forth the composition of the non-government guaranteed fixed maturities categorized by asset class and generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s):
broken out by prime, Alt-A and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under a Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers, which have a risk potential greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.
The following table summarizes the gross unrealized investment losses as of December 31, 2015 by length of time where the fair value was less than 80.0% of amortized cost:
The twelve months or longer unrealized loss of $5.6 million is due to unfavorable foreign exchange movement in our Canadian portfolio.
Our Company has exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess the concentration of underwriting exposures in catastrophe-exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. Our Company also uses modeling and concentration management tools that allow
better monitoring and better control of the accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.
Like all catastrophe exposure estimates, the foregoing estimate of the probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of the earthquake, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of the portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under the policies in products such as Cargo and Hull. There can be no assurances that the gross and net loss amounts that our Company could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, the portfolio of insured risks changes dynamically over time and there can be no assurance that the probable maximum loss will not change materially over time.
Hurricane Joaquin, which occurred in the fourth quarter of 2015, Superstorm Sandy, which occurred in the fourth quarter of 2012 and Hurricanes Gustav and Ike, which occurred in the third quarter of 2008 generated substantial losses in our U.S. and Int’l Marine operating segments and our Energy & Engineering divisions within our U.S. and Int’l P&C operating segment. Management believes that should any adverse loss development for gross claims occur from the aforementioned Superstorm and Hurricanes, it would be contained within the reinsurance program.
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricane Joaquin for the year ended December 31, 2015:
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Superstorm Sandy for the periods indicated:
The increase in incurred losses and LAE, net of reinsurance, for the year ended December 31, 2015 was primarily driven by gross activity subject to quota share reinsurance agreements. During 2015, $19.0 million of Superstorm Sandy gross reserves were released. These reserves were fully ceded resulting in a minimal impact to net reserves and a corresponding release of $3.9 million of previously accrued RRPs.
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for the 2008 Hurricanes Gustav and Ike for the periods indicated:
Our Company has established a reserve for uncollectible reinsurance in the amount of $6.9 million and $11.3 million as of December 31, 2015 and 2014, respectively. The reduction in our allowance for uncollectible reinsurance was the result of payments of
outstanding balance from one of our large reinsurers. Our reserve is determined by considering reinsurer specific default risk as indicated by their financial strength ratings as well as additional default risk for asbestos and environmental related recoverables. Actual uncollectible reinsurance could potentially differ from the estimate.
A review of the emergence of actual losses relative to expectations for each line of business generally derived from the quarterly and/or semi-annual in depth reserve analyses is conducted to determine whether the assumptions used in the reserving process continue to form a reasonable basis for the projection of liabilities for each product line. As time passes, estimated loss reserves for an UWY will be based more on historical loss activity and loss development patterns rather than on assumptions based on underwriters' input, pricing assumptions or industry experience. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved.
The Bornhuetter-Ferguson method calculates the IBNR loss reserves as the product of the earned premium, an expected ultimate loss ratio, and a loss development factor that represents the expected percentage of the ultimate losses that have been incurred but not yet reported. The loss development factor equals one hundred percent less the expected percentage of losses that have thus far been reported, which is generally calculated as an average of the percentage of losses reported for comparable reporting periods of prior UWYs. The expected ultimate loss ratio is generally determined in the same manner as in the loss ratio method.
Short tailed lines of business have the least uncertainty of the three groups. For short tailed lines of business there is typically a mature or close to mature dataset from which to select patterns and estimates. Thus, the actuaries would generally apply a combination of loss development method and Bornhuetter-Ferguson methods that rely on internal historical patterns and losses.
The data distribution as of December 31, 2015 as measured by net case reserves outstanding is as follows:
A portion of our premium is estimated for unreported premium, mostly for our Marine and Energy & Engineering products written by our Int’l Insurance reporting segment, as well as our A&H product and our LatAm business within our P&C and Surety products written by our GlobalRe reporting segment. We generally do not experience any significant backlog in processing premiums. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is written or bound. The estimates are regularly reviewed and updated taking into account the premium received to date versus the estimate and the age of the estimate. To the extent that the actual premium varies from the estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current operations.