We lease office space in Hamilton, Bermuda, where our principal executive office is located. We also lease office space in a number of U.S. states, the United Kingdom, Australia, Ireland, Switzerland, Canada, India, Singapore and several Continental European countries.
We renew and enter into new leases in the ordinary course of our business. We believe that this office space is sufficient for us to conduct our current operations for the foreseeable future, although in connection with future acquisitions from time to time, we may expand to different locations or increase space to support any such growth.
Results of Operations by Segment - for the Years Ended December 31, 2015, 2014, and 2013
While our core focus remains acquiring and managing non-life run-off business, in recent years, we expanded our business to include active underwriting through our acquisitions of Atrium and StarStone. We partnered with Trident in the Atrium and StarStone acquisitions, with Enstar owning a 59.0% interest, Trident owning a 39.3% interest, and Dowling owning a 1.7% interest. We also expanded our portfolio of run-off businesses to include closed life and annuities, primarily through our acquisition of Pavonia from HSBC Holdings plc on March 31, 2013.
Our strategies with respect to these new lines of business and our core non-life run-off business are discussed in "Item 1. Business - Company Overview", "- Business Strategy", and "- Recent Acquisitions and Significant New Business."
The growth of our fully diluted book value per share since becoming a public company is shown in the table below.
Our business strategy includes generating growth through acquisitions and reinsurance transactions, particularly in our Non-life Run-off segment. Our non-life run-off reserves were $4.6 billion as at December 31, 2015, an increase of $1.2 billion during 2015, and we continue to evaluate opportunities for future growth. Most recently, on February 17, 2016, we entered into an agreement to assume net reserves of $1.1 billion from Allianz SE ("Allianz"); we will also provide consulting services to Allianz on this portfolio of business. Our reserves for policyholder benefits in our life and annuities segment were $1.3 billion as at December 31, 2015, having recently acquired approximately $117.2 million of reserves through our purchase of Belgium-based Nationale Suisse Assurance S.A., which we renamed Alpha Insurance SA ("Alpha"). We will continue to employ a disciplined approach when assessing, acquiring or managing portfolios of risk.
Our underwriting results can be affected by changes in premium rates, significant losses, development of prior year loss reserves and current year underwriting margins. In general, our expectation for 2016 is that underwriting margins will be flat or lower than in 2015, with premium rates expected to be impacted by both market and general economic conditions. We continue to see overcapacity in many markets for insurable risks, resulting in continued pressure on premium rates and terms and conditions. If general economic conditions worsen, a decrease in the level of economic activity may impact insurable risks and our ability to write premium that is acceptable to us. We may adjust our level of reinsurance to maintain an amount of net exposure that is aligned with our risk tolerance.
Our strategy is to maintain our disciplined underwriting approach and strong risk management practices, which may result in us writing less premium in certain lines of business than we wrote in 2015. However, we will seek to mitigate these challenging conditions through our diversified book of business, established distribution channels and geographic reach. We will continue to seek growth in certain areas where we have identified opportunities for expansion and the opportunity for increases in premium rates. In addition, our underwriting operations are well-positioned to capture profitable active business from our run-off transactions, where such business is in attractive specialty lines. In both our Atrium and StarStone segments we will maintain our focus on underwriting for profitability. In our StarStone segment we aim to continue reducing our expense base and generating operational efficiencies through ongoing integration into Enstar's operations.
In Atrium’s other operating expense ratio, the excluded holding company general and administrative expenses relate to amortization of the definite-lived intangible assets. The excluded salaries and benefits expenses relate to AUL managing agency employee salaries, benefits, bonuses and current year share grant costs. The excluded AUL general and administrative expenses relate to expenses incurred in managing the syndicate, and eliminated items represent Atrium 5’s share of the fees and commissions paid to AUL. We believe it is a more meaningful presentation to exclude the costs in managing the syndicate because they are principally funded by the profit commission fees earned from Syndicate 609, which is a revenue item not included in the insurance ratios.
Net premiums earned of $839.1 million, including $573.1 million and $134.7 million in our StarStone and Atrium segments
Combined ratios of 98.6% and 81.5% for the active underwriting operations within our StarStone and Atrium segments, respectively (refer to "Non-GAAP Financial Measures" above)
Net investment income of $157.7 million, partially offset by net realized and unrealized losses of $41.3 million
Total gross reserves for losses and LAE of $5,720.1 million, with $1,515.0 million of reserves acquired and assumed in our non-life run-off operations during 2015
2015 versus 2014: We reported consolidated net earnings attributable to Enstar Group Limited shareholders of $220.3 million for the year ended December 31, 2015, an increase of $6.6 million from $213.7 million for the year ended December 31, 2014. Our results were impacted by our acquisition activity during 2015, when we acquired Sussex, Wilton Re’s life settlements business, and Alpha, and completed loss portfolio transfer reinsurance transactions with Reciprocal of America, Voya, and Sun Life. During 2014, our primary acquisition was StarStone. The most significant drivers of the change in our financial performance during 2015 as compared to 2014 included:
StarStone - Net earnings attributable to the StarStone segment were $13.7 million for the year ended December 31, 2015, as compared to a net loss of $10.6 million for the nine months we owned StarStone in 2014. We saw improvement in the underwriting profitability of StarStone, as well as a decrease in other operating expenses attributable to the continued execution of expense management initiatives;
StarStone - Net losses attributable to the StarStone segment in 2014 were impacted by general and administrative expenses relating to our management of StarStone, the amortization of definite-lived intangible assets and acquisition-related expenses.
The following is a discussion and analysis of the results of operations for our Non-life Run-off segment for the years ended December 31, 2015, 2014 and 2013, which are summarized below:
2014 versus 2013: Premiums written and earned in 2014 related primarily to StarStone’s run-off business whereas premiums written and earned in 2013 related to SeaBright.
2015 versus 2014: Our management companies in the Non-life Run-off segment earned fees and commission income of approximately $21.4 million and $19.3 million for the years ended December 31, 2015 and 2014, respectively. The increase in fees and commission income related primarily to management fees charged to our StarStone segment. These internal fees are eliminated upon consolidation of our results of operations. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group.
2014 versus 2013: Our management companies in the Non-life Run-off segment earned fees and commission income of approximately $19.3 million and $12.8 million for the years ended December 31, 2014 and 2013, respectively. The increase in fees and commission income related primarily to management fees charged to our StarStone segment.
2015 versus 2014: The net reduction in incurred losses and LAE for the year ended December 31, 2015 of $270.8 million included net incurred losses and LAE of $39.9 million related to current period net earned premium of $43.3 million (primarily for the portion of the run-off business acquired with Sussex). Excluding current period net incurred losses and LAE of $39.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $310.8 million, which was attributable to a reduction in estimates of net ultimate losses of $242.7 million, a reduction in provisions for bad debt of $25.3 million and a reduction in provisions for unallocated LAE of $62.7 million, relating to 2015 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.9 million.
The reduction in net IBNR reserves of $377.7 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 79 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2015, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $366.3 million for net paid losses of $501.2 million, related to the settlement of non-commuted losses in the year and 79 commutations and policy buy-backs of assumed and ceded exposures (including the partial commutation of one of our top ten ceded recoverables as at January 1, 2015). Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2015 amounted to $56.6 million (comprising $140.3 million of ceded incurred reinsurance recoverable case reserves partially offset by $83.7 million of assumed case reserves and LAE reserves).
The reduction in provisions for bad debt of $25.3 million was a result of the collection of certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods, and the reduction in bad debt
The reduction in estimates of net ultimate losses relating to prior periods of $235.8 million comprised reductions in IBNR reserves of $262.4 million partially offset by net incurred loss development of $26.6 million. The decrease in the estimate of net IBNR reserves of $262.4 million (compared to $265.2 million during the year ended December 31, 2013), was comprised of $59.4 million relating to asbestos liabilities (compared to $69.8 million in 2013), $6.2 million relating to environmental liabilities (compared to $4.9 million in 2013), $62.5 million relating to general casualty liabilities (compared to $42.6 million in 2013), $63.6 million relating to workers' compensation liabilities (compared to $42.1 million in 2013) and $70.7 million relating to all other remaining liabilities (compared to $105.8 million in 2013).
The reduction in provisions for bad debts of $7.7 million was a result of the collection of certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods.
an increase in stock compensation costs of approximately $3.3 million due to new equity-based awards made during the year to our employees. As we continue to grow our organization, we anticipate increased usage of equity-based awards in future years as a way of incentivizing our employees.
2014 versus 2013: Salaries and benefits for the Non-life-Run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $127.8 million and $117.1 million for the years ended December 31, 2014 and 2013, respectively. The principal changes in salaries and benefits were:
2015 versus 2014: General and administrative expenses for the Non-life-Run-off segment increased by $20.1 million, from $70.3 million in the year ended December 31, 2014 to $90.4 million in the year ended December 31, 2015. The increase in expenses in 2015 related primarily to:
2014 versus 2013: General and administrative expenses for the Non-life-Run-off segment increased by $2.3 million, from $68.0 million in the year ended December 31, 2013 to $70.3 million in the year ended December 31, 2014. The increase in expenses in 2014 related primarily to:
a decrease in bank charges of $6.2 million due to lower arrangement fees incurred on various loan and revolving credit facilities in 2014 as compared to 2013.
2015 versus 2014: We recorded net foreign exchange losses of $4.4 million and $8.0 million for the Non-life-Run-off segment for the years ended December 31, 2015 and 2014, respectively. The net foreign exchange losses for the years ended December 31, 2015 and 2014 arose primarily as a result of the holding of surplus Euro and British pound assets at a time when the U.S. dollar appreciated against these currencies. In addition to the net foreign exchange losses recorded in our consolidated statement of earnings, we recorded in our consolidated statement of comprehensive income currency translation adjustment losses, net of noncontrolling interest, related to our Non-life-Run-off segment of $5.9 million and $6.4 million for the years ended December 31, 2015 and 2014, respectively. For the years ended December 31, 2015 and 2014, the currency translation adjustments related primarily to our Australian-based subsidiaries whose functional currency is the Australian dollar.
2015 versus 2014: We recorded income tax expense (benefit) for our Non-life Run-off segment of $12.6 million and $(0.6) million for the years ended December 31, 2015 and 2014, respectively. The increase in income taxes of $13.2 million was due principally to a higher effective tax rate due to increased pre-tax net income recorded in our U.S. and U.K. based subsidiaries as compared to the prior year along with a decrease in the valuation allowance on our deferred tax assets. The effective tax rate was 8.3% for the year ended December 31, 2015 compared with (0.3)% for the year ended December 31, 2014. Income tax expense is primarily generated through our foreign operations outside of Bermuda, principally in the United States, the United Kingdom, Continental Europe and Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income before tax, is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with comparatively higher tax rates and those with comparatively lower income tax rates and as a result may fluctuate significantly from period to period.
2015 versus 2014: We recorded a noncontrolling interest in losses (earnings) of our Non-life Run-off segment of $33.7 million and $(9.8) million for the years ended December 31, 2015 and 2014, respectively. The increase in losses associated with the noncontrolling interests for the year ended December 31, 2015 was due primarily to the decrease in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest decreased from 7 as at December 31, 2014 to 2 as at December 31, 2015 due primarily to the repurchases made during the year as described in "Item 1. Business - Other Transactions."
2014 versus 2013: We recorded a noncontrolling interest in earnings of our Non-life-Run-off segment of $9.8 million and $12.1 million for the years ended December 31, 2014 and 2013, respectively. The decrease for the year ended December 31, 2014 was due primarily to the decrease in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest decreased from 8 as at December 31, 2013 to 7 as at December 31, 2014.
The Atrium segment includes Atrium 5 Ltd. ("Atrium 5"), Atrium Underwriters ("AUL"), Northshore Holdings Limited ("Holding Company"), and an allocation of financing costs ("Enstar Specific Expenses"). Atrium 5 results represent its proportionate share of the results of Syndicate 609 for which it provides 25% of the underwriting capacity and capital. AUL results largely represent fees charged to Syndicate 609 and a 20% profit commission on the results of the syndicate less salaries and general and administrative expenses incurred in managing the syndicate. AUL also includes other Atrium Group non-syndicate fee income and associated expenses. The Holding Company results include the amortization of intangible assets that were fair valued upon acquisition and Enstar Specific Expenses represent our acquisition financing costs.
(1) The 2013 results were not a full year: Atrium was acquired on November 25, 2013 and Arden was acquired on September 9, 2013.
(1) Refer to "Non-GAAP Financial Measures" for a description of how these ratios are calculated. The ratios are based upon the following amounts for Atrium 5, which exclude amounts for AUL and the Holding Company, for the years ended December 31, 2015 and 2014, respectively: net premiums earned of $134,675 and $135,945, net incurred losses and LAE of $45,016 and $54,734, acquisition costs of $46,351 and $43,417, and other operating expenses of $18,499 and $17,569.
The increase in the AUL result from $3.2 million in 2014 to $8.1 million in 2015 reflects increased profit commission earned from the results of Syndicate 609, as well as a decrease in salaries and benefits.
Holding Company and Enstar Specific Expenses were relatively consistent from 2014 to 2015.
See below for a discussion of the drivers of the decrease in net premiums earned for the year ended December 31, 2015 as compared with the year ended December 31, 2014, which also explain the decrease in gross premium written for the same periods.
2015 versus 2014: Net premiums earned for the Atrium segment were $134.7 million and $135.9 million for the years ended December 31, 2015 and 2014, respectively. Net premiums earned for the 2015 year reflect the execution of Atrium’s underwriting strategies combined with the impact of softened market conditions across the industry. Market conditions particularly impacted the upstream energy line, although this was partially offset by the increase in the property and casualty binding authorities line, which reflects the continued success of the AU Gold underwriting platform. The increase in the reinsurance line reflects the commencement of marine excess-of-loss underwriting during 2015.
2014 versus 2013: Salaries and benefits for the Atrium segment were $20.1 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. For the year ended December 31, 2014, the total of $20.1 million was comprised of salaries and benefits of $7.5 million, total current and prior year related share grant costs of $5.2 million and discretionary bonus of approximately $7.4 million. The increase in 2014 as compared to 2013 was due to us owning Atrium for a full year in 2014.
2014 versus 2013: General and administrative expenses for the Atrium segment were $14.8 million and $2.7 million for the years ended December 31, 2014 and 2013, respectively. 2014 expenses were comprised of $12.6 million related to AUL’s direct expenses and Atrium’s share of the syndicate expenses for the year ended December 31, 2014. In addition, expenses of $2.2 million for the year ended December 31, 2014 related to the amortization of the definite-lived intangible assets in the Holding Company. The increase in 2014 as compared to 2013 was due to us owning Atrium for a full year in 2014.
2015 versus 2014: Income tax expense was $6.0 million and $5.1 million for the years ended December 31, 2015 and 2014, respectively. Income tax expense is associated with the operations of Atrium 5 and AUL in the United Kingdom. The effective tax rates for the years ended December 31, 2015 and 2014 were relatively consistent at 20% and 22%, respectively.
The following is a discussion and analysis of the results of operations for the StarStone segment for the year ended December 31, 2015 and for the nine-month period from the date of acquisition of StarStone to December 31, 2014, which are summarized below.
(1) The 2014 results were not a full year: StarStone was acquired on April 1, 2014.
(1) StarStone's net earnings before noncontrolling interest were $20.8 million and $2.6 million for the year and nine months ended December 31, 2015 and 2014, respectively.
In evaluating the underwriting performance of the StarStone segment, we consider the insurance ratios of StarStone, which is the active underwriting component of the segment and excludes the Holding Company. StarStone's insurance ratios are shown below. Because we only owned Starstone for nine months during 2014 as compared to a full year in 2015, ratios provide additional information in describing StarStone's performance in these periods.
The Holding Company result in 2014 was impacted by general and administrative expenses relating to our management of StarStone and the amortization of definite-lived intangible assets.
The following table provides gross premiums written by line of business for the StarStone segment for the year ended December 31, 2015 and for the nine months ended December 31, 2014:
The following table provides net premiums earned by line of business for the StarStone segment for the year ended December 31, 2015 and for the nine months ended December 31, 2014:
2015 versus 2014: Net premiums earned for the StarStone segment for the year ended December 31, 2015 increased from 2014 by $199.5 million to $573.1 million. The lines of business driving the increase were workers' compensation, casualty and marine. Net premiums earned for 2014 were for nine months only.
2015 versus 2014: General and administrative expenses for the year and nine-month period ended December 31, 2015 and 2014 were $57.7 million and $57.5 million, respectively. The 2015 amount reflects the realization of savings from our ongoing expense management initiatives, partially offset by non-recurring costs incurred to close our operations in India, along with restructuring costs in the United Kingdom and Europe. Our expense management initiatives contributing to a decrease in general and administrative expenses included reducing the number of employees and contractors.
For our Life and Annuities segment, although we no longer write new business, the strategy differs from the non-life run-off business, in particular because we have limited ability to shorten the duration of the liabilities in this business through either early claims settlement, commutations or policy buy-backs. Instead, we will hold the policies associated with the life and annuities business to their natural maturity or lapse and will pay claims as they fall due.
Net earnings were $16.9 million and $10.6 million for the years ended December 31, 2015 and 2014, respectively, an increase of $6.3 million. During 2015, we acquired life settlements business from Wilton Re that contributed $16.5 million to net earnings, which was comprised of net investment income of $20.4 million from policy maturity events, offset by expenses of $3.9 million. Excluding the impact of the life settlements business we acquired, net earnings for 2015 compared to 2014 decreased by $10.3 million. This was primarily due to a decrease of $12.9 million in net realized and unrealized gains (losses) on investments. Investment results are separately discussed below in "Investments." We acquired Alpha on November 13, 2015, although it did not contribute significantly to our results because the transaction closed late in the year.
The majority of the term life business consists of term life insurance products directly written by Pavonia. These products offered term life coverage in exchange for a fixed, level premium that is guaranteed for the level term period; either 10, 15, 20, or 30 years. Upon expiration of the level term period, the policyholder can elect to continue coverage through age 95 subject to increased premium rates up to contractually guaranteed rates. These factors impact how premiums run off over time. Over the next 10 years, we expect approximately 60% of policies to reach the end of the level term period.
Credit life and disability premiums are collected monthly in connection with insurance coverage provided on revolving loan balance and real estate secured loans issued in the United States and Canada. Premiums are either fixed amounts determined at the time of issue or are linked to the outstanding balance of the loan and vary each month.
2015 versus 2014: Life and annuity policy benefits were $96.9 million and $108.0 million for the years ended December 31, 2015 and 2014, respectively. The decrease of $11.1 million is consistent with the run-off of policyholders in both the annuity and life business.
Life and disability policy benefits during the year ended December 31, 2015 were $56.1 million, comprised of benefits paid of $80.6 million, partially offset by a reduction in reserves of $24.4 million. Life and disability policy benefits during the year ended December 31, 2014 were $67.8 million, comprised of benefits paid of $101.6 million, partially offset by a reduction in reserves of $33.8 million. The decrease in life and disability policy benefits of $11.7 million from 2014 to 2015 was primarily as a result of a decrease in premiums earned, as well as the cancellation of certain credit products.
2015 versus 2014: Acquisition costs for the years ended December 31, 2015 and 2014 were $13.7 million and $15.0 million, respectively. In 2015, the commissions on credit business were lower by $3.2 million, partially offset by $2.3 million of ceding commissions incurred related to a contractual re-pricing of a block of term life business.
2014 versus 2013: Acquisition costs for the years ended December 31, 2014 and 2013 were $15.0 million and $8.8 million, respectively. The 2014 period included a full year whereas the 2013 period included nine months from the acquisition of Pavonia.
We define invested assets as the sum of total investments, cash and cash equivalents and restricted cash and cash equivalents. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities and other investments. Cash and cash equivalents and restricted cash and cash equivalents is comprised mainly of cash, high-grade fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds.
Invested assets were $8.8 billion as at December 31, 2015 as compared to $7.5 billion as at December 31, 2014, an increase of 17.2%. The increase in invested assets resulted principally from the completion of acquisitions and significant new business acquired during the year.
In the Non-life Run-off, Atrium and StarStone segments, we maintain a relatively short-duration investment portfolio in order to provide liquidity for the settlement of losses and, where possible, to avoid having to liquidate longer-dated investments. In the Non-life Run-off segment, the commutations of liabilities also have the potential to accelerate the natural payout of losses, which requires liquidity. Our fixed maturity securities include U.S. government and agency investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including private equity funds, fixed income funds, fixed income and multi-strategy hedge funds, equity funds, real estate debt funds, CLO equities and CLO equity funds.
Consolidated Statements of Earnings for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013
We have audited the accompanying consolidated balance sheets of Enstar Group Limited and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedules I, II, III, IV, and VI as of December 31, 2015 and 2014, and for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements and financial statement Schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement Schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enstar Group Limited and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement Schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Life and Annuities - This segment comprises our subsidiaries managing our closed-blocks of life and annuity business and our life settlements business.
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale or held-to-maturity, and impairments on goodwill, intangible assets and deferred charges;
Non-life premiums written are earned on a pro-rata basis over the period the coverage is provided. Reinsurance premiums are recorded at the inception of the policy, are based upon contractual terms and for certain business are estimated based on underlying contracts or from information provided by insureds and/or brokers. Changes in reinsurance premium estimates are expected and may result in adjustments in future periods. Any subsequent differences arising on such estimates are recorded as premiums written in the period in which they are determined.
Our insurance and reinsurance subsidiaries also establish provisions for LAE relating to run-off costs for the estimated duration of the run-off, which are included in losses and LAE. These provisions are assessed at each reporting date, and provisions relating to future periods are adjusted to reflect any changes in estimates of the periodic run-off costs or the duration of the run-off, including the impact of any acceleration of the run-off period that may be caused by commutations. Provisions relating to the current period together with any adjustment to future run-off provisions are included in net reduction in ultimate loss and LAE in the consolidated statements of earnings.
Our reinsurance balances recoverable are presented net of a provision for uncollectible amounts, reflecting the amount deemed not collectible due to credit quality, collection problems due to the location of the reinsurer, contractual disputes with reinsurers over individual contentious claims, contract language or coverage issues.
Short-term and fixed maturity investments classified as held-to-maturity securities, which are securities that we have the positive intent and ability to hold to maturity, are carried at amortized cost adjusted for the amortization of premiums and accretion of discounts.
The costs of short-term and fixed maturity investments are adjusted for amortization of premium or discount, recognized using the effective yield method and included in net investment income. For mortgage-backed and asset-backed investments, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised on a regular basis.
Fixed maturity investments classified as available-for-sale and held-to-maturity are reviewed quarterly to determine if they have sustained an impairment of value that is, based on our judgment, considered to be other than temporary. The process includes reviewing each fixed maturity investment that is below cost and: (1) determining if we have the intent to sell the fixed maturity investment; (2) determining if it is more likely than not that we will be required to sell the fixed maturity investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, whether we expect that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the amortized cost basis of the investment.
Other investments include investments in limited partnerships and limited liability companies (collectively "private equities") and fixed income funds, hedge funds, equity funds, real estate debt funds and collateralized loan obligation ("CLO") equity funds that carry their investments at fair value, as well as direct investments in CLO equities. These other investments are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator. Many of our fund investments publish net asset values on a daily basis and provide daily liquidity; others report on a monthly basis. Private equities typically report quarterly. The change in fair value is included in net realized and unrealized gains and losses on investments and recognized in net earnings.
The investments are subject to quarterly impairment review on a contract-by-contract basis. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements are not sufficient to recover the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired contracts are written down to their estimated fair value, which is determined on a discounted cash flow basis using current market longevity assumptions and market yields, with any impairment charges included within net realized and unrealized (losses) gains.
Fixed fee income is recognized in accordance with the terms of our third-party management agreements. Time-based fees are recognized as services are provided. Success-based fees are recognized when all of the contractual requirements specified in the agreement are met. Profit commissions earned from managed Lloyd's syndicates are recorded on an accrual basis.
Intangible assets represent the fair value adjustments related to unpaid losses and LAE, reinsurance balances recoverable and policy benefits for life and annuity contracts along with the intangible assets arising from the acquisitions of Atrium and StarStone. Definite-lived intangible assets are amortized over their useful lives. Amortization of intangible
assets is recognized in the consolidated statement of earnings. Indefinite-lived intangible assets are not subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment at least annually. Impairment is recognized if the carrying values of the intangible assets are not recoverable from their undiscounted cash flows and are measured as the difference between the carrying value and the fair value.
Retroactive reinsurance policies provide indemnification of losses and LAE with respect to past loss events. At the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received. Deferred charges, recorded in other assets, are amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE. Deferred charges amortization is adjusted at each reporting period to reflect new estimates of the amount and timing of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses may have an effect on the unamortized deferred charges and the amount of periodic amortization.
In connection with the acquisitions of Arden, Atrium and StarStone, certain subsidiaries issued shares to noncontrolling interests. These shares provide certain redemption rights to the holders, which may be settled in our own shares or cash, at our option. Redeemable noncontrolling interest with redemption features that are not solely within our control are classified within temporary equity in the consolidated balance sheets and carried at the redemption value, which is fair value. Change in the fair value exceeding the carrying value is recognized through retained earnings as if the balance sheet date were also the redemption date.
There were no new accounting standards adopted during 2015 that impacted our consolidated financial statements and disclosures.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. Under the new guidance, an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In May 2015, the FASB issued ASU No. 2015-09, which makes targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts. The ASU requires enhanced disclosures, on an annual basis, related to the reserve for losses and loss expenses which include (1) net incurred and paid claims development information by accident year, (2) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the reserve for losses and LAE, (3) for each accident year presented of incurred claims development, information about claim frequency (unless impracticable), and the amounts of IBNR liabilities, including expected development on reported claims, included in the reserve for losses and LAE, (4) a description of, and any significant changes to the methods for determining both IBNR and expected development on reported claims, and (5) for each accident year presented of incurred claims development, quantitative information about claims frequency, as well as a description of methodologies used for determining claim frequency information. The ASU is effective for annual periods beginning after December 15, 2015. We expect this guidance to have an impact on our disclosures, but we do not expect it will have a material impact on our consolidated financial statements.
ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value or its Equivalent
In February 2015, the FASB issued ASU 2015-02, which requires entities to evaluate whether they should consolidate certain legal entities. The new consolidation guidance changes the way entities evaluate whether (1) they should consolidate limited partnerships and similar entities; (2) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (3) variable interests in a VIE held by related parties of the registrant require the registrant to consolidate the VIE. The new guidance also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which decision making rights are conveyed through a contractual arrangement. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
On November 13, 2015, we completed the acquisition of Nationale Suisse Assurance S.A. ("NSA"). We changed the name of NSA to Alpha Insurance SA ("Alpha") at closing and placed the company into run-off. Alpha is a Belgium-based composite insurance company that wrote both non-life and life insurance that we are now operating as part of our non-life run-off and life and annuities businesses, respectively.
Canada Pension Plan Investment Board ("CPPIB"), together with management of Wilton Re, owns 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re, CPPIB separately acquired certain of our voting and non-voting ordinary shares pursuant to the CPPIB-First Reserve Transaction, as described in "Note 19 - Related Party Transactions."
The total consideration for the transaction was $218.0 million, which was financed 50% through borrowings under a Term Facility Agreement with two financial institutions (the "Sussex Facility") and 50% from cash on hand.
The purchase price was allocated to the acquired assets and liabilities of Sussex based on estimated fair values at the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.
The purchase price for StarStone was established in the amended and restated amalgamation agreement as $646.0 million, to be paid partly in cash and partly in our stock. The number of our shares to be issued was fixed at the signing of the amalgamation agreement on July 8, 2013 and was determined by reference to an agreed-upon value per share of $132.448, which was the average closing price of our voting ordinary shares, par value $1.00 per share (the "Voting Ordinary Shares"), over the 20 trading days prior to such signing date. On the day before closing of the amalgamation, the Voting Ordinary Shares had a closing price of $136.31 per share. At closing, we contributed cash of $41.6 million towards the purchase price and $3.6 million towards related transaction expenses, as well as 1,898,326 Voting Ordinary Shares and 714,015 shares of our Series B Convertible Participating Non-Voting Perpetual Preferred Stock (the "Non-Voting Preferred Shares"). Based on a price of $136.31 per share, our contribution of cash and shares to the purchase price totaled $397.7 million in the aggregate. Trident contributed cash of $258.4 million towards the purchase price and $2.4 million towards related transaction expenses. Based on a price of $136.31 per share, the aggregate purchase price paid by us and Trident was $656.1 million.
The net unearned premiums acquired included a decrease of $11.1 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at December 31, 2015, $10.6 million has been amortized to acquisition costs in the consolidated statements of earnings and comprehensive income. As at December 31, 2015, the remaining balance of the fair value adjustment was $0.5 million, which will be amortized to acquisition costs in 2016.
U.S. insurance licenses represent the intangible asset related to StarStone’s licenses and have been valued based on recent market transactions.
The operating results for StarStone have been included in the consolidated financial statements from the date of acquisition. The following pro forma condensed combined statement of earnings for the years ended December 31, 2014 and 2013 combines our historical consolidated statements of earnings with the historical consolidated statements of earnings of StarStone, giving effect to the business combinations and related transactions as if they had occurred on January 1, 2013 and 2014, as applicable. The unaudited pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of StarStone and related transactions had taken place at the beginning of each period presented, nor is it indicative of future results.
Prior to the sale of shares to Dowling, Kenmare and Trident owned 60% and 40% of StarStone Holdings and Northshore, respectively. Following the sale Kenmare, Trident and Dowling owned 59.0%, 39.3% and 1.7%, respectively, of StarStone Holdings and Northshore.
The purchase price for Atrium was $158.0 million. Kenmare’s portion of the purchase price was $94.8 million, and was financed by borrowings under our revolving credit facility.
The purchase price and net assets acquired at fair value were as follows:
The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.
Brand represents the intangible asset related to the Atrium name and was valued using the income approach.
On March 31, 2013, we completed the acquisition of all of the shares of Household Life Insurance Company of Delaware ("HLIC DE") and HSBC Insurance Company of Delaware ("HSBC DE") from Household Insurance Group Holding Company, a subsidiary of HSBC Holdings plc. HLIC DE and HSBC DE were both Delaware-domiciled insurers in run-off, and HLIC DE owned three other insurers domiciled in Michigan, New York, and Arizona, which were also in run-off (collectively, "the "Pavonia companies"). We subsequently restructured the acquired companies through internal mergers, following which we only have Pavonia companies domiciled in Michigan and New York. The aggregate cash purchase price was $155.6 million and was financed in part by a drawing of $55.7 million under our revolving credit facility. The Pavonia companies wrote various U.S. and Canadian life insurance, including credit life and disability insurance, term life insurance, assumed life reinsurance and annuities.
On February 7, 2013, we completed the acquisition of SeaBright Holdings Inc. ("SeaBright"). SeaBright owns SeaBright Insurance Company, an Illinois-domiciled insurer that is commercially domiciled in California, which wrote direct workers’ compensation business. The aggregate cash purchase price paid by us for all equity securities of SeaBright was approximately $252.1 million, which was funded in part with $111.0 million borrowed under a four-year term loan facility which we have since repaid.
Immediately following the acquisition, SeaBright was placed into run-off, and accordingly is no longer writing new insurance policies. Since its acquisition, SeaBright had renewed expiring insurance policies when it was obligated to do so by regulators, but has received approvals from all states relieving it of this obligation to renew any further policies.
The net unearned premiums acquired included a decrease of $14.4 million to adjust net unearned premiums to fair value. This fair value adjustment was included within unearned premiums on the December 31, 2013 consolidated balance sheet. This amount was fully amortized to acquisition costs in the consolidated statements of earnings during 2013.
On September 30, 2015, we entered into two 100% reinsurance agreements and a related administration services agreement with Sun Life pursuant to which we reinsured all of the run-off workers' compensation carve-out and occupational accident business of Sun Life. We assumed reinsurance reserves of $128.3 million, received total assets of $122.5 million and recorded a deferred charge of $5.8 million, included in other assets. We transferred approximately $30.6 million of additional funds into trust to further support our obligations under the reinsurance agreements. We provided limited parental guarantees, subject to an overall maximum of approximately $36.8 million.
Included within residential and commercial mortgage-backed securities as at December 31, 2015 were securities issued by U.S. governmental agencies with a fair value of $359.4 million (as at December 31, 2014: $263.4 million). Included within corporate securities as at December 31, 2015 were senior secured loans of $94.4 million (as at December 31, 2014: $33.5 million).
The contractual maturities of the our fixed maturity investments classified as held-to-maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The contractual maturities of our short-term and fixed maturity investments classified as available-for-sale are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
For the year ended December 31, 2015, we did not recognize any other-than-temporary impairment losses on either our available-for-sale or held-to-maturity securities. We determined that no credit losses existed as at December 31, 2015. A description of our other-than-temporary impairment process is included in Note 2 - "Significant Accounting Policies." There were no changes to our process during the year ended December 31, 2015.
The following table sets forth the credit ratings of our fixed maturity and short-term investments as of December 31, 2015:
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices. The funds have liquidity terms that vary from daily up to quarterly.
Equity funds invest in a diversified portfolio of international publicly-traded equity securities. The funds are eligible for bi-monthly redemption.
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories. These are not eligible for redemption.
Our other investments carried at cost of $133.1 million as of December 31, 2015 consist of life settlement contracts acquired during the year. Refer to Note 3 - "Acquisitions" for information about this transaction, and Note 2 - "Significant Accounting Policies" for a description of our accounting policies. In 2013 and 2014, we did not have an investment in life settlements. During the year ended December 31, 2015, net investment income included $20.1 million related to investments in life settlements. There were no impairment charges recognized during the period since acquisition. The following table presents further information regarding our investments in life settlements as of December 31, 2015.
Major categories of net investment income for the years ended December 31, 2015, 2014 and 2013 are summarized as follows:
(1) Our underwriting businesses include three Lloyd's syndicates. Lloyd's determines the required capital principally through the annual business plan of each syndicate. This capital is referred to as "Funds at Lloyd's" and will be drawn upon in the event that a syndicate has a loss that cannot be funded from other sources. As at December 31, 2015, our combined Funds at Lloyd's were comprised of cash and investments of $345.6 million and letters of credit supported by collateral of $37.0 million.
Fair value is defined as the price at which to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. We use a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The hierarchy is broken down into three levels as follows:
We have categorized our investments that are recorded at fair value on a recurring basis among levels based on the observability of inputs as follows:
The independent pricing services used by the investment accounting service providers, investment managers and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets. For determining the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and such other inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
The following describes the techniques generally used to determine the fair value of our fixed maturity investments by asset class.
U.S. government and agency securities consist of securities issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and other agencies. Non-U.S. government securities consist of bonds issued by non-U.S. governments and agencies along with supranational organizations. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades and broker-dealer quotes. These are considered to be observable market inputs and, therefore, the fair values of these securities are classified within Level 2.
For our investments in private equities and private equity funds, we measure fair value by obtaining the most recently provided capital statement from the external fund manager or third-party administrator. The capital statements calculate the net asset value on a fair value basis. Where we can identify publicly-traded companies held within a fund, we adjust the reported net asset value based on the latest share price as of our reporting date. We have classified our investments in private equities and private equity funds as Level 3, except for one private equity where the market price is observable, which we have categorized as Level 2.
For our investments in fixed income and multi-strategy hedge funds, we measure fair value by obtaining the most recently published net asset value as advised by the external fund manager or third-party administrator. The investments in the funds are classified as Level 3.
We measure the fair value of our direct investment in CLO equities based on valuations provided by our external CLO equity manager. If the investment does not involve an external CLO equity manager, the fair value of the investment is valued based on valuations provided by the broker or lead underwriter of the investment (the "broker"). Our CLO equity investments have been classified as Level 3 due to the use of unobservable inputs in the valuation and the limited number of relevant trades in secondary markets.
For our investments in the CLO equity funds, we measure fair value by obtaining the most recently published net asset value as advised by the external fund manager. We use an income approach to corroborate the reasonableness of reported net asset value. The CLO equity funds have been classified as Level 3 due to a lack of observable and relevant trades in secondary markets.
From time to time, we may utilize foreign currency forward contracts as part of our overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement. These derivatives are not designated as hedging investments.
The top ten external reinsurers, as at December 31, 2015 and 2014, were all rated A- or better, with the exception of three non-rated reinsurers from which $337.6 million was recoverable (December 31, 2014: $175.2 million recoverable from one reinsurer). For the three non-rated reinsurers, we hold security in the form of pledged assets in trust or letters of credit issued to us in the full amount of the recoverable. As at December 31, 2015, reinsurance balances recoverable of $165.6 million related to Lloyd’s syndicates and represented 10% or more of total reinsurance balances recoverable. Lloyd’s is rated ‘A+’ by Standard & Poor’s and ‘A’ by A.M. Best. As at December 31, 2014, reinsurance balances recoverable with a carrying value of $314.5 million were associated with two counterparties, each representing 10% or more of total reinsurance balances recoverable.
The liability for losses and LAE includes an amount determined from reported claims and an amount based on historical loss experience and industry statistics for IBNR using a variety of actuarial methods. Our loss reserves cover multiple lines of business, which include workers' compensation, general casualty, asbestos and environmental, marine, aviation and transit, construction defects and other non-life lines of business.
The tables below provide the net incurred losses and LAE in the Non-life Run-off, Atrium and StarStone segments for the years ended December 31, 2015, 2014 and 2013:
The reduction in net IBNR reserves of $262.4 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 98 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $285.8 million for net paid losses of $312.4 million related to the settlement of non-commuted losses in the year and 98 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of two of our top ten assumed exposures and two of our top ten ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2014 amounted to $29.1 million (comprising $99.5 million of assumed case reserves and LAE reserves partially offset by $70.4 million of ceded incurred reinsurance recoverable case reserves).
The reduction in estimates of net ultimate losses relating to prior periods of $215.5 million comprised reductions in net IBNR reserves of $265.2 million partially offset by net incurred loss development of $49.7 million. The decrease in the estimate of net IBNR reserves of $265.2 million (compared to $267.4 million during the year ended December 31, 2012) was comprised of $69.8 million relating to asbestos liabilities (compared to $36.4 million in 2012), $4.9 million relating to environmental liabilities (compared to $2.6 million in 2012), $42.6 million relating to general casualty liabilities (compared to $96.3 million in 2012), $42.1 million relating to workers' compensation liabilities (compared to $52.7 million in 2012) and $105.8 million relating to all other remaining liabilities (compared to $79.4 million in 2012).
The increase in provisions for bad debt of $2.0 million was a result of additional provisions being allowed for contractual disputes with reinsurers, offset by cash collections and commutations on certain reinsurance recoverables against which bad debt provisions had been provided in earlier periods.
In establishing the reserves for losses and LAE related to asbestos and environmental claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves have been established to cover additional exposures on both known and unreported claims. Estimates of the reserves are reviewed and updated continually. Developed case law and adequate claim history do not exist for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. In view of the changes in the legal and tort environment that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of our potential losses for these claims. There can be no assurance that the reserves established by us will be adequate or will not be adversely affected by the development of other latent exposures. The liability for unpaid losses and LAE as of December 31, 2015 and 2014 included $356.6 million and $389.1 million, respectively, which represented an estimate of the net ultimate liability for asbestos and environmental claims. The gross liability for such claims as at December 31, 2015 and 2014 was $390.8 million and $439.5 million, respectively.
We have entered into long duration contracts that subject us to mortality, longevity and morbidity risks and which are accounted for as life and annuity premiums earned. Life and annuity benefit reserves are established using assumptions for investment yields, mortality, morbidity, lapse and expenses, including a provision for adverse deviation. We establish and review our life and annuity reserves regularly based upon cash flow projections. We establish and maintain our life and annuity reinsurance reserves at a level that we estimate will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they become payable. Refer to Note 2 - "Significant Accounting Policies - (d) Policy Benefits for Life and Annuity Contracts" for a description of the assumptions used and the process for establishing our assumptions and estimates.
The increase in 2015 was attributable primarily to the acquisition of Alpha, as described in Note 3 - "Acquisitions."
The following tables provide a summary of net premiums written and earned in our Non-life Run-off, Atrium, StarStone and Life and Annuities segments for the years ended December 31, 2015, 2014 and 2013:
The following tables present a reconciliation of the beginning and ending goodwill, intangible assets and deferred charge for the years ended December 31, 2015 and 2014:
Goodwill as at December 31, 2015 and 2014, related to Non-life Run-off, Atrium and StarStone, was $21.2 million, $38.9 million and $13.0 million, respectively. For the year ended December 31, 2015, we completed our assessment for impairment of goodwill and concluded that there had been no impairment of our carried goodwill amount.
Intangible assets with a definite life - Other includes the distribution channel, Lloyd’s capacity, technology and brand related to our acquisitions of Atrium and StarStone. These assets are amortized on a straight-line basis over a period ranging from four to fifteen years. Intangible asset amortization for the years ended December 31, 2015, 2014 and 2013 was $12.2 million, $5.8 million and $21.2 million, respectively. Amortization for the year ended December 31, 2015 includes an impairment charge of $4.0 million for the Torus brand in relation to the StarStone rebranding exercise.
The gross carrying value, accumulated amortization and net carrying value of intangible assets by type and deferred charge at December 31, 2015 and 2014 were as follows:
The individual outstanding loans under these facilities are short-term floating rate loans, and the fair values of these loans approximate their book values. During the year ended December 31, 2015, we utilized $657.7 million and repaid $377.5 million under the facilities. The facilities were primarily utilized for funding acquisitions and significant new business as described in Note 3 - "Acquisitions" and Note 4 - "Significant New Business," respectively.
We are permitted to borrow up to an aggregate of $665.0 million. As of December 31, 2015, there was $159.2 million of available unutilized capacity under this facility.
On March 30, 2014, Trident contributed $260.8 million to StarStone Holdings in relation to its 40% share of both the purchase price of Torus (renamed StarStone), and the transaction costs related to the acquisition.
On September 30, 2014, Trident, along with Kenmare, transferred to StarStone Holdings its interest of $18.1 million in a segregated cell of one of our non-life run-off subsidiaries.
On June 30, 2015, Trident contributed $15.7 million to StarStone Holdings.
We have accreted the RNCI up to its estimated redemption value, which is fair value, as of December 31, 2015. The majority of this increase is attributable to an increase in the market valuations for comparable companies.
As at December 31, 2015 and 2014, the authorized share capital was 111,000,000 ordinary shares ("Voting Ordinary Shares") and non-voting convertible ordinary shares ("Non-Voting Ordinary Shares"), each of par value $1.00 per share, and 45,000,000 preference shares of par value $1.00 per share.
The Non-Voting Ordinary Shares are comprised of several different series as of December 31, 2015:
a variation of class rights and as required under Bermuda law, provided that the aggregate voting power of the Series C shares with respect to any merger, consolidation or amalgamation will not exceed 0.01% of the aggregate voting power of our issued share capital; and (iv) require the registered holders’ written consent in order to vary the rights of the shares in a significant and adverse manner.
The Series B and Series D shares were created in connection with the 2011 investment transactions, but no shares in these series are issued and outstanding. Holders of the Series C shares have the right to convert such shares, on a share-for-share basis, subject to certain adjustments, into Series D shares at their option. There is no economic difference in Series B, C or D shares, but there are slight differences in the conversion rights and the limited voting rights of each series.
As of December 31, 2015, there were no preference shares issued or outstanding. There were 714,015 Series B Convertible Participating Non-Voting Perpetual Preferred Stock, par value 1.00 per share (the “Non-Voting Preferred Shares”) issued and converted into Series E shares during 2014 in connection with our acquisition of StarStone.
Employee share awards are granted under the 2006 Equity Incentive Plan (the "Equity Plan").
The following table summarizes the non-vested share award activity during 2015:
Cash-settled stock appreciation right awards ("SARs") give the holder the right, upon exercise, to receive in cash the difference between the market price per share of our ordinary shares at the time of exercise and the exercise price of the SARs. The exercise price of each SAR is equal to the market price of our ordinary shares on the date of the grant. Vested SARs are exercisable for periods not to exceed either 4 years or 10 years from the date of grant.
Our subsidiary, Northshore, has long-term incentive plans that award time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years, although certain awards began vesting in 2014. These share awards have been classified as liability awards. For the years ended December 31, 2015 and 2014, compensation costs of $3.9 million and $5.2 million relating to the long-term incentive plans were recorded in our consolidated statement of earnings. The unrecognized compensation cost related to the Northshore incentive plan at December 31, 2015 was $3.5 million. This cost is expected to be recognized over the next 2.89 years, which is the weighted average contractual life of the awards.
For the years ended December 31, 2015, 2014 and 2013, 5,174, 3,716 and 3,566 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the "Deferred Compensation Plan"). Expense related to the restricted share units for the years ended December 31, 2015, 2014 and 2013, was $1.0 million, $0.5 million and $0.5 million, respectively.
During 2015, 2,393 restricted share units previously credited to the accounts of two directors under the Deferred Compensation Plan were converted into ordinary shares following their resignations.
For the years ended December 31, 2015, 2014 and 2013, compensation costs relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan ("Share Plan") of $0.3 million, $0.1 million and $0.1 million, respectively, were recorded as salaries and benefits in our consolidated statement of earnings. For the years ended December 31, 2015, 2014 and 2013, 11,998, 6,031 and 4,959 shares, respectively, were issued to employees under the Share Plan.
We have a noncontributory defined benefit pension plan that was acquired in the Providence Washington transaction in 2010. Pension expense relating to this defined benefit plan was $0.6 million, $0.5 million and $0.7 million for the years ended December 31, 2015, 2014 and 2013, respectively. During 2015, an actuarial review was performed, which determined that the plan’s unfunded liability, as at December 31, 2015, was $12.1 million as compared to $12.6 million as at December 31, 2014. As at December 31, 2015 and 2014, we had an accrued liability of $12.1 million and $12.6 million, respectively, for this plan.
The following table presents our current and deferred income tax expense (benefit) by jurisdiction:
The actual income tax rate differs from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:
We have foreign operating subsidiaries and branch operations principally located in the United Kingdom, Australia, the United States and Continental Europe which are subject to federal, foreign, state and local taxes in those jurisdictions. We have undistributed earnings in these foreign subsidiaries which, if distributed as dividends or otherwise, may be subject to income or withholding taxes. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.
We recognize accrued interest and penalties related to unrecognized tax benefits as a part of income tax expense. During the years ended December 31, 2015, 2014 and 2013, we recognized a benefit for the reversal of interest and penalties related to unrecognized tax benefits due to the expiration of the statute of limitations in the amount of $2.2 million, $nil and $0.2 million, respectively. We had approximately $nil, $nil and $0.7 million accrued for the payment of interest and penalties related to unrecognized tax benefits at December 31, 2015, 2014 and 2013, respectively.
During 2015, we received investment-related consulting services from a firm in which Trident V is a minority investor. We incurred approximately $0.4 million in expenses for these services for the twelve months ended December 31, 2015.
In addition, we are invested in two funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as director. The fair value of our investments in Sound Point Capital funds was $34.5 million and $39.9 million as of December 31, 2015 and December 31, 2014, respectively. For the years ended December 31, 2015 and 2014, we have recognized net realized and unrealized gains of $0.6 million and $0.8 million, respectively, in respect of investments managed by Sound Point Capital.
Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO equity securities. The fair value of these investments was $18.2 million and $10.0 million as at December 31, 2015 and December 31, 2014, respectively. For the year ended December 31, 2015, we recognized net realized and unrealized losses of $3.6 million and interest income of $3.4 million. No income was recognized in respect of these investments for 2014.
During 2015 we opened a separate account managed by Sound Point Capital, with a balance of $53.5 million as at December 31, 2015, with respect to which we incurred approximately $0.1 million in management fees for the year ended December 31, 2015.
Fees charged pursuant to investments affiliated with entities owned by Trident or Sound Point Capital were on an arm's-length basis.
Our insurance and reinsurance subsidiaries prepare their statutory financial statements in conformity with statutory accounting practices prescribed or permitted by the applicable local regulatory authority. The statutory financial statements may vary materially from statements prepared in accordance with U.S. GAAP.
The statutory capital and surplus amounts for the years ended December 31, 2015 and 2014 and statutory net income amounts for the years ended December 31, 2015, 2014 and 2013 for our insurance and reinsurance subsidiaries based in Bermuda, the United Kingdom, Australia, the United States and Continental Europe were as follows:
Our Bermuda-based insurance and reinsurance subsidiaries are registered under the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act imposes certain solvency and liquidity standards and auditing and reporting requirements and grants the Bermuda Monetary Authority (the "BMA") powers to supervise, investigate, require information and the production of documents and intervene in the affairs of insurance companies.
As of December 31, 2015 and 2014, each of our Bermuda-based insurance and reinsurance subsidiaries exceeded their respective minimum solvency and liquidity requirements. The Bermuda insurance and reinsurance subsidiaries in aggregate exceeded minimum solvency requirements by $1.26 billion as of December 31, 2015 (2014: $1.19 billion) and exceeded minimum liquidity requirements by $1.18 billion as of December 31, 2015 (2014: $928.5 million).
Our U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with the requirements of the U.K. Regulator. The calculation of the minimum capital resources requirements in any particular case depends on, among other things, the type and amount of insurance business written and claims paid by the insurance company. As at December 31, 2015 and 2014, all of our U.K. insurance subsidiaries maintained capital in excess of the minimum capital resources requirements (or received a waiver from the U.K. Regulator from the requirement to remedy any shortfall) and complied with the relevant U.K. Regulator requirements. The U.K.-based insurance subsidiaries, in aggregate, maintained capital in excess of the minimum capital resources requirements by $567.4 million and $442.8 million as of December 31, 2015 and 2014, respectively.
In order to achieve finality and to release their capital, Lloyd’s members are usually required to have transferred their liabilities through an approved RITC, such as offered by Syndicate 2008. RITC is generally put in place after the third year of operations of a syndicate year of account. On successful conclusion of RITC, any profit from the syndicate’s operations for that year of account can be remitted by the managing agent to the syndicate’s members.
Our Australian insurance subsidiary is regulated and subject to prudential supervision by the Australian Prudential Regulation Authority ("APRA"). APRA is the primary regulatory body responsible for regulating compliance with the Insurance Act 1973. APRA’s prudential standards require that all insurers maintain and meet prescribed capital adequacy requirements to enable their insurance obligations to be met under a wide range of circumstances.
As of December 31, 2015, all of our U.S. non-life insurance and reinsurance subsidiaries exceeded their required levels of risk-based capital. On an aggregate basis, our U.S. non-life insurance and reinsurance subsidiaries exceeded their minimum levels of risk-based capital as of December 31, 2015 by $528.3 million (December 31, 2014: $549.1 million).
Our Swiss insurance subsidiary, Harper Insurance Limited, is regulated by the Swiss Financial Market Supervisory Authority ("FINMA") pursuant to the Insurance Supervisory Act 2004. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency I and Swiss Solvency Test regulations ("SST") as stipulated by the Insurance Supervisory Act. From January 1, 2016, Switzerland has been granted full Solvency II equivalence by the European Commission.
As of December 31, 2015 and 2014, this subsidiary exceeded the Solvency I requirements by $111.0 million (2014: $119.2 million) and exceeded the SST requirements by $94.8 million (2014: $85.3 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires FINMA’s approval. The solvency and capital requirements must continue to be met following any distribution.
to maintain a minimum solvency margin based on the Solvency I regulations. As of December 31, 2015, this subsidiary exceeded the Solvency I requirements by $20.4 million (2014: $20.0 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires the FMA’s approval. The solvency and capital requirements must continue to be met following any distribution. From January 1, 2016, revised Liechtenstein regulations provide that solvency and capital requirements for this subsidiary will be based on the Solvency II framework.
As of December 31, 2015 and 2014, our life and annuities subsidiaries exceeded their minimum RBC requirements by $80.8 million (2014: $107.6 million). These subsidiaries are restricted by state laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders, depositors or investors. Any dividends in excess of limits are deemed "extraordinary" and require approval. As of December 31, 2015 and 2014, the maximum dividend payout which may be made without prior approval is $0.5 million (2014: $11.9 million).
Our Irish life insurance subsidiary files its audited financial statements with the Companies Registration Office in Ireland. The financial statements are prepared in accordance with the provisions of the Companies Act, 1963 to 2013, and the European Communities (Insurance Undertakings: Accounts) Regulations, 1996.
Our Belgian insurance subsidiary, Alpha, is regulated by the National Bank of Belgium ("BNB") pursuant to the Supervision Law of 1975. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency I regulations. As of December 31, 2015, this subsidiary exceeded the Solvency I requirements by $18.8 million. The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings and the current year profits. The solvency and capital requirements must continue to be met following any distribution. From January 1, 2016, revised Belgian regulations provide that solvency and capital requirements for this subsidiary will be based on the Solvency II framework.
We believe that there are no significant concentrations of credit risk associated with our cash and cash equivalents, fixed maturity investments, or other investments. Cash, cash equivalents and fixed maturity investments are managed pursuant to guidelines that follow prudent standards of diversification and limit the allowable holdings of a single issue and issuers. Other investments are managed pursuant to guidelines that emphasize diversification and liquidity. Pursuant to these guidelines, we manage and monitor risk across a variety of investment funds and vehicles, markets and counterparties. We are also subject to custodial credit risk on our fixed maturity and equity investments, which we manage by diversifying our holdings amongst large financial institutions that are highly regulated.
Rent expense for the years ended December 31, 2015, 2014 and 2013 was $11.1 million, $10.2 million and $5.5 million, respectively.
As at December 31, 2015, we had original commitments to investment funds of $375.0 million, of which $234.8 million has been funded, and $140.2 million remains outstanding as an unfunded commitment.
The second installment of $83.9 million in respect of our acquisition of Wilton Re life settlements is due to be paid on May 5, 2016. This transaction is described in Note 3 - "Acquisitions."
The following table summarizes our gross premiums written for the year ended December 31, 2015 by each of our operating segments by geographic area. Geographic distribution in subsequent years is subject to variation based upon market conditions and business strategies.
In our Non-life Run-off segment, excluding net premiums earned, our revenues from external customers also included fees and commission income from management, consulting and other services through our subsidiaries located in Bermuda, the United States, the United Kingdom and Australia. We have not quantified these amounts by geographic area as the revenues are not significant.
The difference in the amount of other investments shown at fair value and the other investments shown in our consolidated balance sheet relates to the fair value of $374.8 million as of December 31, 2015 for our other investments in funds or companies owned by or affiliated with certain related parties. Refer to Note 19 of the notes to the consolidated financial statements.
The Condensed Financial Information of Registrant should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in Part II - Item 8 of this Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
Investing activities in the Condensed Statements of Cash Flows primarily represents the flow of funds to and from subsidiaries to provide cash on hand to fund acquisitions and significant new business. Net investment income relates to interest on loans to subsidiaries. For the years ended December 31, 2015, 2014, and 2013, interest paid was $13.0 million, $6.6 million, and $2.5 million, respectively.
As at December 31, 2015 and 2014, retained earnings was $1,578.3 million and $1,395.2 million, an increase of $183.1 million. The increase in retained earnings was primarily attributable to net earnings of $220.3 million, partially offset by $37.2 million relating to the accretion of redeemable noncontrolling interests in subsidiaries to the estimated redemption value, which is fair value, as of December 31, 2015.
As of and for the years ended December 31, 2015, 2014 and 2013