The Company also owns real estate property which operates as office facilities in Antwerp, Belgium.
(2) - Cash that was misclassified within Short-Term Investments prior to 2018 was reclassified, representing an immaterial correction. Refer to Note 1 Organization & Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, for further information.
(3) - Net Losses and LAE Reserves is comprised of our Reserves for Losses and Loss Adjustment Expenses less our Reinsurance Recoverable on Unpaid Losses and Loss Adjustment Expenses.
(4) - Calculated as stockholders’ equity divided by actual shares outstanding as of the date indicated.
Book value is equivalent to Stockholders’ Equity and Book Value per Share is calculated by dividing Stockholders’ Equity by the number of outstanding shares at the end of the period being presented.
The Combined Ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in three components. First, the Loss Ratio is represented by Net Losses and LAE divided by Net Earned Premiums. The second component is the Commission Expense Ratio, which is Commission Expenses divided by Net Earned Premiums. The third component is the Other Operating Expense Ratio, which reflects the sum of Other Operating Expenses and Other Underwriting Income (Expense), divided by Net Earned Premiums. All items included in these components of the Combined Ratio are presented in our GAAP Consolidated Financial Statements. The sum of the Loss Ratio, Commission Expense Ratio and Other Operating Expense Ratio is the Combined Ratio. The difference between the Combined Ratio and 100% reflects the rate of Underwriting Profit (Loss). For example, a Combined Ratio of 85% implies that for every $100 of premium we earn, we record $15 of Underwriting Profit.
Underwriting Profit (Loss) represents one measure of the pre-tax profitability of our insurance operations and is derived by subtracting the following from Net Earned Premiums: Net Losses and LAE, Commission Expenses, Other Operating Expenses and Other Underwriting Income (Expense). This information is available in total and by segment in the Notes to Consolidated Financial Statements. The nearest comparable GAAP measure is Income Before Income Taxes which, in addition to Underwriting Profit (Loss), includes Net Investment Income, Total Net Realized and Unrealized Gains (Losses) recognized in our Consolidated Statements of Income, Interest Expense, Other Income (Loss), and Merger Transaction Costs. While this measure is presented in the footnotes to the Consolidated Financial Statements, it is considered a “non-GAAP financial measure” as defined in Regulation G when presented elsewhere on a consolidated basis.
We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer P&C insurance, primarily 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.
We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance by our four reportable segments: U.S. Insurance, Int’l Insurance, GlobalRe and Corporate.
The following table calculates our Net Operating Earnings for the years ended December 31, 2018, 2017 and 2016:
(1) - Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of any other relevant factors.
The Company’s Underwriting Loss of $9.6 million for the year ended December 31, 2018, decreased by $28.1 million, compared to the same period in 2017.
The decrease in the Underwriting Loss was largely attributable to lower Net Current AY Losses and LAE primarily due to a lower level of catastrophe losses with $26.3 million of net catastrophe losses net of RRPs in 2018 related to Typhoon Jebi, Hurricane Michael, Hurricane Florence, the California Camp Fire, Typhoon Trami, and other CAT events, compared to $85.2 million of net catastrophe losses inclusive of net RRPs in 2017 mostly related to Hurricanes Harvey, Irma, and Maria (the “Hurricane events”), the Puebla, Mexico Earthquake, Typhoon Hato, and other CAT events. Also contributing to the decrease was the impact of growth in Net Earned Premiums across all of our reporting segments.
The Company recognized an Underwriting Loss of $37.7 million for the year ended December 31, 2017, compared to an Underwriting Profit of $35.9 million for the same period in 2016, representing a deterioration of $73.6 million in underwriting profit.
The Underwriting Loss was driven by higher Net Current AY Losses and LAE primarily due to a higher level of catastrophe losses with $85.2 million of net catastrophe losses inclusive of net RRPs in 2017, mostly related to the Hurricane events, the Puebla, Mexico Earthquake, Typhoon Hato, and other CAT events, compared to $28.6 million of net catastrophe losses inclusive of net RRPs in 2016 mostly related to the Alberta Wildfires, Hurricane Matthew, the Ecuador earthquake, and the Taiwan earthquake. Also contributing to the deterioration was $34.3 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 compared to $28.5 million of Net Prior AY Reserve Releases, for the same period in 2016.
A major component of our Underwriting Profit (Loss) is Net Losses and LAE. The following table presents the current and prior accident year (“AY”) changes in our Net Losses and LAE Ratio for the years ended December 31, 2018, 2017 and 2016:
For the year ended December 31, 2018, our Reported Net Losses and LAE Ratio decreased 2.4 points as compared to the same period in 2017 primarily driven by:
The year ended December 31, 2018 recognized $76.2 million of Net Prior AY Reserve Strengthening. This strengthening was attributable to worse than expected loss emergence in our Marine and Professional Liability operating segments within our Int’l Insurance reporting segment, higher than expected claims activity in our Accident & Health (“A&H”) product within our GlobalRe reporting segment, and worse than expected loss emergence in our P&C and Professional Liability operating segments within our U.S. Insurance reporting segment. This strengthening was partially offset by net catastrophe loss releases primarily related to the Hurricane events and the Puebla, Mexico Earthquake that occurred during 2017.
The year ended December 31, 2017 recognized $34.3 million of Net Prior AY Reserve Strengthening. This strengthening was primarily attributable to strengthening of our Professional Liability operating segment within our U.S. Insurance reporting segment, strengthening of our Marine, P&C and Professional Liability operating segments within our Int’l Insurance reporting segment and the settlement of a large A&H claim in our GlobalRe reporting segment.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 7.5 points as compared to the same period in 2016 primarily driven by:
Our Company did not incur credit related OTTI losses during the year ended December 31, 2018. Our Company had four credit related OTTI losses totaling $2.1 million in our Equity Securities portfolio during the year ended December 31, 2017. Our Company had one credit related OTTI loss of $0.2 million from our Fixed Maturities portfolio during the year ended December 31, 2016. Upon the adoption of ASU 2016-01 as of January 1, 2018, changes in the fair value of Equity Securities are now recognized in Net Income.
Interest Expense was $15.5 million for the year ended December 31, 2018, respectively, relating to our $265.0 million principal amount of the Senior Notes. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, is approximately 5.86%.
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 USD against the GBP, CAD and EUR.
The increase in our Professional Liability operating segment was primarily due to an increased level of renewals, new business and improved rates.
The decrease in our P&C operating segment’s retention ratio was primarily the result of changes in the mix of business within this operating segment with proportionately more premium written in our Excess Casualty division, which has a lower retention ratio, partially offset by proportionately more premium written in our Auto division, which has a higher retention ratio.
Ceded Written Premiums were $267.0 million, resulting in a retention ratio of 73.0% of Net Written Premiums to Gross Written Premiums, for the year ended December 31, 2017, compared to Ceded Written Premiums of $235.8 million, resulting in a retention ratio of 74.3%, for the same period in 2016. The decrease in the retention ratio was driven by our P&C and Marine operating segments, partially offset by an increase in the retention ratio for our Professional Liability operating segment.
Our Professional Liability operating segment recognized $9.4 million of Net Prior AY Reserve Strengthening primarily related to worse than expected loss emergence within our D&O division. This compares to $13.4 million of Net Prior AY Reserve Strengthening for the same period in 2017 mostly related to large loss activity within our D&O division.
For the year ended December 31, 2018, our Net Current AY Losses and LAE Ratio increased 0.1 points as compared to the same period in 2017. For the year ended December 31, 2018, we recognized $1.8 million of net catastrophe losses related to Hurricane Michael, the California Camp Fire, Typhoon Jebi, and Hurricane Florence. This compared to $9.2 million of net catastrophe losses inclusive of ceded RRPs for the same period in 2017, primarily related to the Hurricane events.
After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio increased 1.1 points as compared to the same period in 2017 primarily due to:
For the year ended December 31, 2017, our Net Losses and LAE Ratio increased 2.5 points as compared to the same period in 2016 driven by:
Our Marine operating segment recognized $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.
For the year ended December 31, 2017, our Net Current AY Losses and LAE Ratio decreased 0.2 points as compared to the same period in 2016. For the year ended December 31, 2017, we recognized $9.2 million of net catastrophe losses inclusive of ceded RRPs primarily related to the Hurricane events.
After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio decreased 1.5 points as compared to the same period in 2016 primarily due to:
Increased large loss activity in our Marine and P&C operating segments for the year ended December 31, 2017 compared to the same period in 2016.
Our Commission Expense Ratio for the year ended December 31, 2018 remained consistent with the same period in 2017, with decreases in our Marine and P&C operating segments, offset by an increase in our Professional Liability operating segment.
Our Marine operating segment’s Commission Expense Ratio decreased due to lower gross commission rates on certain product lines, changes in the mix of business, and greater ceded commission income.
Our Professional Liability operating segment’s Commission Expense Ratio increased due to the reduction in proportional reinsurance and the related ceding commission benefits primarily within our D&O division.
Our Marine operating segment’s Commission Expense Ratio decreased due to changes in business mix, partially offset by the impact of ceded RRPs related to Hurricane Irma and other large loss activity.
Our P&C operating segment’s Commission Expense Ratio was relatively flat with changes in the business mix largely offset by greater ceding commission income from the proportional reinsurance on our Property product purchased during the second quarter of 2017.
Gross Written Premiums increased $16.7 million for the year ended December 31, 2017 compared to the same period in 2016, driven by increases in our Professional Liability and Marine operating segments of $23.6 million and $15.0 million, respectively, partially offset by a decline in our P&C operating segment of $22.0 million.
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, PV&T 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.
Average renewal premium rates for our Int’l Insurance reporting segment for the year ended December 31, 2017 decreased 2.3% compared to the same period in 2016, driven by decreases of 3.5%, 2.0% and 1.4% in our P&C, Marine and Professional Liability operating segments, respectively.
The P&C operating segment’s increase was driven by strategic actions in 2017 to exit our North American Property business, whereby 100% of the unexpired risk was ceded, an increase in our Energy & Engineering division’s retention ratio due to a reduction in proportional reinsurance, and a lower level of ceded RRPs as 2017 was impacted by the Hurricane events.
Ceded Written Premiums were $165.3 million, resulting in a retention ratio of 67.0%, for the year ended December 31, 2017, compared to Ceded Written Premiums of $138.5 million, resulting in a retention ratio of 71.4%, for the same period in 2016. The decrease in the retention ratio was primarily driven by our P&C operating segment, whereby 100% of the unexpired risk on our North American Property business was ceded effective January 1, 2017 as part of strategic actions taken to exit this book of business. Additionally, the impact of an increase in ceded RRPs related to Hurricanes Irma, Maria and Harvey and an increase in excess of loss reinsurance negatively impacted retention in that operating segment.
Net Earned Premiums increased $46.7 million for the year ended December 31, 2018, as compared to the same period in 2017. The increase was driven by growth in our Professional Liability and P&C operating segments, partially offset by a small decrease in our Marine operating segment.
The increase in our Professional Liability operating segment’s Net Earned Premium was driven by increased production across all divisions.
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, partially offset by ceded premium adjustments on prior years.
For the year ended December 31, 2018, our Reported Net Losses and LAE Ratio decreased 2.5 points as compared to the same period in 2017 driven by:
For the year ended December 31, 2018, our Net Prior AY Losses and LAE Ratio increased 3.8 points as compared to the same period in 2017 primarily driven by:
Our Marine operating segment for the year ended December 31, 2018 recognized $21.8 million of Net Prior AY Reserve Strengthening, including $17.7 million of net non-catastrophe reserve strengthening with adverse development in the Hull, Cargo, Transport, and Specie products due to worse than expected loss emergence and $4.1 million of net catastrophe reserve strengthening primarily related to Typhoon Hato, partially offset by favorable development in the Energy Liability, Marine Liability and Protection & Indemnity products. This compares to $6.5 million of Net Prior AY Reserve Strengthening for the same period in 2017 due to adverse loss development primarily related to our Cargo, Specie and Protection & Indemnity products.
Our Professional Liability operating segment for the year ended December 31, 2018 recognized $14.5 million of Net Prior AY Reserve Strengthening primarily related to adverse development on a large loss in our D&O division and worse than expected loss emergence within our E&O division. This compares to $5.2 million of Net Prior AY Reserve Strengthening for the same period in 2017 related to large loss development on our D&O and E&O business.
Our P&C operating segment for the year ended December 31, 2018 recognized $4.9 million of Net Prior AY Reserve Releases resulting from $4.4 million of net catastrophe loss release primarily related to the 2017 Hurricane events and the Puebla, Mexico Earthquake and $0.5 million of net non-catastrophe related reserve release with better than expected loss emergence in our PV&T division, partially offset by unfavorable loss emergence on the runoff of our Property division’s business and worse than expected loss emergence within our Onshore Energy product. This compares to $3.1 million of Net Prior AY Reserve Strengthening for the same period in 2017 related to loss development in our Property division primarily resulting from late reported claims, partially offset by releases related to better than expected loss emergence within our Offshore Energy business.
For the year ended December 31, 2018, our Net Current AY Losses and LAE Ratio decreased 6.3 points as compared to the same period in 2017, with the reduced level of catastrophe activity being the primary driver. During the year ended December 31, 2018, we recognized $3.5 million of net catastrophe losses primarily related to Hurricane Florence and Hurricane Michael, compared to $35.2 million inclusive of ceded RRPs for the same period in 2017 primarily related to the Hurricane events, Typhoon Hato, the California Wildfires, and the Puebla, Mexico Earthquake.
unfavorable performance within certain key products within the Marine, P&C, and Professional Liability operating segments; and
Our Professional Liability operating segment for the year ended December 31, 2017 recognized $5.2 million of Net Prior AY Reserve Strengthening related to large loss development on our D&O and E&O business. This compares to $4.1 million of Net Prior AY Reserve Strengthening related to bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.
For the year ended December 31, 2017, our Net Current AY Losses and LAE Ratio decreased 1.7 points as compared to the same period in 2016. For the year ended December 31, 2017, we recognized $35.2 million of net catastrophe losses inclusive of ceded RRPs primarily related to the Hurricane events, Typhoon Hato, the California Wildfires, and the Puebla, Mexico Earthquake. This compared to $19.2 million of net catastrophe losses inclusive of ceded RRPs for the same period in 2016, related to the Ecuador Earthquake, Hurricane Matthew, the Alberta Wildfires, and the Taiwan Earthquake.
After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio decreased 6.0 points as compared to the same period in 2016 primarily due to:
Decreased large loss activity within our Energy & Engineering and Property divisions; and
The decrease in our P&C operating segment was due to the reduced provision for sliding scale commission on older years and the impact of ceded RRPs related to the Hurricane events on the 2017 Commission Expense Ratio.
Our Marine operating segment’s Commission Expense Ratio decreased due to lower profit commissions compared to the prior year and the Net Earned Premiums impact of RRPs related to Hurricanes Irma and Harvey.
Other Underwriting Income for the year ended December 31, 2018 increased $2.2 million, as compared to the same period in 2017 primarily due to managing agent fee income related to the NICE Group.
The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2018, 2017 and 2016:
Gross Written Premiums increased $75.3 million for the year ended December 31, 2018, compared to the same period in 2017, primarily due to new business and increased renewals in our A&H, P&C, Specialty Casualty, and Surety products. In addition, our A&H and P&C products were impacted by increased premium estimates, and our Specialty Casualty product was impacted by timing on renewals for two large contracts. Assumed RRP benefit of $6.4 million, primarily on CAT losses attributable to Typhoons Jebi and Trami, Hurricane Michael and California Camp Fire were recognized during 2018, compared to $7.5 million for the same period in 2017.
Gross Written Premiums increased $58.8 million for the year ended December 31, 2017, compared to the same period in 2016, with growth across all of our segment’s products. Our A&H product had significant growth, increasing $24.1 million, attributable to new business and increased renewal business. Growth was seen in our P&C, Surety and Agriculture business, as well as an increase of $4.9 million in assumed RRPs, primarily attributable to CAT losses from Hurricanes Harvey, Irma and Maria, period over period.
Ceded Written Premiums were $11.4 million, resulting in a retention ratio of 96.2% of Net Written Premiums to Gross Written Premiums, for the year ended December 31, 2018, compared to Ceded Written Premiums of $9.7 million, resulting in a retention ratio of 95.7%, for the same period in 2017. The increase in the retention ratio was primarily driven by the impact of changes in the mix of business with proportionately more A&H and Specialty Casualty premium, which had 100% retention, and the prior year impact of ceded RRPs resulting from Hurricane Maria. This was partially offset by additional ceded coverage purchased on our P&C products and increased ceded premium estimates in our Surety product during the year.
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.
Net Earned Premiums for the year ended December 31, 2017 increased $14.3 million as compared to the same period in 2016, primarily due to continued growth in our P&C, Agriculture and Specialty Casualty products. In addition, there was an increase in net assumed RRP benefit with a $6.1 million net RRP benefit for the year ended December 31, 2017, compared to a $1.6 million net RRP benefit for the same period in 2016. The net assumed RRP benefit in 2017 was primarily related to RRPs on Hurricanes Irma and Harvey. Partially offsetting these increases in Net Earned Premiums was the impact from non-renewals in 2016 and late 2015 in our A&H product earning into 2017 as compared to 2016.
For the year ended December 31, 2018, our Reported Net Losses and LAE Ratio decreased 11.4 points as compared to the same period in 2017 driven by:
For the year ended December 31, 2017, our Net Current AY Losses and LAE Ratio increased 17.4 points as compared to the same period in 2016, primarily driven by an increase in catastrophe losses. During the year ended December 31, 2017, we recognized $40.7 million of net catastrophe losses net of RRPs from the Hurricane events, the Puebla, Mexico Earthquake, and other CAT events. This compared to $9.4 million of 2016 catastrophe losses mostly from the Alberta Wildfires, Ecuador Earthquake, Taiwan Earthquake, and other weather-related catastrophe events.
After adjusting for these catastrophe losses, our Current AY Losses and LAE Ratio decreased 0.5 points as compared to the same period in 2016 primarily due to changes in mix of business with proportionally less earnings coming from our A&H product, which carries a higher loss ratio, and an increase in earnings from our P&C products, which carry lower loss ratios.
Our Commission Expense Ratio for the year ended December 31, 2018 increased 0.5 points compared to the same period in 2017. The increase was primarily due to changes in the mix of business with more proportional A&H and Specialty Casualty premium earned with higher Commission Expense Ratios.
Our Commission Expense Ratio for the year ended December 31, 2017 increased 1.2 points as compared to the same period in 2016. The increase was attributable to higher profit commission expense particularly on our Surety product and changes in the mix of business, partially offset by the effect of fully earned net RRPs from Hurricanes Irma, Harvey and Maria.
Other Operating Expenses for the year ended December 31, 2017 increased $1.3 million as compared to the same period in 2016, primarily due to costs associated with new business initiatives.
We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations, which mostly consist of semi-annual (April and October) interest payments of $7.6 million on the Senior Notes. We continue to believe that the dividend capacity of our subsidiaries will provide our Parent Company with sufficient liquidity for the foreseeable future.
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, 2018, the maximum amount available for the payment of dividends by NIC in 2019 without prior regulatory approval is $5.2 million. During 2018, NIC paid dividends of $97.0 million to our Parent Company, related to the acquisition and subsequent funding of the NICE Group. The statutory calculation for dividends without prior regulatory approval uses a rolling twelve-month basis, and as of December 31, 2018 this calculation was temporarily impacted by the dividends used to acquire the NICE Group during the first half of 2018. This calculation also excludes consideration for the Company’s ability to request extraordinary dividends.
NCUL, our wholly-owned corporate member at Lloyd’s, may pay dividends to our Parent Company up to the extent of available profits that have been distributed from the Syndicate. As of December 31, 2018, there are no profits available for distribution.
ASCO may only pay a dividend if at the end of its last fiscal year the total amount of its assets, as reduced by its provisions and debts, are in excess of certain minimum capital thresholds calculated under Belgian law. As of December 31, 2018, ASCO may not declare a dividend.
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, 2020, we would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2018, letters of credit with an aggregate face amount of $165.0 million and £60.0 million were outstanding under the Club Facility and we had an aggregate of $1.2 million of cash collateral posted. As of December 31, 2018 there were letters of credit with a face amount of $8.0 million outstanding under the Bilateral Facility.
Net cash provided by operating activities was $342.3 million for the year ended December 31, 2018 compared to $265.3 million for the same period in 2017. 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. Additionally, estimated federal tax payments were less in 2018 as compared with 2017 due to a decrease in our effective tax rate associated with the Tax Act as well as an increase in cash collateral collections for certain lines of business.
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 $350 million at December 31, 2018. By comparison, we estimate that the largest exposure to loss from a single 1 in 250 year natural CAT event as of December 31, 2018, results in a probable maximum pre-tax gross and net loss of approximately $191.0 million and $46.0 million, respectively, including the cost of RRPs.
Our ability to underwrite is dependent upon the financial strength of NIC, NSIC, Lloyd’s, NIIC and ASCO business. Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are important to our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of our Company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. We could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2018:
Our investment portfolio is invested primarily in publicly traded, investment grade, fixed income securities with an average credit quality of AA-/Aa3 as rated by S&P or Moody’s Investors Service (“Moody’s”). As of December 31, 2018, our portfolio had a duration of 3.4 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims.
As of December 31, 2018 and December 31, 2017, all Fixed Maturities Securities were classified as Available-For-Sale. Upon adoption of the FASB’s ASU 2016-01 on January 1, 2018, our Equity Securities have been measured at fair value with changes in fair value recognized through Net Income. Prior to the adoption of ASU 2016-01, our Equity Securities were classified as Available-For-Sale with change in fair value recognized through Accumulated Other Comprehensive Income.
We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our invested assets. An increase in interest rates will tend to increase our yield and have a negative effect on the fair value of our invested assets.
Invested assets increased from December 31, 2017 due to positive operating cash flow partially offset by an increase in unrealized losses due to rising interest rates, credit spread widening and equity market losses. Operating cash flows were primarily directed to Residential Mortgage Obligations, and Asset Backed Securities, some of which are floating rate securities which protect against interest rate risk in a rising rate environment. Operating cash flows were also directed to Corporate Exposures at attractive spreads. Furthermore, certain short dated Municipal Bonds were sold due to technical market factors. The increase in Common Stocks is due to the equity portfolio of the NICE Group, which was acquired as part of the purchase of these entities, as well as the purchase of passively managed equity mutual funds.
The following table sets forth the amount of our Fixed Maturities as of December 31, 2018 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating.
(1) - The total rating is the weighted average quality rating for the Fixed Maturities portfolio as a whole.
The following table sets forth the composition of the non-government guaranteed Fixed Maturities categorized by asset class and generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s):
As of December 31, 2018, we own $23.1 million of municipal securities, which are credit enhanced by various financial guarantors which have an average underlying credit rating of A.
As of December 31, 2018, the fair value of securities issued in foreign countries was $380.6 million, with an amortized cost of $389.3 million, representing 11.1% of our total Fixed Maturities and Equity Securities. Our largest exposure is Canada with a total of $145.1 million followed by the United Kingdom with a total of $41.9 million.
The following table summarizes the gross unrealized losses as of December 31, 2018 by length of time where the fair value was less than 80% of amortized cost:
Our Company had no credit related OTTI losses during the year ended December 31, 2018. Our Company had four credit related OTTI losses totaling $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.
The reserves for asbestos exposures as of December 31, 2018 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.
Our Company has exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess the concentration of underwriting exposures in catastrophe-exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. Our Company also uses modeling and concentration management tools that allow better monitoring and better control of the accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.
The occurrence of large loss events could reduce the reinsurance coverage that is available to our Company and could weaken the financial condition of the reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to policyholders, as our Company is required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
Our Company utilizes reinsurance principally to reduce the exposure on individual risks, to protect against catastrophic losses and to stabilize loss ratios and underwriting results. Our Company is protected by various treaty and facultative reinsurance agreements. The reinsurance is placed either directly by our Company or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
Hurricanes Harvey, Irma and Maria, which occurred in the third quarter of 2017, and the Alberta Wildfires, which occurred in the second quarter of 2016, generated substantial losses in our U.S. and Int’l Marine and P&C operating segments, as well as in our GlobalRe reporting segment. As of December 31, 2018, the net reserves for Hurricanes Harvey, Irma and Maria totaled $1.0 million and the net reserves for the Alberta Wildfires totaled $0.4 million. Management believes that should any adverse loss development for gross claims occur from the aforementioned hurricanes and wildfires, it would be contained within the reinsurance program.
Hurricanes Harvey, Irma and Maria impacted 2018 with a total estimated net benefit for the year of $9.8 million and $0.4 million in additional Net RRPs.
Refer to Note 8, Ceded Reinsurance, in the Notes to Consolidated Financial Statements for additional information.
Reserves for Losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date);
Reserves are established separately for each major product. Our actuaries generally assume that historical loss development patterns are reasonable predictors of future loss patterns and apply a variety of traditional actuarial techniques to develop a reasonable expectation of ultimate losses. However, there are a number of products for which our Company has insufficient experience so as to generate credible actuarial projections. In those instances, we typically evaluate overall industry experience, rely on the input of underwriting, and claims executives in setting assumptions for our IBNR reserves. We also attempt to make reasonable provisions for the impact of economic, legal and competitive trends in projecting future loss development.
Our actuarial IBNR estimation approach is based on the nature of the data generated by the lines of business being reviewed. Each business line can be characterized as either a long or short tailed line of business or, if it is a new business line, the length of the tail would not necessarily be immediately relevant and it would be treated only as a new business line.
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 lines of business, 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.
For new business the assumption is that internal historical data would not be available and the actuaries will typically evaluate based on overall industry experience, and rely on the input of underwriting, and claims executives in setting assumptions for IBNR reserves. Early on, unless there is a credible industry pattern or internal complementary line of business pattern, the loss ratio method would be applied and patterns would only be applied as the business begins to mature. If there is a credible complementary or industry pattern Bornhuetter-Ferguson methods might be applied initially as well, particularly if it is a short tailed line of business.
The following table provides a sensitivity analysis of our Net Reserves for Losses and LAE as of December 31, 2018:
(1) - The totals for each segment are adjusted for portfolio effect. The portfolio effect is the reduction in risk which arises out of diversification in the portfolio.
(2) - Calculated using average diluted shares of 30,193 for the year ended December 31, 2018.
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. Upon adoption of ASU-2016-01 as of January 1, 2018, the changes in the fair value of Equity Securities is recognized through Net Income. 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 4, Investments, in the Notes to Consolidated Financial Statements for additional information.
Goodwill on our Company’s Consolidated Balance Sheets represents the excess of purchase price over the fair value of net assets acquired from our acquisitions. Intangible assets other than goodwill have also been identified as part of our acquisitions when determining the fair value of assets acquired.
Intangible assets other than goodwill included in our Company’s Consolidated Balance Sheets include assets related to customer relationships, the value of business acquired, broker networks, a trade name, licenses, and Lloyd’s syndicate capacity. The valuation of these assets used valuation methods appropriate for determining the market value of each asset. These valuation methodologies used various assumptions which included discount rates, the cost of capital, and forecasting among others.
Goodwill is not amortized, but instead it is assessed for impairment at the reporting unit level on an annual basis or more frequently if indicators of impairment exist.
Intangible assets with a finite life are amortized over the estimated useful life of the asset and intangible assets with an indefinite useful life are not amortized. Finite-lived intangibles are reviewed for impairment when indicators of impairment are present and indefinite-lived intangibles are assessed for impairment on an annual basis or more frequently if indicators of impairment exist.
If goodwill or intangible assets are impaired, they are written down to their fair value with a corresponding expense reflected in the Consolidated Statements of Income in the period in which the determination is made.
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.