(1) - Office lease is in force at December 31, 2017, however, service operations will not commence until 2018.
A reconciliation of Net Income (the nearest GAAP financial measure) to Net Operating Earnings can be found in Item 7, Results of Operations. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our business and enables investors and other users of our financial information to analyze underlying business performance in a manner similar to management. We also believe this measure follows industry practice and, therefore facilitates comparison of our performance with our peer group.
A reconciliation of the Net Losses and LAE Ratio (the nearest GAAP financial measure) to the Adjusted Net Losses and LAE ratio can be found in Item 7, Results of Operations and Segment Results. We believe that presentation of the Adjusted Net Losses and LAE Ratio allows investors and other users of our financial information to more easily analyze our Company’s results of operations and understand our underlying business performance.
Unless the context requires otherwise, the terms “we,” “us,” “our,” or “our Company” are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries. The term “Parent Company” is used to mean The Navigators Group, Inc. without our subsidiaries.
We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer P&C insurance, which consists primarily of general liability coverage and umbrella & excess liability coverage to commercial enterprises through our Primary and Excess Casualty divisions. We have also developed niches in Professional Liability insurance, through our D&O and E&O divisions, as well as assumed reinsurance products.
Effective January 1, 2017, we sold our underwriting agency operations in Sweden and Denmark. The transaction represented a 100% disposition of our Sweden and Denmark corporations, NUAL AB and Navigators A/S, respectively. This transaction did not materially impact our results of operation, financial condition or liquidity.
Our revenue is primarily comprised of premiums and investment income. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses, commission and administrative expenses as well as the timing of reinsurance receipts and payments. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
The following table calculates our Net Operating Earnings for the years ended December 31, 2017, 2016 and 2015:
(2) - As a result of the enactment of the Tax Act, we revalued our deferred tax assets as of December 31, 2017 resulting in a reduction in our deferred tax assets of $17.1 million and we also anticipate incurring a one-time payment of approximately $2.6 million due to tax on previously untaxed accumulated and current earnings and profits on certain foreign subsidiaries.
A major component of our Underwriting Profit (Loss) is due to Net Losses and LAE. The following table presents the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:
$34.3 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 primarily from our U.S. Professional Liability operating segment, our Int’l Insurance reporting segment and the settlement of a large Accident and Health (“A&H”) claim in our GlobalRe reporting segment. This compares to $28.5 million of Net Prior AY Reserve Releases, primarily in our Int’l Insurance reporting segment due to favorable loss emergence for the same period in 2016.
Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are:
Changes in the mix of business and favorable performance within our U.S. P&C operating segment drove the 2.0 point decrease in Adjusted Net Loss and LAE Ratio.
A net $2.4 million RRP benefit consisting of $7.5 million assumed, partially offset by $5.1 million ceded, compared to a net $2.0 million expense for the same period in 2016.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 2.3 points as compared to the same period in 2015 primarily driven by:
$28.5 million of Net Prior AY Reserve Releases for the year ended December 31, 2016, due to favorable loss emergence across all reporting segments. This compares to $64.7 million of Net Prior AY Reserve Releases for the same period in 2015, due to favorable loss emergence across all reporting segments.
Changes in the mix of business drove the 2.6 point decrease in Adjusted Net Loss and LAE Ratio.
The increase in total Net Investment Income for all years presented as compared to the prior years was primarily due to growth of invested assets coupled with an increase in pretax yields, which was driven in part by an increased allocation to higher yielding preferred stocks. The annualized pre-tax yields, excluding Net Realized Gains and Losses and OTTI losses recognized in earnings, on a consolidated basis were 2.7%, 2.6% and 2.4%, respectively, for the years ended December 31, 2017, 2016 and 2015.
Net Realized Gains and Losses are generated as part of the normal ongoing management of our investment portfolio. Net Realized Gains of $45.1 million for the year ended December 31, 2017 is primarily due to the liquidation of our actively managed Common Stock Equity Securities portfolio in December 2017 as we reassess our common equity strategy. The remaining Net Realized Gains and Losses for 2017 relate to the ongoing management of our Fixed Maturities and Short-Term Investments portfolios. Net Realized
Gains of $9.2 million for the year ended December 31, 2016 are primarily due to the sale of Equity Securities. Realized losses of $4.3 million and $1.6 million for the year ended December 31, 2016 in the Fixed Maturities and Short-Term Investments portfolios, respectively, are primarily due to the foreign exchange losses in our Canadian Dollar (“CAD”) and GBP portfolios. Net Realized Gains of $8.4 million for the year ended December 31, 2015 are primarily due to the sale of Equity Securities. Realized losses of $5.9 million in Fixed Maturities are primarily due to foreign exchange loss on the sale and maturity of Fixed Maturities in our Canadian portfolio.
Other Income (Loss) for the years ended December 31, 2017, 2016 and 2015 was ($4.3) million, $8.6 million and ($0.6) million, respectively. Other Income (Loss) primarily consists of realized and unrealized foreign exchange gains and losses.
The losses in 2017 were mostly driven by the re-measurement of net insurance related assets and liabilities impacted by the combined effect of the weakening of the U.S. Dollar against the Great British pound (“GBP”), Canadian Dollar (“CAD) and Euro (“EUR”).
For the year ended December 31, 2016, average renewal rates decreased 0.1% as compared to the same period in 2015, driven by a 0.5% decrease from our Marine operating segment.
The increase in our Professional Liability operating segment’s retention ratio was primarily attributable to a reduction in proportional reinsurance coverage that supports our D&O business.
Net Earned Premiums increased $45.4 million for the year ended December 31, 2017 as compared to the same period in 2016 primarily due to growth within our P&C operating segment and recent reductions to the level of proportional reinsurance within our Professional Liability operating segment. These increases to Net Earned Premiums were partially offset by increased proportional reinsurance on our Property product, a decrease in the amount of premium written in our Marine operating segment and an increase in ceded RRPs related to Hurricane Irma and other large loss events.
Net Earned Premiums increased $73.5 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in Gross Written Premiums, a reduced level of proportional reinsurance within our P&C and Professional Liability operating segments, and a $4.6 million decrease in RRPs from 2015.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 17.1 points as compared to the same period in 2016, primarily driven by:
$1.7 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 due to unfavorable development on large loss activity within our Cargo product line, compared to $10.1 million of Net Prior AY reserve releases for the same period in 2016.
$2.1 million of ceded RRP expense primarily due to Hurricane Irma and other large loss activity for the year ended December 31, 2017.
Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are favorable performance within certain products driving the decrease in the Adjusted Net Losses and LAE Ratio.
For the year ended December 31, 2017, the Reported Net Losses and LAE Ratio for our P&C operating segment decreased 1.4 points as compared to the same period in 2016. This was primarily driven by:
Favorable performance primarily within our Excess Casualty and Auto divisions, coupled with changes in the mix of business driving the decrease in Adjusted Net Losses and LAE Ratio.
$1.6 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017, primarily due to large loss activity within our Primary Casualty division, partially offset by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions. This compares to $2.8 million of Net Prior AY Reserve Strengthening for the same period in 2016.
Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are $8.9 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT loss of $6.6 million from Hurricanes Harvey and Irma and $2.3 million of large losses primarily in our Property product. This compares to $1.8 million of Additional Net Current AY Reserve Development for the same period in 2016.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment increased 5.8 points as compared to the same period in 2016, primarily due to:
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 1.4 points as compared to the same period in 2015 driven by our Professional Liability and Marine operating segments, partially offset by a decrease in our P&C operating segment.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 4.7 points as compared to the same period in 2015, primarily driven by:
$10.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 compared to $24.8 million of Net Prior AY Reserve Releases for the same period in 2015, with both periods’ releases driven by better than expected large loss emergence.
$1.1 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 compared to $10.0 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to losses related to Hurricane Joaquin.
$0.8 million of ceded RRP expense for the year ended December 31, 2016, as compared to $4.1 million of ceded RRP expense primarily due to Hurricane Joaquin for the same period in 2015.
Favorable performance primarily within our Environmental and Other P&C divisions, coupled with changes in the mix of business driving the decrease in Adjusted Net Losses and LAE Ratio.
Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are $2.8 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 driven by unfavorable development on large claims within our Primary Casualty division.
$6.0 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 driven by unfavorable development on large claims within our D&O division and bad debt expense due to lower expectation of recoveries from a large reinsurer. This compares to $3.8 million of Net Prior AY Reserve Releases for the same period in 2015 driven by favorable emergence on large loss activity.
Our Commission Expense Ratio increased 1.2 percentage points for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the reduction in ceded proportional reinsurance and related ceding commission benefit within our Professional Liability and P&C operating segments, partially offset by the implementation of new proportional reinsurance programs within our Marine operating segment.
The following tables summarize our financial results by operating segment for our Int’l Insurance reporting segment for the years ended December 31, 2017, 2016 and 2015:
The decrease in our P&C operating segment was primarily driven by a decline in our Property division, partially offset by increases in our General Liability division, Political Violence & Terrorism product and Energy & Engineering division. The decrease in our Property division was related to strategic actions taken to exit our North American and International Property business. The increase in our General Liability division was driven by new business, a larger renewal base and increased premium estimates. The increase in our Political Violence & Terrorism product was driven by new business. Our Energy & Engineering division increase was driven by new business production in our Offshore Energy product.
The increase in our Professional Liability operating segment’s Net Earned Premium was driven by growth in our Other Professional Liability division, Financial Institution business in our D&O division, and our E&O division offset by ceded premium adjustments on prior years.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 10.8 points as compared to the same period in 2016 driven by increases in our Marine and Professional Liability operating segments, partially offset by a decrease in our P&C operating segment.
$3.1 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 related to loss development in our Property division, partially offset by favorable loss emergence within our Offshore Energy business. This compares to $7.1 million of Net Prior AY reserve release related to favorable loss emergence.
The impact of additional ceded protection on Net Earned Premiums driving the 2.3 point increase in Adjusted Net Losses and LAE Ratio.
$37.1 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 consisting of $22.0 million of losses from our Property division due to weather-related losses and adverse loss emergence from our Energy & Engineering division as well as CAT losses of $15.1 million attributable to Hurricane Matthew, the Alberta Wildfires and the Taiwan Earthquake. This compares to $6.9 million of Additional Net Current AY Reserve Development for the same period in 2015 arising from large loss activity.
$2.4 million of ceded RRP expense primarily for the year ended December 31, 2016.
Repositioning of certain E&O products drove the 4.6 point decrease in Adjusted Net Losses and LAE Ratio.
The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2017, 2016 and 2015:
Ceded Written Premiums were $9.7 million, resulting in a retention ratio of 95.7%, for the year ended December 31, 2017 compared to $8.4 million, resulting in a retention ratio of 94.9%, for the same period in 2016. The increase in the retention ratio was primarily due to changes in the mix of business with proportionately more A&H premium, which had 100% retention. This increase was partially offset by the impact of ceded RRPs resulting from Hurricane Maria.
The Net Losses and LAE Reserves as of December 31, 2017, 2016 and 2015 are as follows:
$2.8 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 mostly related to the settlement of a large A&H claim and unfavorable loss emergence within our P&C product, partially offset by favorable loss emergence across our Agriculture and Marine products, compared to $2.2 million of Net Prior AY Reserve Releases for the same period in 2016, related to our A&H product.
A $6.1 million net RRP benefit was primarily due to the CAT losses from Hurricanes Harvey, Irma and Maria consisting of $7.5 million of assumed RRPs, partially offset by $1.4 million of ceded RRPs, compared to a $1.6 million net RRP benefit for the same period in 2016.
The Adjusted Net Losses and LAE Ratio decreased 5.8 points year over year due to changes in mix of business with proportionally less earnings coming from our A&H product, which carries a higher loss ratio.
$2.2 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 driven by favorable loss emergence mostly from our A&H product. This compares to $9.1 million of Net Prior AY Reserve Releases for the same period in 2015 related to our Marine, P&C and A&H products due to lower than expected loss activity.
We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Our Parent Company’s cash obligations primarily consist of semi-annual (April and October) interest payments of $7.6 million on the Senior notes.
NIC may pay dividends to our Parent Company out of our statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2017, the maximum amount available for the payment of dividends by NIC in 2018 without prior regulatory approval is $105.7 million.
On October 4, 2013, we completed a public debt offering for $265.0 million of 5.75% Senior notes due on October 15, 2023 and received net proceeds of $263.3 million. The effective interest rate related to the net proceeds received from the 5.75% Senior notes is approximately 5.86%. Interest is payable on the 5.75% Senior notes each April 15 and October 15. The terms of the 5.75% Senior notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of December 31, 2017, our Company was in compliance with all such covenants.
On November 4, 2016, NUAL entered into an Australian Dollar credit facility, which was subsequently amended on October 30, 2017, with Barclays Bank PLC. Letter of Credit commissions are payable under this facility at a rate of 1.55% per annum. The facility may be cancelled by either party after providing written notice. This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd’s. As of December 31, 2017, letters of credit with an aggregate face amount of 24.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.
On November 7, 2016, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent for a syndicate of lenders (the “Club Facility”), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd’s. The Club Facility has two tranches with one tranche extending a $140.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2017 UWY, we amended the $25.0 million credit facility with ING Bank N.V., London Branch dated November 20, 2015, on November 7, 2016 to extend the term for an additional two years (the “Bilateral Facility”). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd’s for the 2017 UWY, as well as open prior UWYs.
The Bilateral Facility is a non-committed facility which has an applicable fee rate ranging from 0.85% to 1.20% per annum based upon our Company’s S&P rating. For the Club Facility the applicable fee rate payable ranges from 0.95% to 1.60% per annum based on a tiered schedule that is based on our then-current financial strength ratings issued by S&P and A.M. Best and the amount of our own collateral utilized to fund our participation in the Syndicate. If any letters of credit remain outstanding under these facilities after December 31, 2018, we would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2017, letters of credit with an aggregate face amount of $125.0 million and £60.0 million were outstanding under the Club Facility and we had an aggregate of $1.1 million of cash collateral posted. As of December 31, 2017 there were letters of credit with a face amount of $25.0 million outstanding under the Bilateral Facility.
Net cash provided by operating activities was $265.3 million for the year ended December 31, 2017 compared to $229.4 million for the same period in 2016. Operating cash flows increased from the prior year due to the growth of our business, coupled with increased investment income collections due to growth in invested assets and higher yields. These increases were partially offset by higher federal tax payments and refunds of cash collateral held for certain lines of business.
Net cash used in investing activities was $247.7 million for the year ended December 31, 2017 compared to $211.4 million for the comparable period in 2016. The increase in cash used in investing activities is the result of changes in operating cash flows and the associated ongoing management of our investment portfolio.
Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. Since 1993, we have generated positive cash flows from operations, notwithstanding the impacts of the global financial crisis and the recognition of significant natural CAT-related losses during these years. Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize our cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities which would be available in two business days under normal market conditions. Unrestricted Cash and Short Term investments, together with Fixed Maturities due in one year or less, total $410.5 million at December 31, 2017. By comparison, we estimate that the largest exposure to loss from a single 1 in 250 year natural CAT event as of December 31, 2017, results in a probable maximum pre-tax gross and net loss of approximately $182.1 million and $39.9 million, respectively, including the cost of RRPs.
Our Company anticipates closing on the purchase of all of the shares of ASCO and BDM in the first half of 2018. The aggregate consideration for the acquisition of ASCO and BDM is EUR 35 million and will be funded through our Company’s existing capital resources. See Footnote 8, Commitment and Contingencies, in our consolidated financial statements included in this Annual Report on Form 10-K for further information.
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2017:
Due to the uncertainty regarding the timing and amounts related to the Transition Tax that will ultimately be paid has been excluded from the above contractual obligations table. See Footnote 9, Income Taxes, in our consolidated financial statements included in this Annual Report on Form 10-K for further information.
Our portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. The primary objectives are to maximize total investment return in the context of preserving and enhancing stockholder value and the statutory surplus of our regulated insurance companies. As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. As of December 31, 2017, the tax-exempt portion of our Fixed Maturities portfolio was approximately 22.4%. Additionally, substantially all of our Equity Securities portfolio is invested in tax efficient securities which qualify for the dividends received deduction. Our investments are subject to the oversight of the respective insurance companies’ Boards of Directors and the Finance Committee of the Parent Company’s Board of Directors.
The following table summarizes the composition of our available-for-sale investments at fair value:
The following table sets forth our U.S. Treasury Bonds, agency bonds and Foreign Government Bonds, as well as our State, Municipality and Political Subdivision Bond holdings by type:
As of December 31, 2017, we own $53.6 million of municipal securities, which are credit enhanced by various financial guarantors which have an average underlying credit rating of AA-.
The following table sets forth our Agency Residential Mortgage-Backed Securities (“AMBS”) issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) and the quality category (Prime, Alternative A-paper (“Alt-A”) and Other for Residential Mortgage -Backed Securities (“RMBS”) as of December 31, 2017:
Details of the collateral of our Asset-Backed Securities portfolio as of December 31, 2017 are presented below:
As of December 31, 2017, the fair value of securities issued in foreign countries was $353.1 million, with an amortized cost of $352.8 million, representing 10.7% of our total Fixed Maturities and Equity Securities. Our largest exposure is Canada with a total of $152.3 million followed by the United Kingdom with a total of $40.2 million.
Our Company did not have gross unrealized investment losses where the fair value was less than 80.0% of amortized cost as of December 31, 2017.
Our Company had four credit related OTTI losses of $2.1 million in our Equity Securities portfolio during the year ended December 31, 2017. During the year ended December 31, 2016, we recognized one credit related OTTI loss of $0.2 million in our Fixed Maturities portfolio. During the year ended December 31, 2015, we recognized three credit related OTTI losses of $1.7 million in our Equity Securities portfolio.
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell Fixed Maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis. For Equity Securities, we also consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. We may realize investment losses to the extent our liquidity needs require the disposition of Fixed Maturity Securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.
The reserves for asbestos exposures as of December 31, 2017 are for: (i) one large settled claim for excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years and (ii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our U.S. Marine operating segment loss reserves.
There can be no assurances that material loss development may not arise in the future from existing asbestos claims or new claims given the evolving and complex legal environment that may directly affect the outcome of the asbestos exposures of our insureds.
Hurricanes Harvey, Irma and Maria impacted 2017 with a total estimated net loss for the year of $67.5 million and $0.3 million in additional Net RRPs.
The magnitude and complexity of losses arising from these events inherently increases the level of uncertainty as well as management judgment involved in determining our estimated net reserve for loss expenses. As a result, our actual losses from these events may ultimately differ materially from our current estimates.
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for the Alberta Wildfires for the years ended December 31, 2017 and 2016:
The Alberta wildfires impacted 2016 with a total estimated net loss for the year of $11.7 million and $1.8 million in additional RRPs. During 2017, the net loss decreased by $2.6 million due to favorable development. The RRP decreased by $0.6 million.
Hurricane Joaquin impacted 2015 with a total estimated net loss for the year of $10.0 million and $4.0 million in additional RRPs. At December 31, 2016 the RRPs were $2.6 million, reduced by $1.3 million as a result of losses reported not subject to excess of loss reinsurance protection. At December 31, 2017, there was an overall RRP increase of $0.4 million as a result of a $3.6 million increase in gross losses with no net loss impact.
Our Company has established a reserve for uncollectible reinsurance in the amount of $12.6 million and $12.1 million as of December 31, 2017 and 2016, respectively. Our reserve is determined by considering reinsurer specific default risk as indicated by their financial strength ratings, as well as additional default risk for asbestos and environmental related recoverables or an individual impairment assessment for certain reinsurers that exhibit additional default risk. Actual uncollectible reinsurance could potentially differ from the estimate. The increase in our reserves for uncollectible reinsurance as compared to 2016 is driven primarily by one of our reinsurers having been placed in liquidation by the State of California. We continue to monitor the liquidation process and assess our potential exposure.
This method is based on the assumption that ultimate losses vary proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the ultimate losses for each UWY, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss ratios applied are our Company’s best estimates for each UWY and are generally determined after evaluating a number of factors which include: information derived by underwriters and actuaries in the initial pricing of our business, the ultimate loss ratios established in the prior accounting period and the related judgments applied, the ultimate loss ratios of previous UWYs, premium rate changes, underwriting and coverage changes, changes in terms and conditions, legislative changes, exposure
trends, loss development trends, claim frequency and severity trends, paid claims activity, remaining open case reserves and industry data where deemed appropriate. Such factors are also evaluated when selecting ultimate loss ratios and/or loss development factors in the methods described below.
The following discusses the method used for calculating the IBNR for various lines of business and key assumptions used in applying the actuarial methods described.
For long tailed lines of business the uncertainty is greater. Due to the amount of time it takes a long tailed segment to mature, there is uncertainty with regards to how any line of business or year will settle as well as uncertainty with regards to the path it will take to settle. Additionally, due to their long tailed nature, many of the lines of business that are not new but are long tailed may not have a mature historical dataset from which to derive credible estimates for reserving. For these segments, while standard actuarial reserving methods would usually be applied, the loss development method would generally only be applied in the more mature years where the expectation is that they are close to ultimate. Where internal data on long tailed lines lacks sufficient credibility, overall industry experience would be evaluated and the input of underwriting and claims executives in setting assumptions would be considered.
The data distribution as of December 31, 2017 as measured by net case reserves outstanding is as follows:
We have accounted for the tax effects of the Tax Act on a provisional basis. SAB 118 has provided guidance for companies that are still analyzing their accounting for the income tax effects of the Tax Act in the period of enactment, allowing for a measurement period of up to one year after the enactment date to finalize the recording of the related tax impacts. As of December 31, 2017, we have made a reasonable estimate of the effects on our deferred tax balances and the Transition Tax.
Management regularly reviews our Fixed Maturity and Equity Securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Our investment portfolio is the largest component of consolidated assets and a multiple of stockholder’s equity. OTTI could be material to our financial condition and results of operations. Refer to Note 3, Investments, in the Notes to Consolidated Financial Statements for additional information.
Refer to Note 1. Organization & Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements that we have not yet adopted.
Our Consolidated Financial Statements required in response to this section are submitted as part of Item 15(a) of this report.