The following table sets forth our selected consolidated financial information for the years ended and as of the dates indicated. As described in Note 1 to our Audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, our Audited Consolidated Financial Statements include the accounts of Endurance Holdings, Endurance Bermuda, BCML, Endurance U.K., Endurance at Lloyd's, Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions and ARMtech, as well as all of the other direct or indirect wholly-owned subsidiaries of Endurance Holdings.
We derived the following selected consolidated financial information for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 from our Audited Consolidated Financial Statements and related notes. These historical results are not necessarily indicative of results to be expected from any future period.
Diluted book value per share is a non-GAAP measure based on total shareholders' equity available to Endurance Holdings, less the $460.0 million (2011-2014: $430.0 million) redemption value of the preferred stock, divided by the number of common shares and common share equivalents outstanding at the end of the period, using the treasury stock method. Common share equivalents include options and warrants which are dilutive when the market price of the Company's shares exceeds the exercise price of the options or warrants. Diluted shares outstanding were 67,136,986 at December 31, 2015, 44,920,768 at December 31, 2014, 44,518,210 at December 31, 2013, 43,130,075 at December 31, 2012 and 43,142,277 at December 31, 2011. We believe that this is an effective measure of the per share value of the Company as it takes into account the effect of all outstanding dilutive securities.
The acquisition expense ratio is calculated by dividing acquisition expenses by net premiums earned.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to the Company's plans and strategy for its business and statements regarding marketplace conditions and trends, includes forward-looking statements that involve risk and uncertainties. Please see the "Cautionary Statement Regarding Forward-Looking Statements" in this Form 10-K for more information on factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in this discussion and analysis. You should review the "Risk Factors" set forth in this Form 10-K for 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.
Endurance at Lloyd's Limited ("Endurance at Lloyd's"), managing agent for Lloyd's Syndicate 5151 ("Syndicate 5151"), domiciled in England;
Endurance Risk Solutions Assurance Co. ("Endurance Risk Solutions"), domiciled in Delaware; and
In the Insurance segment, the Company writes agriculture, casualty and other specialty, professional lines, and property, marine/energy and aviation insurance. In the Reinsurance segment, the Company writes catastrophe, property, casualty, professional lines, and specialty reinsurance.
The Company's Insurance and Reinsurance segments both include property related coverages, which provide insurance or reinsurance of an insurable interest in tangible property for property loss, damage, or loss of use. In addition, the Company's Insurance and Reinsurance segments include various casualty insurance and reinsurance coverages, which are primarily concerned with the losses caused by injuries to third parties, i.e., not the insured, or to property owned by third parties and the legal liability imposed on the insured resulting from such injuries.
As part of the acquisition of Montpelier, Endurance Holdings acquired Montpelier's Lloyd's of London ("Lloyd's") operations. Syndicate 5151 is the Company's Lloyd's syndicate. Endurance Corporate Capital Limited ("ECCL"), a wholly-owned subsidiary of the Company, serves as Syndicate 5151's sole corporate underwriting member and Endurance at Lloyd's, a wholly-owned subsidiary of the Company, is the managing agent for Syndicate 5151.
The Company is entitled to receive management and performance fees from BCRH and the BCGR Listed Fund for the services that it performs for these entities through BCML.
Expenses. The Company's expenses consist primarily of losses and loss expenses, acquisition expenses, interest expense, amortization of intangible assets, general and administrative expenses and corporate expenses. Losses and loss expenses are estimated by management and reflect management's best estimate of ultimate losses and loss adjustment costs arising during the current reporting period and revisions of prior period estimates. The Company records losses and loss expenses based on an actuarial analysis of the estimated losses the Company expects to be reported on policies and contracts written. The ultimate losses and loss expenses will depend on the actual costs to settle claims. Acquisition expenses consist of commissions and brokerage expenses that are typically a percentage of the premiums on insurance policies or reinsurance contracts successfully written. General and administrative expenses consist primarily of personnel expenses and general operating expenses directly attributable to the Company's insurance and reinsurance operations. Corporate expenses are expenses not allocated directly to the insurance and reinsurance operations.
In 2016, management believes the following four primary influences may affect the market for the Company's insurance and reinsurance products - the continuation of the challenging global economy, continued pricing competition in most of the markets in which the Company operates, continued volatility in agriculture commodity prices, and a low interest rate environment. The United States and other markets around the world have continued to experience unsettled economic conditions, including high levels of unemployment, significant governmental regulation initiatives and continued uncertainty in the financial markets. Although some economies are slowly recovering, the lower levels of economic activity are likely to continue to suppress growth in demand for insurance and reinsurance. In addition, increased capital investment and new forms of reinsurance in the industry are likely to have a continuing negative impact on pricing, particularly in catastrophe exposed property insurance and reinsurance. This is likely to result in a continued competitive global insurance and reinsurance market in 2016. The Company's agriculture insurance business will be influenced by the volatility of agriculture commodity prices, which could lead to decreased premium and risk exposure levels, which may be partially offset by higher demand for agriculture insurance due to recent yield and price volatility. Lastly, the current low interest rate environment may result in a lower appetite for longer duration risks that are not adequately priced as there will be reduced investment earnings from underwriting cash flows.
If factors such as those described in the "Risk Factors" section in this Form 10-K cause actual events or results to differ materially from management's underlying assumptions or estimates, there could be a material adverse effect on the Company's results of operations, financial condition and liquidity.
Premiums and Related Expenses. The Company's insurance premiums are earned pro rata over the terms of the applicable risk period specified in the insurance policy. The Company's insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium that is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will generally only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable. For the Company's agriculture insurance line, premiums are determined based on estimated acreage planted combined with the base commodity price for the insured crops. Adjustments are made to the agriculture premium estimates as acreage reporting and claims adjusting occurs. Insurance premiums written accounted for 63%, 59%, and 55% of the Company's gross premiums written during the years ended December 31, 2015, 2014, and 2013, respectively.
In addition to the applicable risk period, the Company's estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract's written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Excess of loss reinsurance contracts accounted for approximately 16%, 19%, and 22% of the Company's gross premiums written during the years ended December 31, 2015, 2014, and 2013, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to broker and ceding company estimates, the Company's management also utilizes its judgment in establishing proportional reinsurance contract premium estimates after considering the following factors:
Premiums on the Company's excess of loss and proportional reinsurance contracts are estimated at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contracts are underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known. The Company has not historically experienced material adjustments to its initial premium estimates for its excess of loss reinsurance contracts. For proportional contracts, as is customary in the reinsurance market, there is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company to the Company, either directly or through a reinsurance intermediary. This time lag can vary from one to several months or calendar quarters. In addition, uncertainty in premium estimates arises due to changes in renewal rates or rate of new business acceptances by the cedant insurance companies and changes in the rates being charged by cedants. Changes to original premium estimates for proportional contracts could be material and such adjustments
Reserve for Losses and Loss Expenses. The Company's reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as "IBNR reserves"). Case reserves are established for losses that have been reported to us, but not yet paid. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds and consultations with independent legal counsel. In addition, IBNR reserves are established by management based on reported losses and loss expenses and actuarially determined estimates of ultimate losses and loss expenses.
Information Used in Determining the Reserve for Losses and Loss Expenses. In order to estimate the Company's reserve for losses and loss expenses, management uses information either developed from internal or external sources, or pricing information created by the Company or provided to the Company by insureds and brokers at the time individual contracts and policies are bound. In addition, we use commercially available risk analysis models, contract by contract review by our underwriting teams, other data and estimates provided by our clients, and, to a limited extent, overall market share assumptions to estimate our loss and loss expense reserves related to specific loss events.
The above five assumptions most significantly influence the Company's determination of initial expected loss ratios and expected loss reporting patterns that are the key inputs which impact potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company's business segments. While there can be no assurance that any of the above assumptions will prove to be correct, we believe that these assumptions represent a realistic and appropriate basis for estimating the reserve for losses and loss expenses.
Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company's business lines are by their nature subject to additional uncertainties, including the Company's casualty, property, professional lines, catastrophe, and specialty lines in the Reinsurance segment and the Company's casualty and other specialty, property, marine/energy and aviation and professional lines in the Insurance segment, which are discussed in detail below. In
The inherent uncertainty of estimating the Company's loss and loss expense reserves for its Reinsurance segment increases principally due to:
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company's underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews of the Company's ceding companies. Findings are communicated as appropriate to the ceding companies and are utilized in the establishment or revision of the Company's case reserves and related IBNR reserves. On occasion, these reviews reveal that the ceding company's reported losses and loss expenses do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company's policy is to vigorously defend its position in litigation or arbitration. As of December 31, 2015, the Company was not involved in any material claims litigation or arbitration proceedings.
The Company assumes in its loss and loss expense reserving process that, on average, the time periods between the recording of expected losses and the reporting of actual losses are predictable when measured in the aggregate and over time. The time period over which all losses are expected to be reported to the Company varies significantly by line of business. This period can range from a few quarters for some lines, such as agriculture, to many years for some casualty lines of business. For the Company's Reinsurance business segment, due to ceding company and reinsurance intermediary reporting frequency, the time period is generally longer than for its Insurance segment, resulting in a reliance by the Company for a longer period of time on its actuarial estimates of loss and loss expense reserves. To the extent that actual reported losses are reported more quickly than expected, the Company may adjust upward its estimate of ultimate loss and to the extent that actual reported losses are reported more slowly than expected, the Company may reduce its estimate of ultimate loss.
Investments. The Company currently classifies its fixed maturity investments, short-term investments and equity securities as trading or available for sale. Trading securities are carried at estimated fair value, with related net realized and unrealized gains or losses included in earnings. The Company acquired a portfolio of investments classified as trading from Montpelier. In addition, in the fourth quarter of 2015, the Company started designating, on acquisition, certain fixed maturity, short-term and equity investments as trading, rather than as available for sale. The Company has elected to account for trading securities using the fair value option under current accounting guidance, as the Company believes it represents the most meaningful measurement basis for these assets and presents the Company's fixed maturity, short-term and equity investments in a manner consistent with the way in which the Company manages the investment portfolio, which is on a total investment return basis. The Company currently expects to continue to designate, in future periods, on acquisition, certain fixed maturity, short-term and equity investments as trading, rather than as available for sale. As a result, the Company currently expects its fixed maturity, short-term and equity investments balances classified as available for sale to decrease and the trading balance for each of these investments to increase. This change will result in a reduction in other-than-temporary accounting judgments the Company makes and will result in additional volatility in the Company's net income in future periods as net unrealized gains and losses on these investments will be recorded in net income, rather than as a component of accumulated other comprehensive (loss) income in shareholders' equity.
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. The Company uses quoted values and other data provided by nationally recognized third-party pricing sources as inputs into its process for determining fair values of its fixed maturity, short-term and equity portfolios. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company's fixed maturity, short-term and equity portfolios at December 31, 2015 were as follows:
Broker/Dealers. Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from third-party pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker/dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker/dealers are all non-binding. At December 31, 2015, the Company has not adjusted any pricing provided by broker/dealers and has classified the majority of such securities as Level 2.
Other than Temporary Impairment. Following a determination of fair value, the Company reviews its available for sale portfolios to determine whether any declines in the fair value below the amortized cost basis of these securities are other-than-temporary. If the Company determines that a decision to sell the available for sale security has been made or that it is more likely than not that the Company will be required to sell an available for sale security, the Company deems the security to be other-than-temporarily impaired and writes it down to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as an other-than-temporary impairment ("OTTI") loss.
conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive (loss) income in the shareholders' equity section of the Company's balance sheet.
Other Investments. Other investments consist of alternative and specialty funds and are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Alternative funds include investments in hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity. Specialty funds currently include high yield loan funds. The carrying value of other investments are increased or decreased to reflect the Company's share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
Goodwill and Intangible Assets. The Company is required to make an annual assessment as to whether the value of the Company's goodwill and intangible assets are impaired. Impairment of these assets can be either partial or full. For goodwill, impairment is based on a fair value analysis by individual reporting unit. Based upon the Company's assessment at the reporting unit level, there was no impairment of its goodwill asset of $176.5 million during 2015.
In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company's stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company's goodwill asset. In addition, if the current economic environment and/or the Company's financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2015.
Deferred Tax Assets. The Company provides for income taxes in accordance with the provisions of the relevant accounting guidance on "Accounting for Income Taxes" and "Accounting for Uncertain Tax Positions" for Endurance Reinsurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech, Endurance U.K. and Endurance at Lloyd's, which are the Company's operating subsidiaries in income tax paying jurisdictions. The Company's deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. The Company determines deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis". Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 is effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-02 may be applied retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The objective of ASU 2015-03 is to simplify the presentation of debt issuance costs by requiring direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for public business entities in annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-03 should be applied retrospectively, and upon transition, applicable disclosures for a change in accounting principle shall be provided, including the transition method, a description of the prior period information that has been retrospectively adjusted, and the effect of the change on the applicable financial statement line items. The Company adopted this standard retrospectively effective October 1, 2015. Debt issuance costs for the years ended December 31, 2015, 2014 and 2013 of $3.2 million, $4.1 million, and $5.1 million, respectively, have been reclassified from other assets to debt in the Company's Consolidated Balance Sheets. This standard had no impact on the Company's Consolidated Statements of Income and Comprehensive Income.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 is effective for public business entities in annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15,
2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
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:
(1) General and administrative expense ratio includes general and administrative expenses and corporate expenses.
Gross premiums written in 2015 increased $426.8 million, or 14.7%, compared to 2014 and increased $655.6 million, or 24.6% compared to 2013. The following table provides the distribution of gross premiums written by the geographic location in which the risk originated for the years ended December 31, 2015, 2014 and 2013:
An increase in gross premiums written in the property, marine/energy and aviation line of business in the Insurance segment, due primarily to business generated by new underwriting teams added over the last twenty four months in the U.S. and the U.K., including new business resulting from the acquisition of Montpelier;
An increase in gross premiums written in the specialty line of business in the Reinsurance segment, primarily due to growth in international marine and international agriculture business written by new underwriting teams, partially offset by non-renewals due to increased ceding company retentions;
A decline in gross premiums written in the catastrophe and property lines of business in the Reinsurance segment due to targeted non-renewals and line size reductions on policies that no longer met profitability targets, increased ceding company retentions, negative premium adjustments and rate declines, partially offset by new business; and
A decrease in gross premiums written in the agriculture line of business in the Insurance segment due to lower commodity prices, partially offset by policy count growth and increased demand for insurance from clients.
Net premiums earned in 2015 increased $114.5 million, or 6.1% compared to 2014 principally due to the increase in gross premiums written and the earning of Montpelier premiums acquired in 2015, partially offset by increased ceded
The Company's 2015 net investment income decreased 13.5% or $17.7 million compared to 2014 and decreased 31.5% or $52.4 million compared to 2013. Net investment income during 2015 included net mark to market losses of $13.6 million on other investments as compared to mark to market gains of $19.6 million in 2014 and mark to market gains of $64.3 million in 2013. Investment income generated by the Company's equity securities and fixed income investments increased by $17.2 million compared to 2014 and $27.9 million compared to 2013. The increase in investment income resulted primarily from an increase in fixed income investments acquired as part of the Company's acquisition of Montpelier. The value of the investment portfolio (including cash and cash equivalents and pending investment purchases and sales) as of December 31, 2015 increased 34.9% from 2014 and 37.1% from 2013. The increase in the investment portfolio in 2015 resulted primarily from the acquisition of Montpelier and increased assets available for investment due to income generated during 2014 and 2015. Investment expenses in 2015 increased compared to 2014 and 2013 due to an increase in invested assets.
Net of investment manager fees; includes realized and unrealized gains and losses.
During 2015, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 66 basis point range, with a high of 1.37% and a low of 0.71%. Trading activity in the Company's investment portfolio in 2015 included increased allocations to other investments, equity securities, collateralized loan and debt obligations, corporate debt securities, U.S. government and government agencies securities and short-term investments, and reductions in non-agency mortgage-backed securities, foreign government bonds and municipal securities. The Company's investment portfolio also grew from the addition of a portfolio of investments as part of the Company's acquisition of Montpelier, which mainly consisted of corporate debt securities, short-term investments, U.S. government and government agencies securities, asset-backed securities, mortgage-backed securities, collateralized obligations, foreign government bonds and government and agency guaranteed corporate securities. The duration of the Company's fixed maturity portfolio was 2.74 years at December 31, 2015 and 2.91 years at December 31, 2014. The decrease in duration from 2014 to 2015 was due to higher prepayment expectations on the Company's mortgage-backed securities portfolio, causing a reduction of the average expected maturity of these securities.
The Company's investment portfolio is actively managed on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing and recognition of net realized gains and losses as the portfolio is adjusted and rebalanced. Proceeds from sales and maturities of investments classified as trading and available for sale for the year ended December 31, 2015 were $6,352.7 million compared to $4,145.9 million for the year ended December 31, 2014 and $4,023.3 million for the year ended December 31, 2013. Net realized and unrealized gains decreased in the year ended December 31, 2015 compared to 2014 and 2013. The decrease in net realized and unrealized gains in 2015 compared to 2014 and 2013 resulted from net unrealized losses on trading securities included in the current period as a result of credit spread widening. Net realized and unrealized gains on investment sales in 2015 increased due to increased gross and net losses recognized on the sales of fixed income securities to reposition the portfolio subsequent to the Company's acquisition of Montpelier.
During 2015, the Company remeasured its monetary assets and liabilities denominated in foreign currencies, which resulted in net foreign exchange losses of $27.0 million compared to losses of $3.8 million for 2014 and $14.2 million for 2013. The loss recorded in 2015 resulted from a decrease in the value of net asset positions in key foreign currencies as the U.S. dollar strengthened generally during the year. Additionally, sales of invested assets yielded realized foreign exchange losses recognized in net income that had previously been recognized as unrealized foreign exchange losses in other comprehensive (loss) income. In 2014, the net foreign exchange loss resulted from offsetting exposures across the Company as the U.S. dollar weakened generally in the first half of the year before strengthening against the major currencies in the second half. In 2013, the net foreign exchange loss resulted from the U.S. dollar strengthening in particular against the Japanese Yen and Australian dollar, which caused the Company's net asset positions in those currencies to be revalued lower.
During 2015, 2014 and 2013, the Company's previously estimated ultimate losses for prior accident years were reduced by $243.5 million, $233.8 million and $222.4 million, respectively, as the loss emergence related to prior accident years was lower than expected. The overall net reduction in the Company's estimated losses for prior accident years experienced in 2015 emerged across all lines of the Company's Insurance and Reinsurance segments. Favorable prior year loss reserve development in 2015 was higher than in 2014 in the Insurance segment due to lower than expected reported losses in the property, marine/energy and aviation line of business. Favorable prior year loss reserve development in 2015 was higher than in 2014 in the Reinsurance segment primarily due to lower than expected reported losses in the casualty and professional lines of business.
The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company's consolidated financial statements. These
The Company's expenses related to the amortization of intangibles increased $24.1 million in 2015 compared to 2014 as a result of finite lived intangibles acquired as part of the acquisition of Montpelier. The Company estimates additional amortization expenses will be incurred related to Montpelier of $79.2 million, $58.1 million, $31.8 million for the years ended 2016, 2017 and 2018 with $99.8 million to be recognized thereafter.
The Company incurred a tax expense for the year ended December 31, 2015 of $4.4 million compared to a tax expense of $0.4 million and $5.9 million for the years ended December 31, 2014 and 2013. The tax expense in 2015 resulted from income recorded at the Company's United States taxable jurisdictions.
The Company generated net income of $355.1 million in 2015 compared to net income of $348.5 million in 2014 and $311.9 million in 2013. The increase in 2015 net income compared to 2014 and 2013 was primarily due to an increase in net premiums earned and a reduction in losses incurred, partially offset by increased corporate expenses associated with the Company's acquisition of Montpelier, increased acquisition expenses and general and administrative expenses, increased foreign exchange losses, lower net investment income and higher amortization expenses.
The following table summarizes the underwriting results and associated ratios for the Company's Insurance segment for the years ended December 31, 2015, 2014 and 2013:
An increase in gross premiums written in the casualty and other specialty and professional lines of business, including excess casualty and various professional liability coverages, due to the expansion of the Company's Insurance underwriting personnel over the past twenty four months, as well as new business resulting from the acquisition of Montpelier; and
Net premiums earned by the Company in 2015 in the Insurance segment decreased compared to net premiums earned in 2014 and 2013 primarily due to increased ceded premiums across the segment, partially offset by growth in gross premiums written.
The following table summarizes the underwriting results and associated ratios for the Company's Reinsurance segment for the years ended December 31, 2015, 2014 and 2013:
Premiums. Gross premiums written in 2015 increased $57.0 million, or 4.8%, compared to 2014 and increased $45.1 million, or 3.8% compared to 2013. Net premiums written in the Reinsurance segment decreased in 2015 by 0.3% over 2014 and 4.1% over 2013, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
The change in the Reinsurance business segment gross premiums written during 2015 compared to 2014 and 2013 was driven by the following factors:
Ceded premiums written increased in 2015 compared to 2014 and 2013 as the Company purchased increased levels of protection, including additional proportional and excess of loss retrocessional coverage within the catastrophe line of business, and additional proportional coverage on the specialty line of business.
In 2015, catastrophe related losses added 3.0 percentage points to the Reinsurance segment's net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 5.1 percentage points in 2014 and 7.4 percentage points in 2013.
Acquisition Expenses. The Company's acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2015 was lower than in 2014 and higher than 2013. The decrease in the Company's acquisition expense ratio in the Reinsurance segment for the year ended December 31, 2015 compared to 2014 was primarily due to the addition of earned premiums from the Company's acquisition of Montpelier, which had no associated acquisition costs as these were written off on purchase. The increase in the acquisition expense ratio in 2015 compared to 2013 was primarily due to the increase in premiums earned in the specialty and professional lines of business, which incur a higher than average net acquisition expense rate.
Balances include amounts related to collateralized debt obligations held with total fair values of $49.8 million.
Corporate Securities. Corporate securities are comprised of bonds issued by corporations, primarily rated Baa3/BBB- or higher and are diversified across a wide range of issuers and industries. Corporate securities also include high yield securities comprised of bonds issued by corporations rated below BBB-. The principal risk of corporate securities is the potential loss of income and potential realized and unrealized principal losses due to insolvencies or deteriorating credit. The largest corporate security in the Company's portfolio represented approximately 1% of our fixed income investments at December 31, 2015.
Short-term investments are investments that mature within no more than one year or no less than 90 days at the time of purchase. The Company's short-term investments generally consist of U.S. government and agencies securities.
The credit rating for each security reflected above was determined based on the rating assigned to the individual security by Standard & Poor's Financial Services LLC ("S&P"). If a rating is not supplied by S&P, the equivalent rating supplied by Moody's Investors Service, Inc. ("Moody's"), Fitch Ratings, Inc., or DBRS, Inc. is used.
The Company's other investments are comprised of (i) hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity ("alternative funds") and (ii) high yield loan and convertible debt funds ("specialty funds") are recorded on the Company's balance sheet as "other investments." As of December 31, 2015, the Company's Board of Directors had approved investments in alternative funds at the time of commitment of capital of up to 25% of total shareholders' equity. Using this measure, as of December 31, 2015, alternative funds represented 18% of the Company's shareholders’ equity. This restriction does not apply to investments in specialty funds that are typically long only structures. As of December 31, 2015, the Company's other investments totaled $872.6 million and represented 9.8% of the Company's investment portfolio. As of December 31, 2015, the Company had invested, net of capital returned, a total of $737.1 million in alternative funds and specialty funds. As of December 31, 2015, the market value of alternative funds represented $809.1 million or approximately 92.7% of other investments, and specialty funds represented $63.5 million or approximately 7.3% of other investments.
During 2015, 2014 and 2013, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. In identifying such securities, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at the end of the applicable period. To the extent that the Company did not identify securities meeting these criteria, the Company then performed various analyses and reviews to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. As such, the Company recognized in earnings total other than temporary impairments of $3.7 million (2014 - $0.6 million; 2013 - $1.6 million) primarily as a result of the Company's intent to sell certain securities as of December 31, 2015.
The following table shows the fair value of the Company's investments exposed to all countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2015. The amortized cost basis of these investments was not significantly different from their fair value at December 31, 2015. The Company determined the underlying exposure of the investment by reference to the risk country or parent risk country as published by a third party pricing service.
The following table shows the fair value as of December 31, 2015 based on the ratings of the securities held by country of risk in those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2015:
Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares, its 7.5% Non-Cumulative Preferred Shares, Series B ("Series B Preferred Shares") and its 6.35% Non-Cumulative Preferred Shares, Series C ("Series C Preferred Shares"). There are restrictions on the payment of dividends by the Company's operating subsidiaries to Endurance Holdings, which are described in more detail below.
Endurance Corporate Capital Limited, Syndicate 5151 and Endurance at Lloyd's Limited are subject to oversight by the Council of Lloyd's. Endurance at Lloyd's is also subject to regulation by the PRA and the Financial Conduct Authority. Underwriting capacity of a member of Lloyd's must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd's ("FAL"). This amount is determined by Lloyd's and is based on Syndicate 5151's solvency and capital requirement as calculated through its internal model. In addition, if the FAL are not sufficient to cover all losses, the Lloyd's Central Fund provides an additional level of security for policyholders. At December 31, 2015, the FAL requirement set by Lloyd's for Syndicate 5151 was $215.2 million based on its business plan, approved in November 2014. Actual FAL posted for Syndicate 5151 at December 31, 2015 by was $276.8 million. At December 31, 2015, Endurance Corporate Capital Limited did not have assets available for distribution.
As of December 31, 2015 and 2014, the Company had pledged cash and cash equivalents and fixed maturity investments of $108.9 million and $130.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2015 and 2014, the Company had also pledged $383.3 million and $240.0 million of its cash and fixed maturity investments to meet collateral obligations for $341.6 million and $209.9 million in secured letters of credit outstanding under its credit facilities, respectively. In addition, at December 31, 2015 and 2014, cash and fixed maturity investments with fair values of $208.3 million and $205.2 million were on deposit with U.S. state regulators, respectively.
Endurance Bermuda is party to a second multi-beneficiary reinsurance trust (the "Reduced Collateral Trust") domiciled in Delaware. The Reduced Collateral Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states. As of December 31, 2015, the fair value of the assets held in the Reduced Collateral Trust exceeded $10.8 million, the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to Montpelier U.S. Insurance Company ("MUSIC") in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC to Selective Insurance Group, Inc. ("Selective"). As of December 31, 2015, the fair value of the assets held in the MUSIC Trust exceeded $21.3 million, the minimum value required on that date.
Cash flows provided by operating activities. Cash flows provided by operating activities for the year ended December 31, 2015 were $245.5 million compared to $266.3 million for the year ended December 31, 2014 and $157.9 million for the year ended December 31, 2013. The decrease in cash flows provided by operating activities in 2015 compared to 2014 was primarily due to higher net cash outflows on reinsurance and retrocessional purchases and higher general expense payments partially offset by higher cash inflows from premiums written. The increase in cash flows provided by operating activities in 2015 compared to 2013 was primarily due to lower net claims payments.
were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $329.9 million (2014 - $204 million).
The Credit Facility consists of two tranches: (i) a tranche 1 secured credit facility in an aggregate principal amount of $560.0 million (the "Tranche 1 Facility"), which is collateralized on a several basis by the respective entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas and (ii) a tranche 2 facility, which is not collateralized, in an aggregate principal amount of $140.0 million (the "Tranche 2 Facility"). The proceeds of the Credit Facility may be used for general corporate purposes, to finance potential acquisitions and for the repurchase of the Company's outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $350.0 million, provided that no participating lender is obligated to increase its commitments under the Credit Facility.
For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company's debt ratings as issued by Moody's or S&P. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company's ratings as issued by Moody's and S&P or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.
The Credit Facility requires the Company's compliance with certain customary restrictive covenants. These include certain financial covenants, such as maintaining a leverage ratio (no greater than 0.35:1.00 at any time) and a consolidated tangible net worth (no less than $1.8 billion at any time). In addition, each of the Company's regulated insurance subsidiaries that has a claims paying rating from A.M. Best must maintain a rating of at least B++ at all times. The terms of the Credit Facility restrict the declaration or payment of dividends if the Company is already in default or the payment or declaration would cause a default under the terms of the Credit Facility.
The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company's representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the Credit Facility. The Company was in compliance with all covenants contained in its credit facilities as of December 31, 2015.
The Company is party to certain uncommitted letter of credit reimbursement agreements ("LOC Agreements") that allow for the issuance of letters of credit in a variety of currencies, including U.S. dollars. The fees paid under the LOC Agreements depend on the amount of the outstanding letters of credit and vary from 0.30% to 0.45% on the principal amount of letters of credit outstanding to a fee negotiated at the time of issuance of the individual letters of credit. The total amount of letters of credit outstanding under the LOC Agreements as of December 31, 2015 was $11.7 million (2014 - $5.9 million).
Senior Notes. On October 17, 2005, Endurance Holdings issued $200.0 million principal amount of 6.15% Senior Notes due October 15, 2015. The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%. The 6.15% Senior Notes matured on October 15, 2015 and were repaid by the Company on that date.
Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and The Bank of New York Mellon, as trustee, entered into a Fourth Supplemental Indenture, dated as of July 31, 2015 (the "Fourth Supplemental Indenture"). The Fourth Supplemental Indenture amended the Indenture, dated as of July 15, 2003 (as amended and supplemented from time to time (collectively, the "Senior Notes Supplemental Indentures")). The Senior Notes Supplemental Indentures provided for the unconditional assumption of the due and punctual payment of the principal of, any premium and interest on and any additional amounts with respect to the 4.7% Senior Unsecured Notes Due 2022 (the "4.7% Senior Notes") originally issued by Montpelier on October 2, 2012 in an aggregate principal amount of $300.0 million and the performance of every obligation in the Senior Notes Indenture and the 4.7% Senior Notes to be performed or observed. The 4.7% Senior Notes bear a rate of interest equal to 4.7% per annum, payable semi-annually in arrears on April 15 and October 15 each year. The 4.7% Senior Notes mature on October 15, 2022. The 4.7% Senior Notes do not contain any covenants
regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
Trust Preferred Securities. Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and Wilmington Trust Company, as trustee, entered into the Second Supplemental Indenture, dated as of July 31, 2015 (the "Second Supplemental Indenture"). The Second Supplemental Indenture amended the Junior Subordinated Indenture, dated as of January 6, 2006 (as amended and supplemented from time to time (collectively, the "Junior Subordinated Supplemental Indentures")). The Junior Subordinated Supplemental Indentures provided for the express assumption by Endurance Holdings of the due and punctual payment of the principal of and any premium and interest (including any additional interest) on all of the Trust Preferred Securities and the performance of every covenant of the Junior Subordinated Indenture on the part of Montpelier to be performed or observed. Montpelier originally issued the Trust Preferred Securities in January 2006 in an aggregate principal amount of $100.0 million. The Trust Preferred Securities mature on March 30, 2036 and bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. The Trust Preferred Securities may be redeemed at the option of the issuer prior to maturity at a redemption price equal to 100% of the principal amount thereof plus accrued interest, provided that the issuer has received the prior approval of any applicable insurance regulatory authority with respect to such redemption, if required. The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
LIBOR Swap. Upon closing of the acquisition of Montpelier, the Company became a party to the LIBOR Swap, which will result in the future net cash flows in connection with the Trust Preferred Securities for the five-year period beginning March 30, 2012 being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the LIBOR Swap to its maturity. Net realized and unrealized gains and losses associated with the LIBOR Swap are reported within net realized and unrealized gains on the Company's Consolidated Statements of Income and Comprehensive Income, as opposed to interest expense.
BCGR Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCGR 364-day unsecured credit agreement (the "BCGR Credit Agreement"), which permits BCGR to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company is receives an annual guarantee fee from BCGR equal to 0.125% of the facility's total capacity. See Note 8 to the Company's Consolidated Financial Statements, Debt and financing arrangements.
As of December 31, 2015, the BCGR Listed Fund had $6.0 million of outstanding borrowings under the BCGR Credit Agreement. With respect to BCGR's outstanding borrowings at December 31, 2015, $3.0 million was repaid on February 1, 2016 and was subject to an annual interest rate of 1.54%, and $3.0 million was repaid February 12, 2016 and was subject to an annual interest rate of 1.51%.
The Series B Preferred Shares and Series C Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after June 1, 2016 (in the case of the Series B Preferred Shares) and after December 15, 2020 (in the case of the Series C Preferred Shares) in each case at a redemption price of $25.00 per Series B Preferred Share and $25,000.00 per Series C Preferred Share (equivalent to $25.00 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series B Preferred Shares or Series C Preferred Shares before their respective redemption dates at a redemption price of $26.00 per Series B Preferred Share and $26,000.00 per Series C Preferred Share (equivalent to $26.00 per Depositary Share), plus any declared and unpaid dividends, to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series B Preferred Shares or Series C Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.
Upon any voluntary or involuntary liquidation, dissolution or winding-up of Endurance Holdings, holders of the Series B Preferred Shares, Series C Preferred Shares and any parity shares are entitled to receive out of Endurance Holdings' assets available for distribution to shareholders, before any distribution is made to holders of Endurance Holdings' common equity securities, a liquidating distribution in the amount of $25.00 per Series B Preferred Share and $25,000.00 per Series C Preferred Share (equivalent to $25.00 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Distributions will be made pro rata as to the Series B Preferred Shares, Series C Preferred Shares and any parity shares and only to the extent of Endurance Holdings' assets, if any, that are available after satisfaction of all liabilities to creditors.
Holders of the Series B Preferred Shares and the Series C Preferred Shares have no voting rights, except with respect to certain fundamental changes in the terms of the Series B Preferred Shares or the Series C Preferred Shares and in the case of certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings' bye-laws.
Contractual Obligations. The Company's contractual obligations as of December 31, 2015 are summarized as follows:
Assumes that the Trust Preferred Securities are redeemed upon their maturity in March 2036, and that the interest rate thereon remains at 4.905% per year, the rate that has been set through the LIBOR swap.
The Company leases office space and office equipment under various operating leases.
The Company also has Credit Facility and LOC Agreements capacity of $438.4 million and $574.8 million as at December 31, 2015 and 2014, respectively.
The aggregate consideration for the acquisition of Montpelier consisted of the issuance of 20.7 million Endurance Holdings ordinary shares valued at $1.4 billion, 841,926 Endurance Holdings restricted share units with fair value of $33.3 million apportioned as purchase consideration based on service provided to Montpelier as of the closing date, and $451.1 million of cash. The cash consideration was funded through a dividend of $9.89 per Montpelier common share paid by Montpelier to its common shareholders prior to the closing of the acquisition.
For the year ended December 31, 2015, 15.7% of the Company's gross premiums were written in currencies other than the U.S. dollar. The portions of the Company's cash and cash equivalents, investments, net premium receivable and insurance and reinsurance balances receivable, and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2015 were approximately 23.5%, 4.7%, 26.5%, and 16.0%, respectively. As of December 31, 2015, the Company's principal foreign currency exposures are denominated in British Sterling and Euros. The Company measures and manages its exposure in these currencies, among others, by monitoring its estimated gross and net asset positions. In order to estimate such exposures, the Company considers currency specific investments, cash and cash equivalents, premiums receivable, reserve for losses and loss expenses, and unearned premiums. The total estimated gross and net asset balances denominated in Euros were $254.6 million and $33.5 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $335.1 million and $95.5 million, respectively. Assuming all other variables are held constant and disregarding any tax effects, a 10% change in the U.S. dollar relative to these currencies could result in a $12.9 million increase or decrease in the net assets held by the Company at December 31, 2015.
The effects of inflation could cause the severity of claims to rise in the future. The Company's estimates for losses and loss expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above reserves established for these claims, the Company will be required to increase the reserve for losses and loss expenses with a corresponding reduction in its earnings in the period in which the deficiency is identified. In addition, inflation could lead to higher interest rates causing the current unrealized gain position on the Company's fixed maturity portfolio to decrease or become an unrealized loss position. The current short duration of the Company's fixed maturity portfolio has the potential to help reduce the negative effects of higher interest rates on the Company's fixed maturity portfolio. The Company may also choose to hold its fixed income investments to maturity which would result in the unrealized gains largely amortizing through net investment income.
The Company's reserving actuaries, who report separately from the Company's business units, review the Company's loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of actuarial evaluation used within the insurance industry: the expected loss ratio method; the Bornhuetter-Ferguson method; and the loss development method. The expected loss ratio approach is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.
The estimate of the reserve for losses and loss expenses is reviewed each quarter by the Company's Loss Reserve Committee, consisting of the Company's Chief Executive Officer, Chief Financial Officer, Chief Risk Officer and Group Actuary, Chief Reserving Actuary, General Counsel and representatives of various disciplines from within the Company, such as underwriting, claims, actuarial pricing and legal.
As more fully described under "Reserving Process" above, the Company incorporates a variety of actuarial methods and judgments in its reserving process. Two key inputs in the various actuarial methods employed by the Company are initial expected loss ratios and expected loss reporting patterns. These key inputs impact the potential variability in the estimate of the reserve for losses and loss expenses and are applicable to each of the Company's business segments. The Company's loss and loss expense reserves consider and reflect, in part, deviations resulting from differences between expected loss and actual loss reporting as well as judgments relating to the weights applied to the reserve levels indicated by the actuarial methods. Expected loss reporting patterns are based upon internal and external historical data and assumptions regarding claims reporting trends over a period of time that extends beyond the Company's own operating history.
Losses and loss expenses for the year ended December 31, 2015 include $243.5 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during 2015 benefited the Company’s 2015 reported loss ratio by approximately 12.3 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company's reserve categories within both the Insurance and Reinsurance segments.
For the year ended December 31, 2015, as part of the Company's periodic review of key inputs and parameters it uses to establish its reserve for losses and loss expenses and in order to recognize accumulated historical experience and other relevant industry information, the Company made minor adjustments to the loss reporting patterns used for a number of lines of business. For the year ended December 31, 2015, the Company did not materially alter initial expected loss ratios for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2015 for those reserve categories were within the range of possible results anticipated by the Company.
Losses and loss expenses for the year ended December 31, 2014 include $233.8 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during 2014 benefited the Company's 2014 reported loss ratio by approximately 12.5 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company's reserve categories within both the Insurance and Reinsurance segments.
Agriculture. The modest amount of favorable loss emergence within the agriculture insurance line of business during 2015 and 2014 resulted from lower than anticipated agriculture claims settlements for the 2014 and 2013 crop years, respectively.
Casualty and other specialty. The favorable loss emergence within the casualty and other specialty insurance line of business during 2015 was primarily due to lower than expected claims activity within the Bermuda excess casualty and healthcare businesses. In 2014, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity within the excess casualty businesses and a reduction in accident year 2009 and prior IBNR for the healthcare liability business due to case incurred loss activity and open claim counts being less than expected.
Professional lines. The modest amount of favorable loss emergence within the professional liability line of business during 2015 and 2014 was primarily due to lower than expected claims activity.
Property. The Company recorded favorable loss emergence in the property line of business during 2015 primarily due to lower than expected claims activity within the property treaty business for accident years 2012 and 2013. The Company recorded favorable loss emergence in the property line of business in 2014 due to lower than expected claims activity.
Specialty. The Company recorded favorable loss emergence within this line of business during 2015 due to lower than expected claims emergence in the aviation and space, surety and political risk businesses, as well as an IBNR reduction for the Company's self insured risk business, which stopped writing business in 2003. The Company recorded favorable loss emergence within this line of business during 2014 due to lower than expected claims emergence in the aviation and space business.
Case and IBNR reserves for losses and loss expenses by segment and line of business were as follows at December 31, 2015:
The following table reconciles cumulative paid losses on the net reserve liability per the table above to the cumulative paid losses reported in the Company’s audited financial statements.
The Company's estimated reserve for losses and loss expenses can change over time due to unexpected changes in the external business environment in which the Company operates or changes in internal Company operations. For a discussion of the factors which can contribute to uncertainty in the reserving process and volatility in the reserve for losses and loss expenses, see "Critical Accounting Estimates - Reserves for Losses and Loss Expenses" above.
Two key inputs utilized in determining loss and loss expense reserves for the Company's two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the percent of loss yet to be reported at each valuation date as of December 31, 2015. The 10% changes in the initial expected loss ratio and the percent of loss yet to be reported were chosen to demonstrate the impact on the Company's loss and loss expense reserves of variation in key inputs and, as described below, may not be reflective of actual changes in loss and loss expense reserves.
At December 31, 2015 and 2014, the Company had reinsurance recoverables of $1,196.0 million and $889.1 million, respectively, related to its ceded reinsurance agreements. The Company remains obligated for amounts ceded in the event that its reinsurers or retrocessionaires do not meet their obligations, except for amounts ceded to the U.S. federal government in the agriculture line of business. Accordingly, the Company has evaluated the reinsurers and retrocessionaires that are providing reinsurance and retrocessional protection and will continue to monitor the stability of its reinsurers and retrocessionaires. At December 31, 2015 and 2014, the Company held collateral of $321.5 million and $199.7 million, respectively, related to its ceded reinsurance agreements. The balance of losses recoverable at December 31, 2015 was distributed as follows based on the ratings of the reinsurers:
process. This change will not delay, accelerate or avoid any impairment charge. This change was not applied retrospectively as it is impracticable to do so as retrospective application would require application of significant estimates and assumptions. It would be difficult to avoid applying hindsight and objectively determine assumptions. Therefore, the change was applied prospectively.
The Company has three primary sources of goodwill - goodwill obtained from a renewal rights transaction completed in 2003 with HartRe, goodwill obtained from the Company’s acquisition of ARMtech in 2007 and goodwill obtained from the Company's acquisition of Montpelier in 2015. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe and part of the Montpelier acquisition, the agriculture line of business of the Insurance segment in relation to the ARMtech goodwill, and Syndicate 5151 in the Insurance segment in relation to the Montpelier acquisition. The Company used a discounted cash flow approach to estimate the fair value of these reporting units. The fair value determined was in excess of the carrying value including goodwill for both reporting units noted. As a result of the goodwill impairment testing, no write-downs of goodwill were deemed necessary during 2015 and 2014.
The Company is subject to income taxes on the operations of its subsidiaries and branch offices in the United States, United Kingdom, Switzerland and Singapore. The Company is not required to pay any income or capital gains taxes on its operations in Bermuda.
The Company's income tax expense was as follows for the years ended December 31, 2015, 2014 and 2013, respectively:
Of the 2015 current income tax expense, $4.2 million related to taxes incurred in the United States (2014 - $1.8 million; 2013 - $3.1 million), $2.2 million related to taxes incurred in the United Kingdom (2014 and 2013 - nil) and $0.1 million related to a tax benefit in Switzerland (2014 and 2013 - nil). Of the deferred income tax benefit (expense), $0.7 million related to deferred income tax benefit in the United States (2014 - $1.4 million; 2013 - $(2.8) million), $0.2 million related to deferred income tax benefit in the United Kingdom (2014 and 2013 - nil) and $1.0 million related to deferred income tax benefit in Bermuda (2014 and 2013 - nil). The deferred income tax benefit in Bermuda related to amortization of intangible assets from the acquisition of Montpelier which the Company elected not to push down to Endurance at Lloyd's under current accounting guidance.
A full valuation allowance has been recorded against the net asset position of Endurance Bermuda's foreign branches and Endurance U.K.
The Company's income before income taxes was distributed as follows for the years ended December 31, 2015, 2014 and 2013, respectively:
Gross premiums written and earned by our non-U.S. and U.S. operations generally do not bear a proportionate relationship to the respective pre-tax income of these operations. The disproportionate relationship between gross premium written and net income between our operations occurs as a result of various factors, including but not limited to the differences in the underlying type of business underwritten, the underwriting profitability attributable to such business, and the applicable investment income generated.
The Company is subject to income taxes in certain jurisdictions in which the Company operates; however, since the majority of the Company's income is currently earned in Bermuda, a jurisdiction with no corporate income tax, the tax impact to the Company's operations has historically been minimal. In 2015, the Company generated income before income taxes in its subsidiaries, which generated a consolidated 1.2% (2014 - 0.1%, 2013 - 1.8%) effective income tax rate.
The Company's balance sheet at December 31, 2015 contains a net deferred tax asset in the amount of $46.8 million (2014 - $49.0 million). The current year net deferred tax asset consists of gross deferred tax assets of $233.3 million, gross deferred tax liabilities of $55.3 million and a valuation allowance against certain operating loss carryforwards of $131.1 million (2014 - $121.4 million). Of the Company's gross deferred tax assets, $92.8 million (2014 - $93.2 million) relates to net operating loss carryforwards that are available to offset future taxable income generated by the Company's United States subsidiaries, a United Kingdom subsidiary and non-U.S. branches. The Company's net operating losses may be carried forward indefinitely in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carryforwards expire in 2016 and 2028, respectively.
The 2015 and 2014 valuation allowances were established against net operating loss carryforwards in the Company's United States subsidiaries, United Kingdom subsidiary and non-U.S. branches. The increase in the valuation allowance was charged to the Company's income tax expense during 2015. Management believes the net deferred tax assets, less the valuation allowance noted, are more likely than not to be fully realized in corresponding future periods, and the Company's net deferred tax asset has been fairly stated as at December 31, 2015. In the event that management determines in the future that it is more likely than not that the net deferred tax assets will be fully realized in the near term and prior to their expiration, the Company
We have audited Endurance Specialty Holdings Ltd.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Endurance Specialty Holdings Ltd.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
In our opinion, Endurance Specialty Holdings Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.
Notes to the Consolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013
We have audited the accompanying consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
American Agri-Business Insurance Company ("American Agri-Business"), managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, "ARMtech")
In addition, as part of the Blue Capital operations Endurance Holdings and Endurance Bermuda together own 33.3% of Blue Capital Reinsurance Holdings Ltd. ("BCRH") and Endurance Bermuda owns 25.1% of Blue Capital Global Reinsurance Fund Limited ("BCGR").
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Endurance Holdings and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The following are significant accounting and reporting policies adopted by the Company:
Premiums on the Company's excess of loss and proportional reinsurance contracts are estimated at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contract is underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known.
Reinsurance recoverable on paid and unpaid losses represent estimates of losses and loss expenses that will be recovered from reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the provisions of the reinsurance agreements and consistent with the establishment of the Company's reserve for losses and loss expenses. Ceding commissions earned on ceded business are classified as an offset to acquisition and general and administrative expenses.
The Company currently classifies its fixed maturity investments, short-term investments and equity securities as trading or available for sale. Trading securities are carried at estimated fair value, with related net realized and unrealized gains or losses included in earnings. The Company acquired a portfolio of investments classified as trading from Montpelier. In addition, in the fourth quarter of 2015, the Company started designating, on acquisition, certain fixed maturity, short-term and equity investments as trading, rather than as available for sale. The Company has elected to account for trading securities using the fair value option under current accounting guidance, as the Company believes it represents the most meaningful measurement basis for these assets and presents the Company's fixed maturity, short-term and equity investments in a manner consistent with the way in which the Company manages the investment portfolio, which is on a total investment return basis. The Company currently expects to continue to designate, in future periods, on acquisition, certain fixed maturity, short-term and equity investments as trading, rather than as available for sale. As a result, the Company currently expects its fixed maturity, short-term and equity investments balances classified as available for sale to decrease and the trading balance for each of these investments to increase. This change will result in a reduction in other-than-temporary accounting judgments the Company makes and will result in additional volatility in the Company's net income in future periods as net unrealized gains and losses on these investments will be recorded in net income, rather than as a component of accumulated other comprehensive (loss) income in shareholders' equity.
Available for sale securities are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders' equity as a component of accumulated other comprehensive (loss) income. Investment transactions are recorded on a trade date basis. The Company determines the fair value of its trading and available for sale investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:
To the extent the Company determines that the amortized cost of the Company's fixed maturity and short-term investments classified as available for sale is likely to be recovered and the decline in value is related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive (loss) income in the shareholders' equity section of the Company's Consolidated Balance Sheets.
Basic earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. The weighted average number of common shares excludes any dilutive effect of outstanding options and convertible securities such as unvested restricted shares and restricted share units.
Certain comparative information has been reclassified to conform to current year presentation.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The objective of ASU 2015-03 is to simplify the presentation of debt issuance costs by requiring direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for public business entities in annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-03 should be applied retrospectively, and upon transition, applicable disclosures for a change in accounting principle shall be provided, including the transition method, a description of the prior period information that has been retrospectively adjusted, and the effect of the change on the applicable financial statement line items. The Company retrospectively adopted this standard effective October 1, 2015. Debt issuance costs as at December 31, 2015, 2014 and 2013 of $3.2 million, $4.1 million, and $5.1 million, respectively, have been reclassified from other assets to debt in the Company's Consolidated Balance Sheets. This standard had no impact on the Company's Consolidated Statements of Income and Comprehensive Income.
In May 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" ("ASU 2015-07"). The objective of ASU 2015-07 is to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using net asset value per share. ASU 2015-07 is effective for public business entities in annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-07 should be applied retrospectively. The Company retrospectively adopted this standard effective October 1, 2015. The Company's other investments were removed from the fair value hierarchy tables for the years ended December 31, 2015 and 2014 in Note 5, Fair value. This standard had no impact on the Company's Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 is effective for public business entities in annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
The aggregate consideration for the transaction consisted of the issuance of 20.7 million of the Company’s ordinary shares valued at $1.4 billion and $451.1 million of cash. The cash consideration was funded through a pre-closing dividend from Montpelier of $9.89 per common share, or $451.1 million (the "Special Dividend"). In connection with the acquisition of Montpelier, the Company incurred transaction and integration related expenses of $76.6 million in the year ended December 31, 2015, which included $19.5 million related to transaction costs, including due diligence, legal, accounting and investment banking fees and expenses, $4.4 million of costs related to the integration of Montpelier and the Company, and $52.7 million of compensation-related costs associated with terminating employees of Montpelier. These expenses have all been reported as a component of corporate expenses.
The Company's total purchase price for Montpelier at July 31, 2015 was calculated as follows:
The purchase price was allocated to the acquired assets and liabilities of Montpelier based on estimated fair values on July 31, 2015, the Closing Date, as detailed below. The Company recognized goodwill of $87.6 million primarily attributable to Montpelier's assembled workforce and synergies expected to result upon integration of Montpelier into the Company's operations. The Company estimates that none of the goodwill that was recorded will be deductible for income tax purposes. The allocation of the purchase price is based on information that was available to management at the time the consolidated financial statements were prepared. The allocation may change as additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair value recorded for these items may be subject to adjustments, which may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill. The Company identified finite lived intangible assets of $293.2 million, which will be amortized over a weighted average period of 8 years, identifiable indefinite lived intangible assets of $57.6 million, and certain other
adjustments to the fair values of the assets acquired, liabilities assumed and shareholders' equity of Montpelier at July 31, 2015 as summarized in the table below:
Fixed maturity investments, trading at fair value - To reflect certain investments at fair value;
Identifiable indefinite lived and finite lived intangible assets - To establish the fair value of identifiable intangible assets related to the acquisition of Montpelier described in detail below.
Trade names - represents the value of the Montpelier and Blue Capital brands acquired;
Insurance licenses - the value of insurance licenses acquired providing the ability to write reinsurance in 15 states of the U.S.;
Renewal rights - the value of policy renewal rights taking into consideration written premium on assumed retention ratios and the insurance cash flows and the associated equity cash flows from these renewal policies over the expected life of the renewals;
The following table presents unaudited pro forma consolidated financial information for the years ended December 31, 2015 and 2014 and assumes the acquisition of Montpelier occurred on January 1, 2014. The unaudited pro forma consolidated financial information is provided for informational purposes only and is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of January 1, 2014 or that may be achieved in the future. The unaudited pro forma consolidated financial information does not give consideration to the impact of possible revenue enhancements, expense efficiencies, synergies or asset dispositions that may result from the acquisition of Montpelier. In addition, unaudited pro forma consolidated financial information does not include the effects of costs associated with any restructuring or integration activities resulting from the acquisition of Montpelier, as they are nonrecurring.
The components of net investment income for the years ended December 31, 2015, 2014 and 2013 are as follows:
Contractual maturities of the Company's fixed maturity and short-term investments are shown below as of December 31, 2015 and 2014. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following table summarizes the fair value of the fixed maturity investments, short-term investments and equity securities classified as trading at December 31, 2015. The Company had no securities classified as trading as of December 31, 2014.
In addition to the Company's fixed maturity, short-term and equity investments, the Company invests in alternative funds and specialty funds. The Company's alternative funds and specialty funds are recorded on the Company's balance sheet as "other investments". At December 31, 2015 and 2014, the Company had invested, net of capital returned, a total of $737.1 million and $387.2 million, respectively, in other investments. At December 31, 2015 and 2014, the carrying value of other investments was $872.6 million and $541.5 million, respectively.
Hedge funds - The redemption frequency of the hedge funds range from monthly to biennially with notice periods from 30 to 90 days. Over one year, it is estimated that the Company can liquidate approximately 91.8% of the hedge fund portfolio, with the remainder over the following two years.
For additional information on the Company's intangible assets, see Note 11, Goodwill and intangible assets.
The Company classifies some of its investments in fixed maturity investments, short-term investments and equities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses on the Company's securities classified as available for sale at December 31, 2015 and 2014 are as follows:
Balances include amounts related to collateralized debt obligations held with total fair values of $11.4 million.
Balances include amounts related to collateralized debt obligations held with total fair values of $15.2 million.
As of December 31, 2014, 747 available for sale securities were in an unrealized loss position aggregating $19.9 million. Of those, 171 securities with aggregated unrealized losses of $7.1 million at December 31, 2014 had been in a continuous unrealized loss position for twelve months or greater.
The increase in gross unrealized losses on the Company's fixed income investments and equity securities at December 31, 2015 compared to December 31, 2014 was primarily due to widening of credit spreads and broad equity market declines during the year, rather than any actual credit losses on these securities. At December 31, 2015, the Company had the intent to sell certain of the fixed maturity investments and equity securities in an unrealized loss position and therefore recognized in earnings total other-than-temporary impairments of $3.7 million (2014 - $0.6 million; 2013 - $1.6 million).
The following table summarizes the movements in the non-redeemable non-controlling interests balance from the acquisition date, July 31, 2015, to December 31, 2015:
Structured securities including agency and non-agency, residential and commercial mortgage, asset-backed securities and collateralized loan and debt obligations - These securities are generally priced by broker/dealers. Broker/dealers may use current market trades for securities with similar qualities. If no such trades are available, inputs such as bid and offer, prepayment speeds, the U.S. treasury curve, swap curve and cash settlement may be used in a discounted cash flow model to determine the fair value of a security. The Company generally classifies the fair values of its structured securities in Level 2.
Other assets and liabilities - A portion of other assets and liabilities are composed of a variety of derivative instruments used to enhance the efficiency of the investment portfolio and economically hedge certain risks. These instruments are generally priced by pricing services, broker/dealers and/or recent trading activity. The market value approach valuation technique is used to estimate the fair value for these derivatives based on significant observable market inputs. Certain derivative instruments are priced by pricing services based on quoted market prices in active markets. These derivative instruments are generally classified in Level 1. Other derivative instruments are priced using industry valuation models and are considered Level 2, as the inputs to the valuation model are based on observable market inputs. Also included in this line item are proprietary, non-exchange traded derivative-based risk management products primarily used to address weather and energy risks. The trading market for these weather derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. In instances where market prices are not available, the Company uses industry or internally developed valuation techniques such as spread option, Black Scholes, quanto and simulation modeling to determine fair value and classifies these in Level 3. These models may reference prices for similar instruments.
Debt - Outstanding debt consists of the Company's 7% Senior Notes due July 15, 2034 and 4.7% Senior Notes due October 15, 2022 (the "Senior Notes") and the Trust Preferred Securities. The fair values of these securities were obtained from a third party pricing service and pricing was based on the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of the Senior Notes and the Trust Preferred Securities are classified in Level 2.
The carrying values of cash and cash equivalents, accrued investment income, other investments, net receivable on sales of investments, net payable on purchases of investments, the amount outstanding under the BCRH Credit Agreement and other financial instruments not described above approximated their fair values at December 31, 2015 and 2014.
During the year ended December 31, 2015, $131.2 million of investments, consisting primarily of corporate securities acquired from Montpelier, were transferred into Level 3 as no observable inputs were available, and $12.4 million of primarily collateralized loan and debt obligations, asset-backed and commercial mortgage-backed securities were transferred out of Level 3 to Level 2 during the year as market activity for these securities increased and observable inputs became available. During the year ended December 31, 2015, $11.8 million of U.S. government and agencies securities were transferred from Level 1 to Level 2 as they no longer qualified as on the run U.S. treasury securities.
The Company's weather curves are determined by taking the average payouts for each transaction within its portfolio utilizing detrended historical weather measurements. The Company's commodity curves are determined using historical market data scaled to currently observed market prices. The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information.
If a trade has one or more significant valuation input that is unobservable, such trade is initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the initial valuation, the Company updates market observable inputs to reflect observable market changes. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.
(1) Represents the fair value of Montpelier's reserve for losses and loss expenses and reinsurance recoverable acquired at July 31, 2015.
During the year ended December 31, 2015, the Company recorded ceded losses of $833.7 million (2014 - $575.7 million; 2013 - $683.2 million). The balance of reinsurance recoverable on paid and unpaid losses at December 31, 2015 and 2014 was distributed as follows based on the ratings of the reinsurers:
At December 31, 2015 and 2014, the Company held collateral of $321.5 million and $199.7 million, respectively, related to its ceded reinsurance agreements.
On April 19, 2012, the Company and certain designated subsidiaries of the Company entered into a $700.0 million four-year revolving credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent (the "Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $1,175.0 million amended and restated credit agreement dated May 8, 2007 with JPMorgan as administrative agent. As of December 31, 2015 and 2014, there were no borrowings under the Credit Facility and letters of credit outstanding under the Credit Facility were $329.9 million and $204.0 million, respectively.
The Credit Facility consists of two tranches: (i) tranche 1 collateralized credit facility in an aggregate principal amount of $560.0 million (the "Tranche 1 Facility"), which is collateralized on a several basis by the respective entity incurring such obligation by cash and securities deposited into collateral accounts from time to time with Deutsche Bank Trust Company Americas and (ii) tranche 2 facility, which is not collateralized, in an aggregate principal amount of $140.0 million (the "Tranche 2 Facility"). The proceeds of the Credit Facility may be used for general corporate purposes, to finance potential acquisitions and for the repurchase of the Company's outstanding publicly or privately issued securities. So long as the Company is not in default under the terms of the Credit Facility, the Company may request that the size of the Credit Facility be increased by $350.0 million, provided that no participating lender is obligated to increase its commitments under the Credit Facility.
For letters of credit issued on a collateralized basis under the Tranche 1 Facility, the Company is required to pay a fee of 0.45% on the daily stated amount of such letters of credit. For letters of credit issued on an uncollateralized basis under the Tranche 2 Facility, the Company is required to pay a fee ranging from 1.125% to 1.750% over LIBOR on the daily stated amount of such letters of credit based upon the Company's debt ratings as issued by Moody's or S&P. The interest rate for revolving loans under the Tranche 2 Facility is (a) the highest of (i) 0.5% in excess of the federal funds effective rate, (ii) the prime rate as announced by JP Morgan, and (iii) the Eurodollar rate applicable for an interest period of one month plus 1%, plus a margin ranging from 0.125% to 0.750% depending upon the type of loan and the Company's ratings as issued by Moody's and S&P, or (b) LIBOR plus a margin ranging from 1.125% to 1.750%. In addition, the Credit Facility required the Company to pay to the lenders a commitment fee.
The Company is party to certain uncommitted letter of credit reimbursement agreements ("LOC Agreements") that allow for the issuance of letters of credit in a variety of currencies, including U.S. dollars. The fees paid under the LOC Agreements depend on the amount of the outstanding letters of credit and vary from 0.30% to 0.45% on the principal amount of letters of credit outstanding to a fee negotiated at the time of issuance of the individual letters of credit. The total amount of letters of credit outstanding under the LOC Agreements at December 31, 2015 was $11.7 million (December 31, 2014 - $5.9 million).
The Company has issued $335.0 million principal amount of 7% Senior Notes due July 15, 2034 (the "7% Senior Notes"). The 7% Senior Notes are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings' existing and future unsecured and unsubordinated debt. The 7% Senior Notes are also effectively junior to claims of creditors of Endurance Holdings' subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
The Company issued $200.0 million principal amount of 6.15% Senior Notes due 2015 (the "6.15% Senior Notes"). The 6.15% Senior Notes were senior unsecured obligations of Endurance Holdings and ranked equally with all of Endurance Holdings' existing and future unsecured and unsubordinated debt. The 6.15% Senior Notes also were effectively junior to claims of creditors of Endurance Holdings' subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities. The 6.15% Senior Notes matured on October 15, 2015 and were repaid by the Company on that date.
Upon closing of the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and The Bank of New York Mellon, as trustee, entered into a Fourth Supplemental Indenture, dated as of July 31, 2015 (the "Fourth Supplemental Indenture"). The Fourth Supplemental Indenture amended the Indenture, dated as of July 15, 2003 (as amended and supplemented from time to time (collectively, the "Senior Notes Supplemental Indentures")) applicable to the 4.7% Senior Unsecured Notes Due 2022 (the "4.7% Senior Notes") originally issued by Montpelier on October 2, 2012 in an aggregate principal amount of $300.0 million. The Senior Notes Supplemental Indentures provided for the unconditional assumption of the due and punctual payment of the principal of, any premium and interest on and any additional amounts with respect to the 4.7% Senior Notes and the performance of every obligation in the Senior Notes Indenture and the 4.7% Senior Notes to be performed or observed. The 4.7% Senior Notes bear a rate of interest equal to 4.7% per annum, payable semi-annually in arrears on April 15 and October 15 each year. The 4.7% Senior Notes mature on October 15, 2022. The 4.7% Senior Notes do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere but do contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the 4.7% Senior Notes as of December 31, 2015.
Upon closing the acquisition of Montpelier, Montpelier, as issuer, Endurance Holdings, as parent guarantor, and Wilmington Trust Company, as trustee, entered into the Second Supplemental Indenture, dated as of July 31, 2015 (the "Second Supplemental Indenture"). The Second Supplemental Indenture amended the Junior Subordinated Indenture, dated as of January 6, 2006 (as amended and supplemented from time to time (collectively, the "Junior Subordinated Supplemental Indentures")). The Junior Subordinated Supplemental Indentures provided for the express assumption by Endurance Holdings of the due and punctual payment of the principal of and any premium and interest (including any additional interest) on all of the Trust Preferred Securities and the performance of every covenant of the Junior Subordinated Indenture on the part of Montpelier to be performed or observed. Montpelier originally issued the Trust Preferred Securities in January 2006 in an aggregate principal amount of $100.0 million. The Trust Preferred Securities mature on March 30, 2036 and bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. The Trust Preferred Securities may be redeemed at the option of the issuer prior to maturity at a redemption price equal to 100% of the principal amount thereof plus accrued interest, provided that the issuer has received the prior approval of any applicable insurance regulatory authority with respect to such redemption, if required. The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.
Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCRH 364-day unsecured credit agreement (the "BCRH Credit Agreement"), which permits BCRH to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company is entitled to receive an annual guarantee fee from BCRH equal to 0.125% of the facility's total capacity.
As of December 31, 2015, BCRH had $13.0 million outstanding borrowings under the BCRH Credit Agreement. With respect to BCRH's outstanding borrowings at December 31, 2015, $4.0 million was repaid on February 2, 2016 and was subject to an annual interest rate of 1.33%, $5.0 million was repaid February 22, 2016 and was subject to an annual interest rate of 1.48%, and $4.0 million must be repaid or extended, in the form of a new borrowing, no later than March 11, 2016 and is subject to an annual interest rate of 1.51%.
Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCGR 364-day unsecured credit agreement (the "BCGR Credit Agreement"), which permits BCGR to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company is entitled to receive an annual guarantee fee from BCGR equal to 0.125% of the facility's total capacity.
The Company regularly transacts in certain derivative-based weather risk management products primarily to address weather and energy risks on behalf of third parties. The markets for these derivatives are generally linked to energy and agriculture commodities, weather and other natural phenomena. Generally, the Company's current portfolio of such derivative contracts is of short duration and such contracts are predominantly seasonal in nature. The Company also invests a portion of its investments with third party investment managers with investment guidelines that permit the use of derivative instruments. The Company may enter derivative transactions directly or as part of strategies employed by its external investment managers.
LIBOR Swap - to establish future net cash flows in connection with the Trust Preferred Securities for the 5-year period beginning March 30, 2012 as if these securities bore interest at a fixed rate of 4.905%. See Note 8, Debt and financing arrangements.
Loss Development Cover - as part of the sale of Montpelier U.S. Insurance Company ("MUSIC") to Selective Insurance Group, Inc. ("Selective"), Montpelier Reinsurance Ltd. ("Montpelier Re", now Endurance Bermuda) entered into a loss development cover with MUSIC which ensures that MUSIC's reserve for losses and loss expenses relating to retained business written on or prior to December 31, 2011 remains adequate. Under the loss development cover, any future adverse development associated with such retained reserves will be protected by Endurance Bermuda and any future favorable development associated with such retained reserves will benefit Endurance Bermuda.
The fair values and the related notional values of derivatives at December 31, 2015 and 2014 are noted below.
At December 31, 2015, derivative assets of $68.9 million (December 31, 2014 - $99.5 million) and liabilities of $46.1 million (December 31, 2014 - $54.3 million) were subject to master netting agreements, which provide for the ability to settle the derivative asset and liability with each counterparty on a net basis. Interest rate futures are not subject to master netting agreements. At December 31, 2015 and 2014, the Company's derivative instruments were recorded on a gross basis in the Consolidated Balance Sheets.
Management measures Insurance and Reinsurance segment results on the basis of the combined ratio, which is obtained by dividing the sum of the net losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by segments are allocated directly. Remaining general and administrative expenses not incurred by the segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the business segment to which they apply.
The underwriting results of Montpelier are included in the Company's segment results from August 1, 2015.
The following table provides a summary of the segment revenues and results for the year ended December 31, 2013, reserve for losses and loss expenses as of December 31, 2013 and the carrying value of goodwill as of December 31, 2013:
The following table provides gross premiums written by line of business for the years ended December 31, 2015, 2014 and 2013:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2015 and 2014:
(1) For additional information on the intangible assets acquired during 2015, see Note 3, Acquisition of Montpelier.
For the year ended December 31, 2015, a valuation analysis was performed to determine the fair value of the Company's intangible assets with indefinite lives which showed that none of the Company's intangible assets were impaired. For the year ended December 31, 2014, certain of the Company's U.S. insurance licenses, which are included in the Company's Insurance segment, were determined to be impaired and an impairment of $5.5 million was recognized in net realized and unrealized gains line item in the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2014. The determination of this impairment was a result of an evaluation of recent sales prices for companies with similar insurance licenses, which indicated that the prices for excess and surplus lines licenses are lower due to the passage of Dodd-Frank legislation that has standardized and simplified the process to obtain excess and surplus lines licenses, resulting in a lower value for these licenses.
During the fourth quarter of 2015, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment testing date from December 31st to October 1st. This voluntary change does not represent a material change to the Company's method of applying current accounting guidance and is preferable as it better aligns with the Company's strategic planning and forecasting process. This change will not delay, accelerate or avoid any impairment charge. This change was not applied retrospectively as it is impracticable to do so, as retrospective application would require the application of significant estimates and assumptions. It would be difficult to avoid applying hindsight and objectively determine assumptions. Therefore, the change was applied prospectively. No impairment of the Company's goodwill asset was noted following the annual impairment reviews during the years ended December 31, 2015 and 2014. The Company expects the amortization of the intangible assets with finite lives to approximate $85.5 million in 2016, $64.4 million in 2017, $38.0 million in 2018, $27.7 million in 2019, $22.9 million in 2020 and $74.5 million in all years thereafter.
Concentrations of credit risk. The areas where significant concentrations of credit risk may exist include reinsurance recoverables, investments and cash and cash equivalents. The Company's reinsurance recoverables on paid and unpaid losses at December 31, 2015 and 2014 amounted to $1,196.0 million and $889.1 million, respectively, and resulted from reinsurance arrangements entered into in the normal course of operations. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of cash, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. As of December 31, 2015, $941.5 million of reinsurance recoverable on paid and
The Company's investment guidelines limit the amount of credit exposure to any one issuer other than the U.S. Treasury and certain other foreign government obligations rated AAA.
Investment commitments. As of December 31, 2015 and 2014, the Company had pledged cash and cash equivalents and fixed maturity investments of $108.9 million and $130.6 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2015 and 2014, the Company had also pledged $383.3 million and $240.0 million of its cash and fixed maturity investments as required to meet collateral obligations for $341.6 million and $209.9 million in secured letters of credit outstanding under its credit facilities, respectively. In addition, at December 31, 2015 and 2014, cash and fixed maturity investments with fair values of $208.3 million and $205.2 million were on deposit with U.S. state regulators, respectively.
Investment assets held in trust. Blue Water Re and Blue Water Re II do not operate with a financial strength rating and, instead, fully collateralizes their reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Water Re and Blue Water Re II (the "Blue Water Trusts") for the benefit of ceding companies. As of December 31, 2015, the fair value of assets held in the Blue Water Trusts was $438.9 million, which met the minimum values required on that date.
As of December 31, 2015, Blue Capital Re had pledged $195.3 million of its cash and cash equivalents to trust accounts established for the benefit of Blue Water Re.
Blue Capital Re ILS fully collateralizes its insurance-linked security obligations through cash and cash equivalents held in trust funds established by Blue Capital Re ILS (the "Blue Capital Re ILS Trusts") for the benefit of third parties. As of December 31, 2015, the fair value of assets held in the Blue Capital Re ILS Trusts was $5.2 million, which met the minimum value required on that date.
During 2015, Endurance Bermuda established a multi-beneficiary reinsurance trust (the "Endurance Reinsurance Trust") domiciled in Delaware. The Endurance Reinsurance Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants. As of December 31, 2015, the fair value of the assets held in the Endurance Reinsurance Trust exceeded $94.1 million, the minimum value required on that date.
Endurance Bermuda is party to a multi-beneficiary Reinsurance Trust originally established by Montpelier Re (the "Montpelier Reinsurance Trust") domiciled in New York. The Montpelier Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re's U.S. cedants. Endurance Bermuda is also party to a multi-beneficiary reinsurance trust originally established by Montpelier Re (the "FL Trust") in connection with a reduction in its Florida collateral requirements. With the consent of the New York Department of Financial Services, all assets in excess of the statutory minimum required amounts in the Montpelier Reinsurance Trust and the FL Trust were transferred to the Endurance Reinsurance Trust upon the merger of Montpelier Re with and into Endurance Bermuda, with Endurance Bermuda as the surviving entity, on December 29, 2015.
As of December 31, 2015, the fair value of assets held in the Montpelier Reinsurance Trust was $20.0 million and the fair value of assets held in the FL Trust was $10.0 million, both of which exceeded the minimum values required on that date.
Premiums received by Syndicate 5151 are required to be received into the Lloyd's Premiums Trust Funds (the "Premiums Trust Funds"). Under the Premiums Trust Funds' deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time. As of December 31, 2015, the fair value of assets held in the Premiums Trust Funds was $231.9 million. The Company also held cash balances in Syndicate 5151 of $23.8 million.
The Company's investment assets held in trust appear on the Company's Consolidated Balance Sheets as cash and cash equivalents, fixed maturity investments and accrued investment income, as appropriate.
Lloyd's also imposes other charges on its members and the syndicates on which they participate, including an annual subscription charge (0.5% of written premiums with respect to 2015) and an overseas business charge, levied as a percentage of gross international premiums (defined as business outside the U.K. and the Channel Islands), with the percentage depending on the type of business written. Lloyd's also has power to impose additional charges under Lloyd's Powers of Charging Byelaw. The Company currently estimates that its 2015 obligation to Lloyd's for such charges will be approximately $1.0 million and accrues for this obligation ratably throughout the year on a quarterly basis.
Operating leases. The Company leases office space and office equipment under operating leases. Future minimum lease commitments at December 31, 2015 are as follows:
Total lease expense under operating leases for the year ended December 31, 2015 was $16.5 million (2014 - $14.7 million; 2013 - $14.7 million). Total sublease income included in total lease expense under operating leases for the year ended December 31, 2015 was $1.3 million (2014 - $1.3 million; 2013 - $0.8 million).
During 2015, the Company issued restricted shares under its equity compensation plans (Note 16, Stock-based employee compensation and other stock plans). The common shares issued, outstanding and fully paid for at December 31, 2015 includes 1,357,279 restricted shares.
On December 24, 2015, Endurance Holdings redeemed all 8,000,000 of its Series A Preferred Shares. The Series A Preferred shares were redeemed at a redemption price of $25.00 per share together with an amount equal to any dividends that were declared but not paid prior to December 24, 2015.
The Series B Preferred Shares and Series C Preferred shares are traded on the New York Stock Exchange. The Series B Preferred Shares and Series C Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after June 1, 2016 (in the case of the Series B Preferred Shares) and after December 15, 2020 (in the case of the Series C Preferred Shares) in each case at a redemption price of $25.00 per Series B Preferred Share and $25,000.00 per Series C Preferred Share (equivalent to $25.00 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series B Preferred Shares or Series C Preferred Shares before their respective redemption dates at a redemption price of $26.00 per Series B Preferred Share and $26,000.00 per Series C Preferred Share (equivalent to $26.00 per Depositary Share), plus any declared and unpaid dividends to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series B Preferred Shares or Series C Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction or change in Bermuda law.
In conjunction with the issuance by the Company of the Series A Preferred Shares, the Company entered into a "Declaration of Covenant" for the benefit of the holders of the 7% Senior Notes. The Covenant states that the Company will redeem its Series A Preferred Shares only if the total redemption price is less than or equal to the proceeds Endurance Holdings or its subsidiaries have received during the six months prior to the date of such redemption from the sale of certain qualifying securities that, among other things, are, with limited exceptions, pari passu with or junior to the Series A Preferred Shares upon the Company's liquidation, dissolution or winding-up; perpetual, or have a mandatory redemption or maturity date that is not less than sixty years after the initial issuance of such securities; and provide for dividends or other income distributions that are non-cumulative. The proceeds from the issuance of the Series C Preferred Shares met the requirements of the Declaration of Covenant and upon redemption of the Series A Preferred Shares, by its terms, the Declaration of Covenant was no longer available to the holders of the 7% Senior Notes.
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2015, 2014 and 2013:
Represents earnings and dividends attributable to holders of unvested restricted shares and restricted share units issued under the Company's stock compensation plans that are considered participating. In periods of loss, no losses are allocated to participating common shareholders (unvested restricted shares and restricted share units).
The following table sets forth dividends declared in the years ended December 31, 2015, 2014 and 2013, respectively:
Upon the acquisition of Montpelier, each Montpelier restricted share unit (including any restricted share units held by an executive officer or non-employee director) that was outstanding immediately prior to the completion of the acquisition of Montpelier subject solely to service-based vesting requirements (a "Montpelier Fixed RSU") was converted into a service-based restricted share unit under the 2007 Plan as amended, on the same terms and conditions as were applicable to such Montpelier Fixed RSU immediately prior to the completion of the acquisition of Montpelier. The number of service-based restricted share units granted was equal to the product of (i) 0.472, the exchange ratio in the Merger Agreement and (ii) the number of Montpelier common shares that were subject to such Montpelier Fixed RSU immediately prior to the completion of the acquisition.
On August 3, 2015, the Company registered 842,755 ordinary shares for issuance.
After the approval of the additional shares, a total of 5,763,104 ordinary shares were reserved for issuance. The Company issues new ordinary shares upon the issuance of share based equity incentives, such as restricted shares, or the exercise or settlement of outstanding derivative equity incentives, such as options or restricted share units. As of December 31, 2015, 2,463,798 (2014 - 1,738,370) ordinary shares remained available for issuance under the 2007 and prior Plans.
Prior to 2005, the Company issued stock options to employees and non-employee directors, with exercise prices equal to the fair market values of the Company's ordinary shares on the grant dates. Options generally vested at a rate of 20% per year over a five-year term. Option awards had a 10-year contractual life.
Commencing in March 2015, the Company issued performance-based restricted shares to certain of its senior executives under the 2007 Plan. The performance-based restricted shares represent the right to receive a specified number of ordinary shares in the future, based upon the achievement of pre-established performance criteria during the applicable performance period. Performance-based restricted shares granted to employees vest three years after the date of grant. The number of performance-based restricted shares that will ultimately vest is based upon the actual performance of the Company compared to the performance of a peer group of publicly-traded companies.
The fair value of the performance-based restricted shares is measured at the grant date using a Monte Carlo simulation based on pre-established targets relating to certain performance based measures achieved by the Company, with the associated expense recognized over the applicable performance and vesting period.
The 708,890 restricted shares awarded to Mr. Charman, as discussed above, will vest annually, in five equal tranches
commencing on May 28, 2013, subject to Mr. Charman’s continued employment, or in the event of certain terminations of
A summary of option activity, including options held by employees, during the year ended December 31, 2015 is presented below:
For the years ended December 31, 2015, 2014 and 2013, compensation costs recognized in earnings for all options totaled $1.6 million, $3.1 million and $4.5 million, respectively. There were unrecognized stock-based compensation expenses of $1.0 million related to unvested stock options at December 31, 2015 (2014 - $2.6 million). This expense is expected to be recognized in 2016 and 2017, with approximately 78.9% expected to be recognized during 2016.
During the years ended December 31, 2015, 2014 and 2013, the Company granted an aggregate of 546,253, 505,997 and 503,097 restricted shares and restricted share units under the 2007 Plan, and assumed 841,926 (2014 - nil and 2013 - nil), the converted outstanding Montpelier restricted share units, adjusted to represent the right to receive 0.472 of the Company's ordinary shares for each outstanding Montpelier restricted share unit rounded down to the next whole number of ordinary shares. As mentioned above, the Company also granted 708,890 restricted shares to Mr. Charman outside of the 2007 Plan on May, 28, 2013. The restricted shares and restricted share units granted had weighted average grant date fair values of $91.2 million, $26.7 million and $58.1 million in the years ended December 31, 2015, 2014 and 2013, respectively. During the years ended December 31, 2015, 2014 and 2013, the aggregate fair value of restricted shares and restricted share units that vested was $60.0 million, $18.7 million and $17.1 million, respectively.
On October 26, 2005, Endurance Holdings' shareholders approved the Employee Share Purchase Plan (the "2005 ESPP"). Following approval by the Company's shareholders in 2005, 200,000 of Endurance Holdings' ordinary shares were reserved for issuance under the 2005 ESPP. At a meeting on February 23, 2011, the Company's Board of Directors adopted a resolution to add 200,000 ordinary shares to the 2005 ESPP. The addition of 200,000 ordinary shares to the 2005 ESPP was approved by the Company's shareholders at the Annual General Meeting of Shareholders held on May 11, 2011. After approval of the additional ordinary shares, a total of 400,000 ordinary shares were reserved for issuance under the 2005 ESPP. The 2005 ESPP terminated in accordance with its terms on October 1, 2015. On February 26, 2015, the Compensation Committee of the Company's Board of Directors approved a new employee share purchase plan ("2015 ESPP"), which was approved by the Company's shareholders at its Annual General Meeting of Shareholders held on May 20, 2015. The Company ceased offering and issuing new shares under the 2005 ESPP on June 30, 2015 and began offering and issuing new shares under the 2015 ESPP after July 1, 2015. Following approval by the Company's shareholders in 2015, 300,000 of Endurance Holdings' ordinary shares were reserved for issuance under the 2015 ESPP.
Under the terms of the 2015 ESPP, employees of Endurance Holdings and certain of its subsidiaries may purchase Endurance Holdings' ordinary shares at a 15% discount to the closing market price on the purchase date. Participants are eligible to receive dividends on the shares purchased in the 2015 ESPP and are entitled to vote such shares at any Annual General or Special Meeting of Shareholders. These shares are restricted from sale, transfer or certification for one year from the purchase date.
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company's defined contribution plans, the Company makes contributions to its employees' accounts in amounts ranging from 4% to 12% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Company contributions for the year ended December 31, 2015 resulted in an expense of $13.8 million being recorded in earnings (2014 - $12.6 million; 2013 - $10.8 million).
Endurance Bermuda is a registered Class 4 insurer under the Insurance Act 1978 ("Bermuda Insurance Act") and related regulations as amended (the "Insurance Act"). Endurance Bermuda is required to maintain minimum solvency standards and to hold available statutory capital and surplus equal to or exceeding the Enhanced Capital Requirement as determined by the Bermuda Monetary Authority ("BMA") based upon a standard mathematical model that correlates the risk underwritten to the capital that is dedicated to the business. The required capital noted in the table above has been based on the Enhanced Capital Requirement. In addition to the Enhanced Capital Requirement, Endurance Bermuda is required to maintain a minimum statutory liquidity ratio and solvency margin. For all periods presented herein, Endurance Bermuda materially exceeded these minimum requirements.
Blue Water Re and Blue Water Re II are registered with the BMA as Special Purpose Insurers and are not subject to the BMA's Bermuda Solvency Capital Requirement ("BSCR"); however, the Bermuda Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by Blue Water Re and Blue Water Re II. There is no minimum solvency margin or liquidity ratio that must be maintained by Blue Water Re or Blue Water Re II so long as the value of their assets exceed the value of their liabilities. At December 31, 2015, Blue Water Re's assets exceeded the value of its liabilities by $269.6 million, and Blue Water Re II's assets exceeded the value of its liabilities by $212.5 million. Blue Water Re and Blue Water Re II did not declare or pay any dividends to their parent, BCML, during 2015.
The required and actual statutory capital amounts in the "U.K." category in the table above include amounts related to Endurance U.K. Under the jurisdiction of the United Kingdom's Prudential Regulation Authority ("PRA"), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. Insurers are required to calculate their required minimum solvency margin and to report it to the PRA. The PRA also mandates calculation of an Enhanced Capital Requirement for Endurance U.K. and provides Individual Capital Guidance as an additional risk based capital assessment. At December 31, 2015 and 2014, the actual capital for Endurance U.K. exceeded all of the capital requirements currently promulgated by the PRA.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2014, the United States Internal Revenue Service ("IRS") completed its audit of the income tax returns of the Company's U.S. subsidiaries for 2009, 2010 and 2011. The audit results were immaterial to the operations of the Company. During 2015, the IRS commenced an examination of the 2012 income tax return of Endurance Bermuda. In February 2016, the IRS commenced an examination of the 2013 income tax return of Endurance Bermuda. Although the timing and ultimate resolution of the IRS examinations is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations and cash flows. As of December 31, 2015, none of the Company's other operating subsidiaries or branch operations were under examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2009 through 2015.
Endurance Holdings and Endurance Bermuda are not required to pay any income or capital gains taxes in Bermuda. Endurance Bermuda has received written assurance dated May 16, 2011 and Endurance Holdings has received written assurance dated May 17, 2011 from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966 of Bermuda, as amended, that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not be applicable to the Company until March 31, 2035 provided that the assurance is subject to the condition that it will not prevent the application of any taxes payable by the Company in respect of real property or leasehold interests in Bermuda held by it. Endurance Holdings and Endurance Bermuda intend to operate in a manner such that they will owe no United States tax other than premium excise tax and withholding taxes on certain investments.
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following as of December 31, 2015 and 2014:
Net income tax payments for the years ended December 31, 2015 and 2014 totaled $2.4 million and $0.9 million, respectively. The Company received net income tax refunds totaling $8.4 million for the year ended December 31, 2013. Net operating loss carryforwards gross of tax in the amount of $155.4 million, $112.3 million, $49.9 million and $56.6 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States, the net operating loss carry forwards expire through 2016 and 2028, respectively.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2015, management has established a valuation allowance of $131.1 million (2014 - $121.4 million) against net deferred tax assets in the Company's United States subsidiaries, a United Kingdom subsidiary and non-U.S. branches.
As of December 31, 2015 and 2014, the Company had no uncertain tax positions.