Our corporate headquarters are located in offices owned by the company in Switzerland. In addition, we lease space in Australia, Bermuda, Canada, Hong Kong, Ireland, Labuan, Singapore, the United Kingdom and the United States for the operation of our North American Insurance, Global Markets Insurance and Reinsurance segments. Our leases have remaining terms ranging from approximately two months to approximately fifteen years in length. We renew and enter into new leases in the ordinary course of business as needed. While we believe that the office space from these leased properties is sufficient for us to conduct our operations for the foreseeable future, we may need to expand into additional facilities to accommodate future growth. For more information on our leasing arrangements, please see Note 16 of the notes to the audited consolidated financial statements in this Form 10-K.
Some of the statements in this Form 10-K include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve inherent risks and uncertainties. These statements include in general forward-looking statements both with respect to us and the insurance industry. Statements that are not historical facts, including statements that use terms such as “anticipates,” “believes,” “expects,” “intends,” “plans,” “projects,” “seeks” and “will” and that relate to our plans and objectives for future operations, are forward-looking statements. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Form 10-K should not be considered as a representation by us or any other person that our objectives or plans will be achieved. These statements are based on current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. Important factors that could cause actual results to differ materially from those in such forward-looking statements are set forth in Item 1A. “Risk Factors” in this Form 10-K. We undertake no obligation to release publicly the results of any future revisions we make to the forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
During the year ended December 31, 2016, the property and casualty insurance and reinsurance industry experienced challenging market conditions due to heavy competition. These market conditions have resulted in rate decreases across several lines of business in our North American Insurance and Global Markets Insurance segments. Given these market conditions, we selectively expanded our operations and did not renew business or write new accounts that did not meet our underwriting standards. Our Reinsurance segment continued to experience unfavorable market conditions in terms of pricing, and terms and conditions, and either did not renew or decreased line sizes on certain treaties.
On June 23, 2016, a referendum was held in the United Kingdom in which a majority voted for the United Kingdom's withdrawal from the European Union (“Brexit”). The uncertainty related to the impact of Brexit caused significant financial market volatility and the full impact will not be known for the foreseeable future. Brexit did not have a material impact on our financial statements for the year ended December 31, 2016. For further information see Item 1A. “Risk Factors” in this Form 10-K.
Higher net realized investment losses of $63.1 million. For the three months ended December 31, 2016, we recognized $101.9 million of realized investment losses compared to realized investment losses of $38.8 million for the three months ended December 31, 2015. Partially offsetting the higher realized investment losses was a partial sale of one of our other private securities during the quarter ended December 31, 2016 that we account for under the equity method of accounting. As a result of the sale, we no longer maintained significant influence over the operations and discontinued the use of the equity method of accounting for the remaining equity interest still owned by us. We recorded a realized gain of $21.7 million related to the equity interest sold and recorded an unrealized gain of $8.1 million related to the fair value of the remaining interest we still own.
Lower net premiums earned across each of our segments totaling $45.8 million.
Higher general and administrative expenses driven by higher compensation-related expenses. The higher compensation-related expenses were primarily due to the increase in our stock price during the current quarter.
Operating income is an internal performance measure used in the management of our operations and represents after-tax operational results excluding, as applicable, net realized investment gains or losses, net foreign exchange gain or loss, and other non-recurring items. We exclude net realized investment gains or losses, net foreign exchange gain or loss and any other non-recurring items from our calculation of operating income because these amounts are heavily influenced by and fluctuate in part according to the availability of market opportunities and other factors. In addition to presenting net income determined in accordance with U.S. GAAP, we believe that showing operating income enables investors, analysts, rating agencies and other users of our financial information to more easily analyze our results of operations and our underlying business performance. Operating income should not be viewed as a substitute for U.S. GAAP net income.
(1) Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment related to.
Annualized operating return on average shareholders’ equity and average tangible shareholders' equity is calculated using operating income instead of net income.
Reserves for losses and loss expenses by segment as of December 31, 2016 and 2015 were comprised of the following:
The reserve for losses and loss expenses is comprised of two main elements: outstanding loss reserves, also known as case reserves, and reserves for IBNR. Outstanding loss reserves relate to known claims and represent management’s best estimate of the likely loss settlement. IBNR reserves relate primarily to unreported events that, based on industry information, management’s experience and actuarial evaluation, can reasonably be expected to have occurred and are reasonably likely to result in a loss to our company. IBNR reserves also relate to estimated development of reported events that based on industry information, management’s experience and actuarial evaluation, can reasonably be expected to reach our attachment point and are reasonably likely to result in a loss to our company. We also include in IBNR changes in the values of claims that have been reported to us but are not yet settled. Each claim is settled individually based upon its merits and it is not unusual for a claim to take years after being reported to settle, especially if legal action is involved. As a result, reserves for losses and loss expenses include significant estimates for IBNR reserves.
Although management believes that our case reserves and IBNR reserves are sufficient to cover losses assumed by us, there can be no assurance that losses will not deviate from our reserves, possibly by material amounts. The methodology of estimating loss reserves is periodically reviewed to ensure that the assumptions made continue to be appropriate. To the extent actual reported losses exceed estimated losses, the carried estimate of the ultimate losses will be increased (i.e., unfavorable reserve development), and to the extent actual reported losses are less than estimated losses, the carried estimate of ultimate losses will be reduced (i.e., favorable reserve development). We record any changes in our loss reserve estimates and the related reinsurance recoverables in the periods in which they are determined. Determining whether our estimated losses are sufficient to cover all reported and non-reported claims involves a high degree of judgment. It is our practice to address unfavorable loss emergence early in our long-tail lines of business while we tend to recognize favorable loss emergence more slowly in our long-tail lines once actual loss emergence and data provides greater confidence around the adequacy of ultimate estimates.
In establishing the estimate for the reserve for losses and loss expenses, there are many assumptions that are used in determining the best estimate of these reserves. Management believes the key assumptions used to arrive at our best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, selection of benchmarks and reported and paid loss emergence patterns. Our reporting factors and expected loss ratios are based on a blend of our own experience and industry benchmarks for long-tailed business and primarily our own experience for short-tail business. The benchmarks selected were those that we believe are most similar to our underwriting business. In general, the methods and related assumptions used for
During the years ended December 31, 2016, 2015 and 2014, we incurred catastrophe-related losses of $75.7 million, $60.5 million and $65.0 million, respectively. We classify catastrophe losses as those losses that result from a major singular event or series of similar events (such as tornadoes) which are assigned a catastrophe loss number by industry data services, where our consolidated net losses are expected to be at least $10 million per loss event or series of similar events and where we believe it is important to our investors’ understanding of our operations.
The selection of the expected loss ratios for the long-tail lines is our most significant assumption. Due to the lengthy reporting pattern of long-tail lines, we supplement our own experience with industry benchmarks of expected loss ratios and reporting patterns. Also during 2016, actual paid and reported loss emergence for our casualty line of business was more severe than estimated in our North American Insurance segment for the 2011 through 2014 loss years. The additions to the 2011 through 2014 loss years are consistent with our practice of addressing unfavorable loss emergence early in our long-tail lines of business. We believe that recognition of the reserve changes in the period they were recorded was appropriate since a pattern of reported losses had not emerged and the loss years were previously too immature to deviate from the expected loss ratio method in prior periods.
The change in the reasonably possible variance for the 2008 through 2012 loss years in 2016 compared to 2015 is due to giving greater weight to the Bornhuetter-Ferguson loss development method for additional lines of business during 2016 and additional development of losses. As we gain more information and experience about our losses, we are able to refine our estimate of the ultimate loss and as a result the reasonably possible variance in our losses is reduced. We believe the reasonably possible change in our loss reserves for the recent years is appropriate as we are relying on less information and experience about how the losses will ultimately develop compared to the older loss years. The total reasonably possible variance of our expected loss ratio for all loss years for our casualty insurance and casualty reinsurance lines of business was five percentage points as of December 31, 2016. Because we expect a small volume of large claims, it is more difficult to estimate the ultimate loss ratios, so we believe the variance of our loss ratio selection could be relatively wide.
If our final casualty insurance and reinsurance loss ratios vary by five percentage points from the expected loss ratios in aggregate, our required net reserves after reinsurance recoverable would increase or decrease by approximately $835.2 million. Excluding the impact of income taxes, this would result in either an increase or decrease to net income and total shareholders’ equity of approximately $835.2 million. As of December 31, 2016, this represented approximately 24% of total shareholders’ equity.
Our range for each business segment was determined by utilizing multiple actuarial loss reserving methods along with various assumptions of reporting patterns and expected loss ratios by loss year. The various outcomes of these techniques were combined to determine a reasonable range of required loss and loss expense reserves. Although we believe our approach to determine the range of loss and loss expense is reasonable, there are no assurances that actual loss experience will be within the ranges of loss and loss expense noted above.
When we reinsure a portion of our exposures, we pay reinsurers a portion of premiums received on the reinsured policies. The following table illustrates our gross premiums written, ceded premiums written and net premiums written:
We had net cash outflows relating to ceded reinsurance activities (premiums paid less losses recovered and net ceding commissions received) of approximately $332.6 million, $282.7 million and $261.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. The net cash outflows in all years are reflective of fewer losses that were recoverable under our reinsurance coverages than we paid in premiums.
Property: We have purchased both quota share reinsurance for our property business, which includes general property, energy, inland marine and program business that have property-related exposure, written in each of our segments, as well as excess-of-loss cover providing protection for specified classes of catastrophe. We have also purchased a limited amount of facultative reinsurance, which provides cover for specified general property policies.
Casualty: We have purchased quota share reinsurance for our general casualty business in our North American Insurance and Global Markets Insurance segments. At year-end 2016, the percentage ceded varied by location of writing office, with a larger cession being effective for policies written in our Global Markets Insurance segment.
credit ratings and financial stability. We generally have the right to terminate our treaty reinsurance contracts at any time, upon prior written notice to the reinsurer, under specified circumstances, including the assignment to the reinsurer by A.M. Best of a financial strength rating of less than “A-.”
As of December 31, 2016, approximately 99% of ceded case reserves and ceded IBNR reserves were recoverable from reinsurers who had an A.M. Best rating of “A” or higher. The following table shows a breakdown of our reinsurance recoverables by credit rating as of December 31, 2016:
Our reinsurance recoverables are subject to the same uncertainties as the estimate of case reserves and IBNR reserves. The reasonably possible variance of our expected ceded loss ratio for all loss years for our casualty insurance and casualty reinsurance lines of business was six percentage points as of December 31, 2016.
If our final casualty insurance ceded loss ratios vary by six percentage points from the expected loss ratios in aggregate, our required reinsurance recoverable would increase or decrease by approximately $240.1 million. Excluding the impact of income taxes, this would result in either an increase or decrease to net income and shareholders’ equity of approximately $240.1 million. As of December 31, 2016, this amount represented approximately 7% of total shareholders’ equity.
Equity securities: Comprised of U.S. and foreign common and preferred stocks and mutual funds. Equities are generally included in the Level 1 fair value hierarchy as prices are obtained from market exchanges in active markets. Non-U.S. mutual funds where the net asset value (“NAV”) is not provided on a daily basis are included in the Level 3 fair value hierarchy. Also, our remaining equity interest in an equity security that it no longer accounts for under the equity method of accounting is included in the Level 3 fair value hierarchy as the fair value is based on the enterprise value of that security which is not a publicly traded company.
Derivative instruments: The fair values of foreign exchange contracts and interest rate futures and swaps are priced from quoted market prices for similar exchange-traded derivatives and pricing valuation models that utilize independent market data inputs. The fair values of derivatives are included in the Level 2 fair value hierarchy. The fair value of the insurance and reinsurance contracts are based on an internal model that estimates the expected value based on multiple scenarios (i.e., Monte-Carlo simulation) and discounted back to current value. The key unobservable inputs are the discount rate, which was 10%, and the values of the underlying insured risks. Given the inputs to the internal model are unobservable, the fair value of the insurance and reinsurance contracts are included in the Level 3 fair value hierarchy.
The following table shows the pricing sources of our fixed maturity investments held as of December 31, 2016 and 2015:
Interactive Data Pricing: We use Interactive Data Pricing to price our non-U.S. government agencies, municipalities and political subdivisions securities, corporate debt, agency and non-agency mortgage-backed and asset-backed securities. There are several observable inputs that Interactive Data Pricing uses in determining its prices which include among others, benchmark yields, reported trades and issuer spreads.
Reuters pricing service: We use the Reuters pricing service to price our U.S. and non-U.S. government agencies, corporate debt, agency and non-agency mortgage-backed and asset-backed securities. There are several observable inputs that the Reuters pricing service uses in determining its prices which include among others, option-adjusted spreads, treasury yields, new issuance and secondary trades, sector and issuer level spreads, underlying collateral and prepayment speeds.
Broker-dealer quotes: We also utilize broker-dealers to price our corporate debt, agency and non-agency mortgage-backed and asset-backed securities. The pricing sources include JP Morgan Securities Inc., Deutsche Bank Securities Inc., Citigroup Global Markets Inc. and other broker-dealers. When broker-dealer quotes are utilized it is primarily due to the fact that the particular broker-dealer was involved in the initial pricing of the security.
We classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. Intangible assets, other than goodwill, may consist of distribution channels, renewal rights, internally generated software, non-compete covenants and insurance licenses held by subsidiaries domiciled in the United States. The following is a summary of our goodwill and other intangible assets as of December 31, 2016 and 2015:
Related to the acquisition of Latin American Underwriters Holding Ltd. (“LAU”).
Related to the acquisition of the remaining interest in an insurance agency operation we did not own.
If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers).
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. Goodwill is assigned at acquisition to the applicable reporting unit(s) based on the expected benefit to be received by the reporting unit(s) from the business combination. We determine the expected benefit based on several factors including the purpose of the business combination, the strategy of the company subsequent to the business combination and structure of the acquired company subsequent to the business combination. A reporting unit is a component of our business that has discrete financial information which is reviewed by management. In determining the reporting unit, we analyze the inputs, processes, outputs and overall operating performance of the reporting unit.
The first step of the goodwill impairment test is to compare the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value then the second step of the goodwill impairment test is performed. In determining the fair value of the reporting units, discounted cash flow models and market multiple models are utilized. The discounted cash flow models apply a discount to projected cash flows including a terminal value calculation. The market multiple models apply earnings and book value multiples of similar publicly-traded companies to
Based on our analysis, the point estimate fair value of the U.S. insurance operations reporting unit, using both a discounted cash flow model and market multiple model, was in excess of its carrying value by approximately 19% as of the October 1, 2016 measurement date. As a result of this analysis, we concluded there was no implied goodwill impairment, and therefore, no step two goodwill impairment testing was required.
Based on our analysis, the point estimate fair value of the Asia insurance operations reporting unit, using both a discounted cash flow model and market multiple model, was in excess of its carrying value by approximately 6% as of the October 1, 2016 measurement date. As a result of this analysis, we concluded that there was no implied goodwill impairment, and therefore, no step two goodwill impairment testing was required. We continue to monitor the performance of our Asia insurance operations, and if in the future those operations do not perform as expected, we will perform our goodwill impairment test earlier than our annual goodwill impairment test date to determine whether or not an impairment exists.
Gross premiums written decreased by $27.2 million, or 0.9%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The overall decrease in gross premiums written was primarily the result of the following:
Reinsurance: Gross premiums written in our Reinsurance segment decreased by $95.2 million, or 11.9%, for the year ended December 31, 2016 compared to 2015. The decrease was primarily due to the non-renewal of certain
Net premiums earned decreased by $144.3 million, or 5.8%, for the year ended December 31, 2016 compared to the year ended December 31, 2015 as a result of lower premiums earned in our North American Insurance and Reinsurance segments, partially offset by higher premiums earned in our Global Markets Insurance segment.
Net investment income increased by $35.7 million, or 19.6%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase was primarily due to higher interest income in the current year from our fixed maturity investments and higher returns from our equity method investments. The annualized period book yield of the investment portfolio for the years ended December 31, 2016 and 2015 was 2.5% and 2.1%, respectively. Our average duration increased from 2.6 years as of December 31, 2015 to 3.0 years as of December 31, 2016.
Other income increased by $8.9 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in other income was due to a net unrealized gain recorded of $3.4 million for insurance and reinsurance contracts that we account for as derivatives in our North American Insurance segment, the revenue from our insurance agency operation in our Global Markets Insurance segment that was acquired in the current period and the recoveries from single-trigger ILW derivatives related to catastrophe losses that occurred in the current year in our Reinsurance segment.
Net losses and loss expenses decreased by $84.5 million, or 5.3%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2016 and 2015:
During the year ended December 31, 2015, we incurred $60.5 million in catastrophe-related losses, which included $25.0 million in losses related to windstorms that occurred in the New South Wales region of Australia and $35.5 million related to explosions in the port of Tianjin, China.
We recorded net favorable reserve development related to prior years of $98.3 million during the year ended December 31, 2016 compared to net favorable reserve development of $81.6 million for the year ended December 31, 2015, as shown in the tables below.
The following table shows the components of net losses and loss expenses for the years ended December 31, 2016 and 2015.
The net reserves for losses and loss expenses acquired during 2015 relates to the acquisitions of the Hong Kong, Singapore and Labuan operations of RSA.
Acquisition costs decreased by $35.6 million, or 9.5%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in acquisition costs was primarily due to lower acquisition costs in each of our operating segments. The decrease was primarily due to lower net premiums earned and higher ceding commission income. Acquisition costs as a percentage of net premiums earned were 14.5% for the year ended December 31, 2016 compared to 15.1% for 2015. The decrease in the acquisition cost ratio was primarily driven by higher ceding commission income due to restructuring some of our underlying reinsurance programs in our North American Insurance and Global Markets Insurance segments.
General and administrative expenses increased by $5.2 million, or 1.3%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in general and administrative expenses was primarily due to the additional general and administrative expenses from the RSA operations, higher stock-based compensation expense, partially offset by expense-control initiatives implemented during the current year. We have granted cash equivalent restricted stock units and performance-based equity awards to certain key employees, and we measure the value of each of those awards at the share price at the end of the period. Changes in our share price are recognized as increases or decreases in our compensation expense ratably over the service period. Our share price increased 44% for the year ended December 31, 2016 compared to a 2% decrease for the same period in 2015. Our general and administrative expense ratio was 17.6% for the year ended December 31, 2016 compared to 16.3% for the year ended December 31, 2015.
Other expense increased by $0.6 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in other expense was primarily due to expenses incurred related to our insurance agency operation in our Global Markets Insurance segment that was acquired in 2016.
Interest expense increased by $2.3 million, or 3.7%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in interest expense was due to the accrued interest related to the senior notes issued in October 2015. The interest expense will be lower in future years due to the repayment of the $500.0 million aggregate principal amount of 7.50% senior notes that matured on August 1, 2016, and the lower interest rate on our remaining outstanding senior notes. As of December 31, 2016, we had outstanding senior notes with an aggregate principal amount of $800.0 million and an average interest rate of 4.93%, compared to $1,300.0 million and 5.78%, respectively, as of December 31, 2015.
We recorded an income tax benefit of $9.1 million for the year ended December 31, 2016, compared to income tax expense of $5.8 million for the year ended December 31, 2015. The change in income tax expense was primarily due to recording a pre-tax loss in our U.S. operations during the current year compared to taxable income in the prior year. Most of the pre-tax loss recorded in the current year was due to realized and unrealized investment losses.
Reinsurance: Gross premiums written in our Reinsurance segment decreased by $137.2 million, or 14.6%, for the year ended December 31, 2015 compared to 2014. The decrease was primarily due to lower premiums written across each line of business. The decrease for each line of business was driven by non-renewal of business due to poor terms and conditions, cedents retaining more of their own business, and lower premiums on renewed treaties mainly due to year-over-year rate decreases and our assuming a lower percentage of the premiums than in the prior year. These reductions were partially offset by new business written for each line of business.
Net premiums written increased by $126.0 million, or 5.4%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in net premiums written was consistent with the increase in gross premiums written. The difference between gross and net premiums written is the cost to us of purchasing reinsurance coverage, including the cost of property catastrophe reinsurance coverage. We ceded 20.9% of gross premiums written for both the years ended December 31, 2015 and 2014. The ceded premiums written for the year ended December 31, 2015 included a higher cost for our property catastrophe reinsurance coverage offset by retaining more of our gross premiums written in both of our North American Insurance and Global Markets Insurance segments in the current year than in the prior year. The cost of our current property catastrophe reinsurance coverage, which was effective May 1, 2015, was higher than our prior coverage as we purchased additional coverage, for both world-wide and North American perils, and also purchased dual-trigger ILWs which we did not purchase in the prior year.
Net premiums earned increased by $305.7 million, or 14.0%, for the year ended December 31, 2015 compared to the year ended December 31, 2014 as a result of higher premiums earned in the North American Insurance and Global Markets Insurance segments, including $160.9 million from our acquired Asian operations, partially offset by lower net premiums earned in our Reinsurance segment.
We evaluate our business by segment, distinguishing between North American Insurance, Global Markets Insurance and Reinsurance. The following table illustrates the mix of our business on both a gross premiums written and net premiums earned basis.
equity method investments. The book yield of the investment portfolio for both the years ended December 31, 2015 and 2014 was 2.1%. Our average duration increased from 2.0 years as of December 31, 2014 to 2.6 years as of December 31, 2015.
Net losses and loss expenses increased by $387.1 million, or 32.3%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2015 and 2014:
The increase in the current year non-catastrophe losses and loss expenses and the related ratio was primarily due to the overall growth of our operations, including the acquired Asian operations, and higher loss ratios for certain classes of business partially offset by a reduction in IBNR loss reserves due to lower than expected property losses in our Reinsurance segment.
During the year ended December 31, 2015, we incurred $25.0 million in property catastrophe losses and loss expenses related to windstorms that occurred in the New South Wales region of Australia and $35.5 million related to explosions in the port of Tianjin, China. During the year ended December 31, 2014, we incurred $65.0 million in catastrophe-related losses. The catastrophe related losses during 2014 were related to Hurricane Odile ($18.0 million), hailstorm in Brisbane, Australia ($12.5 million), Property Claims Services designated storm #45 in the Midwestern U.S. (“PCS storm #45”) ($12.5 million), Windstorm Ela ($12.0 million) and Typhoon Rammasun ($10.0 million).
For the year ended December 31, 2015, we recognized net favorable prior year reserve development primarily due to lower than expected loss emergence in our Global Markets Insurance and Reinsurance segments. The net favorable reserve development in the Global Markets Insurance segment was primarily due to net favorable loss reserve development in the property, professional liability and casualty lines of business, partially offset by unfavorable prior year reserve development in the specialty and other line of business from the 2013 loss year. The net favorable reserve development in the Reinsurance segment was primarily related to the property and casualty reinsurance lines of business. The net unfavorable prior year reserve development for the North American Insurance segment primarily related to net unfavorable prior year development in the healthcare and casualty lines of business mainly from the 2012 through 2014 loss years partially offset by favorable prior year reserve development in the professional liability, programs and property lines of business.
The following table shows the components of net losses and loss expenses for the years ended December 31, 2015 and 2014.
administrative expense ratio was 16.3% for the year ended December 31, 2015 compared to 16.8% for the year ended December 31, 2014.
Income tax expense decreased by $24.7 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease in income tax expense was primarily due to lower taxable income in our U.S. operations driven by higher investment losses.
North American Insurance Segment. The North American Insurance segment includes our direct specialty insurance operations in the United States, Bermuda and Canada, as well as our claims administration services operation. This segment provides both direct property and specialty casualty insurance primarily to North American domiciled accounts.
Reinsurance Segment. Our Reinsurance segment has operations in Bermuda, London, Singapore, the United States and Zug. This segment includes the reinsurance of property, general casualty, professional liability, specialty lines and property catastrophe coverages written by insurance companies. We presently write reinsurance on both a treaty and a facultative basis, targeting several niche reinsurance markets.
Premiums. Gross premiums written increased by $41.0 million, or 2.3%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in gross premiums written was primarily due to growth in our programs line of business and certain other specialty lines of business, such as environmental and construction. This was partially offset by the non-renewal of business that did not meet our underwriting requirements, particularly in our casualty and property lines of business.
(1) Includes our environmental, primary construction, surety, trade credit, product recall and accounts receivable insurance lines of business.
Net losses and loss expenses. Net losses and loss expenses decreased by $48.0 million, or 5.3%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2016 and 2015:
Overall, our North American Insurance segment recorded net favorable reserve development of $33.0 million during the year ended December 31, 2016 compared to net unfavorable reserve development of $1.7 million for the year ended December 31, 2015, as shown in the tables below.
Net unfavorable prior year reserve development for the healthcare line of business for the 2011 through 2014 loss years was primarily due to adverse development above our previous expectations and higher than expected frequency of losses.
The table below illustrates our gross premiums written by underwriter location for our North American Insurance operations.
Net losses and loss expenses. Net losses and loss expenses increased by $226.4 million, or 33.1%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2015 and 2014:
Overall, our North American Insurance segment recorded net unfavorable reserve development of $1.7 million during the year ended December 31, 2015 compared to net favorable reserve development of $68.4 million for the year ended December 31, 2014, as shown in the tables below.
The net unfavorable prior year reserve development for the 2011 through 2013 loss years was primarily related to our healthcare line of business primarily due to higher than expected loss frequency and severity. The net favorable development in our professional liability line of business was primarily related to our public directors and officers liability class of business due to favorable development on reported claims in the 2006 through 2009 loss years partially offset by adverse development on reported claims in the 2005 loss year.
Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services operation. The increase in the net profit for this operation was primarily due to the results of this operation being included in the Company's results since the beginning of 2015, whereas the results were included in the Company's results starting in the second quarter of 2014, and reduced costs required to manage the operation.
The following table summarizes the underwriting results and associated ratios for the Global Markets Insurance segment for the years ended December 31, 2016, 2015 and 2014.
Premiums. Gross premiums written increased by $27.0 million, or 5.7%, for the year ended December 31, 2016 compared to 2015. The increase was primarily due to gross premiums written from the Asian operations in Hong Kong, Singapore and Labuan acquired from RSA, which were included in our results for the full twelve months of the current year, whereas the results from those operations were included starting only in April during the year ended December 31, 2015.
The table below illustrates our gross premiums written by underwriter location for our Global Markets Insurance operations.
Net premiums written increased by $43.4 million, or 13.4%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in net premiums written was primarily due to higher gross premiums written and lower ceded premiums written. We ceded to reinsurers 27.0% of gross premiums written for the year ended December 31, 2016 compared to 32.0% for the year ended December 31, 2015. The decrease in ceded premiums written was primarily due to a reinsurance treaty entered into during the year ended December 31, 2015 for the construction line of business brought over from the acquired Asian operations as the previous treaty was canceled.
Net premiums earned increased by $11.0 million, or 3.0%, primarily due to net premiums earned from the operations acquired from RSA being included in our results for the full twelve months of the current year, whereas the results for the Asian operations acquired from RSA were included starting only in April of the previous year.
Acquisition costs. Acquisition costs decreased by $4.4 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in acquisition costs was primarily due to lower amortization of the insurance-related intangible asset recorded related to the acquisitions of the RSA operations. The acquisition cost ratio was 17.6% for the year ended December 31, 2016 and 19.3% for the year ended December 31, 2015.
General and administrative expenses. General and administrative expenses increased by $15.3 million, or 14.1%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase in general and administrative
Other insurance-related income and expense. The other insurance-related income and expense during the year ended December 31, 2016 related to the revenues and expenses from an insurance agency operation we acquired in the current year that is based in London. The other insurance-related expenses incurred during the twelve months ended December 31, 2015 represented the transaction-related costs for our acquisitions of the Hong Kong and Singapore operations of RSA.
Net losses and loss expenses. Net losses and loss expenses increased by $179.2 million, or 293.3%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2015 and 2014:
The following table summarizes the underwriting results and associated ratios for the Reinsurance segment for the years ended December 31, 2016, 2015 and 2014.
Premiums. Gross premiums written decreased by $95.2 million, or 11.9%, for the year ended December 31, 2016 compared to 2015. The decrease was primarily due to the non-renewal of certain treaties across all lines of business, due either to poor terms and conditions, including rate decreases, or cedents retaining more of their own business. The non-renewal of treaties was partially offset by new business written for each line of business.
Net premiums written decreased by $100.9 million, or 13.2%, for the year ended December 31, 2016 compared to the same period in 2015. The decrease was primarily due to the decrease in gross premiums written and higher ceded premiums. The increase in ceded premiums was primarily the result of a new retrocessional quota share reinsurance treaty for our property catastrophe business.
Net losses and loss expenses. Net losses and loss expenses decreased by $65.7 million, or 15.1%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2016 and 2015:
General and administrative expenses. General and administrative expenses decreased by $8.8 million, or 12.0%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. The decrease in general and administrative expenses was primarily related to expense-control initiatives implemented during the current year, and lower compensation-related costs. The general and administrative expense ratios for the years ended December 31, 2016 and 2015 were 9.2% and 8.9%, respectively.
own business, and lower premiums on renewed treaties mainly due to year-over-year rate decreases and our assuming a lower percentage of the premiums than in the prior period. These reductions were partially offset by new business written for each line of business.
Net premiums earned decreased by $88.8 million, or 9.8%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease in net premiums earned was as a result of the decrease in net premiums written during the previous periods, as well as the increase in ceded earned premiums related to the higher cost of our current year outward property catastrophe reinsurance coverage.
Net losses and loss expenses. Net losses and loss expenses decreased by $18.5 million, or 4.1%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2015 and 2014:
For the year ended December 31, 2015, the net favorable reserve development in the 2014 loss year was primarily due to favorable reserve development in the property reinsurance line of business due to benign reported loss activity. We also experienced net favorable development in the 2011 and prior loss years in our casualty reinsurance line of business, as a result of actual loss emergence being lower than anticipated. The net favorable prior year reserve development for the casualty reinsurance line of business was partially offset by unfavorable prior year reserve development from the 2012 and 2013 loss years due to higher than expected frequency of losses.
The net favorable reserve development in the property line of business for the 2013 loss year was due to benign global property catastrophe activity.
performance-based compensation related costs. The general and administrative expense ratios for the years ended December 31, 2015 and 2014 were 8.9% and 8.6%, respectively.
Other insurance-related income and expense. The other insurance-related expenses incurred for the year ended December 31, 2015 represents an unrealized loss recorded on an ILW derivative.
As of December 31, 2016, we had $200 million available under our revolving loan facility.
We also have insurance subsidiaries that are the parent company for other insurance subsidiaries, which means that dividends and other distributions will be subject to multiple layers of regulations in order for our insurance subsidiaries to be able to dividend funds to Holdings. The inability of the subsidiaries of Holdings to pay dividends and other permitted distributions could have a material adverse effect on Holdings’ cash requirements and our ability to make principal, interest and dividend payments on the senior notes and common shares.
Allied World Assurance Company, Ltd uses trust accounts primarily to meet security requirements for inter-company and certain reinsurance transactions. We also have cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with reinsurance contract provisions and relevant insurance regulations. In addition, Allied World Assurance Company, Ltd currently has access to up to $1.1 billion in letters of credit under two letter of credit facilities, a $900.0 million uncommitted facility with Citibank Europe plc and a $200.0 million committed unsecured credit facility with a syndication of lenders (the “Credit Agreement”). These facilities are used to provide security to reinsureds and are collateralized by us, at least to the extent of letters of credit outstanding at any given time.
more restrictive than the investment regulations otherwise applicable to us. The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability.
Financial strength ratings represent the opinions of rating agencies on our capacity to meet our obligations. In the event of a significant downgrade in ratings, our ability to write business and to access the capital markets could be impacted. For additional information on our financial strength ratings refer to Item 1 “Business - Financial Strength Ratings”.
The ratio of debt to total capitalization as of December 31, 2016 included the $500 million senior notes we issued on October 29, 2015 that we used to repay the $500 million senior notes at maturity on August 1, 2016. Assuming such repayment occurred as of December 31, 2015, the ratio of debt to total capitalization would have been 18.6%.
During the year ended December 31, 2016, our share repurchases were as follows:
In July 2006, Allied World Bermuda issued $500 million aggregate principal amount of 7.50% senior notes due August 1, 2016, with interest payable August 1 and February 1 each year. These senior notes were repaid when they matured on August 1, 2016.
In November 2010, Allied World Bermuda issued $300 million aggregate principal amount of 5.50% senior notes due November 1, 2020, with interest payable May 15 and November 15 each year. Allied World Bermuda can redeem the senior notes prior to maturity, subject to payment of a “make-whole” premium; however, Allied World Bermuda currently has no intention of redeeming the notes.
The senior notes issued in 2010 and 2015 have been unconditionally and irrevocably guaranteed for the payment of the principal and interest by Holdings.
As of December 31, 2016, we also have access to a $900.0 million uncommitted letter of credit facility with Citibank Europe plc. The letters of credit issued under the credit facility with Citibank Europe plc are deemed to be automatically extended without amendment for twelve months from the expiry date, or any future expiration date unless at least 30 days prior to any expiration date Citibank Europe plc notifies us that they elect not to consider the letters of credit renewed for any such additional period.
The following table shows our aggregate contractual obligations by time period remaining until due date as of December 31, 2016:
Our unpaid losses and loss expenses represent our best estimate of the cost to settle the ultimate liabilities based on information available as of December 31, 2016, and are not fixed amounts payable pursuant to contractual commitments. The timing and amounts of actual loss payments related to these reserves might vary significantly from our current estimate of the expected timing and amounts of loss payments based on many factors, including large individual losses as well as general market conditions.