The Company leases office space in Pembroke, Bermuda where the Company's principal executive office is located. Additionally, the Company and its subsidiaries lease office space in the United States, the United Kingdom, Switzerland and Singapore sufficient for the operation of its business. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2015, please see Note 12, "Commitments and Contingencies" to our Audited Consolidated Financial Statements.
Book value per share is a non-GAAP measure based on total shareholders' equity available to Endurance Holdings, less the $460.0 million (2011-2014: $430.0 million) redemption value of the preferred stock, divided by basic common shares outstanding of 65,440,712 at December 31, 2015, 43,474,259 at December 31, 2014, 43,107,897 at December 31, 2013, 42,431,589 at December 31, 2012 and 42,366,873 at December 31, 2011.
The general and administrative expense ratio includes general and administrative expenses and corporate expenses. The general and administrative expense ratio is calculated by dividing general and administrative expenses and corporate expenses by net premiums earned.
Blue Capital Management Ltd. ("BCML"), domiciled in Bermuda, manger of Blue Water Re Ltd. ("Blue Water Re") and Blue Water Re II Ltd. ("Blue Water Re II"), domiciled in Bermuda;
Endurance Reinsurance Corporation of America ("Endurance U.S. Reinsurance"), domiciled in Delaware;
Endurance Worldwide Insurance Limited ("Endurance U.K."), domiciled in England with a branch office in Switzerland;
American Agri-Business Insurance Company ("American Agri-Business"), domiciled in Texas and managed by ARMtech Insurance Services, Inc. (together with American Agri-Business, "ARMtech").
Endurance Holdings and its wholly-owned subsidiaries are collectively referred to in this discussion and analysis as the "Company."
Prior to the closing of the acquisition, Montpelier was a publicly traded company listed on the New York Stock Exchange and headquartered in Bermuda. As of the close of trading on July 31, 2015, the common shares of Montpelier ceased trading. Montpelier, through its operating subsidiaries, was a provider of global property and casualty reinsurance and insurance products.
Effective December 29, 2015, Montpelier Reinsurance Ltd., a wholly-owned Bermuda domiciled class 4 insurer, merged with and into Endurance Bermuda with Endurance Bermuda as the surviving company.
Endurance Bermuda holds a 25.1% interest in Blue Capital Global Reinsurance Fund Limited ( "BCGR") is a closed-ended mutual fund incorporated in Bermuda and managed by BCML that serves as the feeder fund for the Blue Capital Global Reinsurance SA-I cell (the "BCGR Cell"). BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
Revenues. The Company derives its revenues primarily from premiums from its insurance policies and reinsurance contracts. The premiums the Company charges for the risks assumed are priced based on many assumptions and are a function of the amount and type of policies and contracts the Company writes as well as prevailing market prices, and, in the case of agricultural insurance contracts, federally mandated pricing and commodity price levels. The Company prices these risks before its ultimate costs are known, which may extend many years into the future.
method of accounting. In accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), trading securities are carried at fair value with unrealized gains and losses recognized through earnings while the available for sale investments are carried at fair value with unrealized gains and losses included on the Company's balance sheet in accumulated other comprehensive (loss) income as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporary due to the Company's intent to sell or requirement to sell such securities, or credit related factors, such losses are included in earnings as net impairment losses recognized in earnings. For other investments, the Company increases or decreases the value of these investments for the Company's share of income or loss, less dividends, through net investment income.
Marketplace Conditions and Trends. In general, management believes operating conditions continued to be competitive in both the insurance and reinsurance markets in which the Company operates in 2015. In most classes of property and casualty business, the Company experienced competitive pricing pressure due to the relatively high levels of underwriting capacity and recent favorable loss trends, particularly in catastrophe exposed property insurance and reinsurance, where rates have declined. In the Company's agriculture insurance business, pricing was relatively stable across the portfolio, although the underlying exposure base has varied with commodity price movements. The Company continued to adhere to its underwriting standards by declining business when pricing, terms and conditions did not meet the Company's underwriting criteria.
Management believes that the following critical accounting policies affect significant estimates used in the preparation of its consolidated financial statements:
anticipated changes in the marketplace and the ceding company's competitive position therein;
Proportional reinsurance contracts accounted for approximately 21%, 22%, and 23% of the Company's gross premiums written during the years ended December 31, 2015, 2014, and 2013, respectively.
may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.
The Company's historical experience has shown that estimated premiums from proportional contracts have varied and have been adjusted by up to approximately 7%, although larger variations, both positive and negative, are possible as a result of changes in one or more of the premium assumptions as noted above. A 7% variation in the Company's proportional premiums receivable, net as of December 31, 2015, after considering the related expected losses and loss expenses, acquisition expenses and taxes, would result in an impact of approximately $2.9 million on the Company's net income.
Under U.S. GAAP, the Company is not permitted to establish loss reserves until the occurrence of an actual loss event. Once such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding companies or insureds as a result of the event, its estimate of the potential losses incurred, and its estimate of the portion of such loss the Company has insured or reinsured. As a result, only loss reserves applicable to losses incurred up to the financial statement date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. See "Reserve for Losses and Loss Expenses" below for further discussion.
Actuarial Methods Used to Estimate Loss and Loss Expense Reserves. The Company uses a variety of actuarial methods to estimate the ultimate losses and loss expenses incurred by the Company. One actuarial method used by the Company to estimate its reserve for losses and loss expenses is the expected loss ratio approach, which is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). Another actuarial method used by the Company is known as the Bornhuetter-Ferguson method. The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate losses. A third actuarial method used by the Company to estimate reserves for losses and loss expenses is known as the loss development method. The loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. Management uses these multiple actuarial methods, supplemented with its own professional judgment, to establish its best estimate of reserves for losses and loss expenses.
Significant Assumptions Employed in the Estimation of Loss and Loss Expense Reserves. The most significant assumptions used as of December 31, 2015 to estimate the reserve for losses and loss expenses within the Company's Insurance and Reinsurance segments are as follows:
the information developed from internal and external sources can be used to develop meaningful estimates of the likely future performance of business bound by the Company;
addition, the Company's Reinsurance segment is subject to additional factors that add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.
The aspects of the Company's casualty, casualty and other specialty and professional lines in the Reinsurance and Insurance segments that complicate the process of estimating loss reserves include the lack of long-term historical data for losses of the same type intended to be covered by the policies and contracts written by the Company and the expectation that a portion of losses in excess of the Company's attachment levels in many of its contracts will be low in frequency and high in severity, limiting the usefulness of claims experience of other insurers and reinsurers for similar claims. In addition, the portion of the Company's casualty and other specialty line in its Insurance segment that is underwritten in Bermuda sometimes includes policy forms that vary from more traditional policy forms. The primary difference in the casualty policy form sometimes used by Endurance Bermuda from more traditional policy forms relates to the coverage being provided on an occurrence reported basis instead of the typical occurrence or claims-made basis used in traditional policy forms. The occurrence reported policy forms typically cover occurrences causing unexpected and unintended personal injury or property damage to third parties arising from events or conditions that commence at or subsequent to an inception date, and prior to the expiration of the policy provided that proper notice is given during the term of the policy or the discovery period.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company's business activities can also impair the accuracy of its loss and loss expense reserve estimates. As of December 31, 2015, there were no significant backlogs related to the processing of policy or contract information in the Company's Insurance or Reinsurance segments.
Potential Volatility in the Reserve for Losses and Loss Expenses. In addition to the factors creating uncertainty in the Company's estimate of loss and loss expense reserves, the Company's estimated reserve for losses and loss expenses can change over time because of unexpected changes in the external environment. Potential changing external factors include:
Due to the inherent complexity of the assumptions used in establishing the Company's loss and loss expense reserve estimates, final claim settlements made by the Company may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. For an illustration of the effect of a 10% change in the Company's two key inputs used in determining its loss and loss expense reserves - the expected loss ratio and the expected loss reporting pattern - please see "Reserve for Losses and Loss Expenses" below.
Available for sale securities are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders' equity as a component of accumulated other comprehensive (loss) income. The Company determines the fair value of its fixed maturity, short-term and equity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:
Pricing Services and Index Providers. Pricing services, including index providers, provide pricing for less-complex, liquid securities based on market quotations in active markets. For securities that do not trade on a listed exchange, these pricing services may use a matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic factors. Additionally, pricing services may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and asset-backed securities. At December 31, 2015, the Company has not adjusted any pricing provided by third-party pricing services and index providers and have classified all such securities as Level 2.
To the extent the Company determines that the amortized cost of the Company's fixed maturity or short-term investments classified as available for sale is likely to be recovered and related to non-credit factors (such as interest rates, market
Intangible assets are tested for impairment annually. For the year ended December 31, 2015, a quantitative analysis was performed to determine the fair value of the Company's intangible assets with indefinite lives which showed that none of the Company's intangible assets were impaired. For the year ended December 31, 2014, certain of the Company's U.S. insurance licenses, which are included in the Company's Insurance business segment, were determined to be impaired and an impairment of $5.5 million was recognized in net realized and unrealized gains line item in the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2014. The determination of this impairment was a result of an evaluation of recent sales prices for companies with similar insurance licenses, which indicated that the prices for excess and surplus lines licenses are lower due to the passage of Dodd-Frank legislation that has standardized and simplified the process to obtain excess and surplus lines licenses, resulting in a lower value for these licenses.
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax asset will not be realized. The valuation allowance is based on all available information from each tax-paying component in each tax jurisdiction and available tax planning strategies. Estimates of future taxable income incorporate several assumptions that may differ from actual experience. Differences in management's assumptions and resulting estimates could be material and have an adverse impact on the Company's financial results of operations and liquidity. Any such differences are recorded in the period in which they become known. As of December 31, 2015, the Company had a net deferred income tax asset of $46.8 million (2014 - $49.0 million), which includes a valuation allowance of $131.1 million (2014 - $121.4 million).
In May 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)" ("ASU 2015-07"). The objective of ASU 2015-07 is to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using net asset value per share. ASU 2015-07 is effective for public business entities in annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-07 should be applied retrospectively. The Company retrospectively adopted this standard effective October 1, 2015. The Company's other investments were removed from the fair value hierarchy tables for the years ended December 31, 2015 and 2014 in Note 5, Fair value measurement. This standard had no impact on the Company's Consolidated Financial Statements.
An increase in gross premiums written in the professional line of business in the Reinsurance segment, due primarily to new business and increased renewals generated by underwriting teams that joined the Company in late 2013;
premiums. Net premiums earned in 2015 decreased by $38.0 million, or 1.9% compared to 2013 principally due to the increase in ceded premiums written.
The annualized net earned yield and total return of the investment portfolio for the years ended December 31, 2015, 2014 and 2013 and market yield and portfolio duration as of December 31, 2015, 2014 and 2013 were as follows:
The internal rate of return of the investment portfolio based on the given market price or the single discount rate that equates a security price (inclusive of accrued interest) for the portfolio with its projected cash flows. Excludes other investments and operating cash.
For 2015, catastrophe related losses added 2.3 percentage points to the Company's net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 2.9 percentage points in 2014 and 3.9 percentage points in 2013. The Company's net loss ratio improved in 2015 compared to 2014 and 2013 due to a decrease in catastrophe losses, increased favorable prior year loss reserve development and the strategic re-underwriting and re-balancing of the Company's underwriting portfolios, driven in part by increased purchases of reinsurance protection and the impact of underwriting teams added during the past two years.
estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. As a result of the incorporation of the Company's own loss reporting patterns and loss history related to its short tail business, including catastrophe reinsurance and property insurance and reinsurance business lines, the Company would expect its prior year loss reserve development and adjustments for short tail business to be less than recorded in prior years. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company's actuaries and reflect management's best estimate of ultimate losses. See "Reserve for Losses and Loss Expenses" below for further discussion.
The Company's general and administrative expense ratio for 2015 was higher than that of 2014 and 2013. The increase in the Company's general and administrative expense ratio for 2015 compared to 2014 and 2013 was primarily due to $76.6 million of acquisition and integration costs associated with the Company's acquisition of Montpelier compared to $15.5 million of costs incurred in the Company's proposed acquisition of Aspen Insurance Holdings Limited ("Aspen") in 2014, which are included in corporate expenses and no similar costs in 2013. This increase was partially offset by increased ceding commission reimbursements as a result of additional purchases of reinsurance during 2015. At December 31, 2015, the Company had a total of 1,154 employees as compared to 997 employees at December 31, 2014 and 920 employees at December 31, 2013.
The determination of the Company's business segments is based on the manner in which management monitors the performance of the Company’s underwriting operations. As a result, we report two business segments - Insurance and Reinsurance.
One of the key measures used by management in assessing the Company's underwriting performance is the combined ratio, which is obtained by dividing the sum of the losses and loss expenses, acquisition expenses and general and administrative expenses by net premiums earned. The Company's historic combined ratios may not be indicative of future underwriting performance. When purchased within a single line of business, ceded reinsurance and recoveries are accounted for within that line of business. When purchased across multiple lines of business, ceded reinsurance and recoveries are allocated to the lines of business in proportion to the related risks assumed. The Company does not manage its assets by business segment; accordingly, investment income and total assets are not allocated to the individual business segments. General and administrative expenses incurred by business segments are allocated directly. Remaining general and administrative expenses not directly incurred by the segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the segment to which they apply.
Premiums. Gross premiums written in 2015 increased $369.8 million, or 21.5%, compared to 2014 and increased $610.5 million, or 41.4% compared to 2013. Net premiums written in the Insurance segment increased in 2015 by 2.3% compared to 2014 and decreased 5.6% compared to 2013. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
The increase in the Insurance business segment gross premiums written in 2015 compared to 2014 and 2013 was driven by the following factors:
A decrease in gross premiums written in the agriculture line of business due to lower commodity prices, partially offset by policy count growth and increased demand for insurance from clients.
Net premiums written in the Insurance segment increased compared to 2014 as a result of increased gross premiums written by the Company during 2015 and decreased compared to 2013 as a result of increased ceded premiums reflected in 2015. Net premium growth was partially offset by an increase in ceded premiums written across all lines of business primarily due to a whole account quota share treaty providing protection for all of the Insurance segment's book of business for 2014, which was increased during 2015. In addition, the Company purchased additional quota share, facultative and excess of loss reinsurance across most lines of business in the Insurance segment, as well as increased quota share coverage on the agriculture line of business.
Net Losses and Loss Expenses. The decrease in the net loss ratio in the Company's Insurance segment for the year ended December 31, 2015 compared to 2014 and 2013 resulted primarily from a lower current accident year loss ratio and increased levels of favorable loss reserve development. The current accident year loss ratio improved for 2015 versus 2014 due primarily to lower losses incurred in the agriculture line of business. Prior year loss reserves were reduced in 2015 by $82.0 million as compared to reductions of $80.6 million and $33.9 million for the years ended December 31, 2014 and 2013. The Company's Insurance segment experienced net reductions in the Company's estimated losses for prior accident years in 2015 as claims have not materialized as originally estimated by the Company, primarily in the property, marine/energy and aviation line of business.
Acquisition Expenses. The Company's acquisition expense ratio in the Insurance segment for the year ended December 31, 2015 increased compared to 2014 and 2013. The increase in acquisition expense ratio was primarily due to the decrease in net earned premiums in the agriculture line of business, which incurs a lower than average net acquisition expense rate.
General and Administrative Expenses. The Company's general and administrative expense ratio in the Insurance segment for 2015 decreased compared to 2014 and increased compared to 2013. The decrease in 2015 compared to 2014 was due to increased ceding commission reimbursements received as a result of additional purchases of reinsurance during the current year. This benefit was partially offset by an increase in personnel costs associated with the addition of new underwriting teams over the past year. The increase in 2015 compared to 2013 was due to an increase in personnel costs associated with the addition of new underwriting teams over the past two years, partially offset by increased ceding commission reimbursements received as a result of additional purchases of reinsurance during 2015.
An increase in gross premiums written in the specialty line of business primarily due to growth in international marine and international agriculture business written by new underwriting teams, partially offset by non-renewals due to increased ceding company retentions;
An increase in gross premiums written in the professional line of business, due primarily to new business and increased renewals generated by underwriting teams that joined the Company in late 2013;
An increase in gross premiums written in the casualty line of business compared to 2014 due to new business written and increased premiums on renewal business, partially offset by non-renewal of policies that no longer met profitability targets; and
Net premiums earned by the Company in the Reinsurance segment increased in 2015 compared to 2014 and 2013 primarily due to $141.1 million of reinsurance premiums earned resulting from the Company's acquisition of Montpelier, partially offset by the overall increase in ceded premiums written during 2015.
Net Losses and Loss Expenses. The net loss ratio in the Company's Reinsurance segment for 2015 decreased compared to 2014 and 2013 as a result of lower levels of catastrophe losses in 2015, increased favorable prior year reserve development and a decline in the current accident year loss ratio in the specialty line of business. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes in the Reinsurance segment for the years ended December 31, 2015, 2014 and 2013.
In 2015, the current accident year loss ratio decreased as compared to 2014 and 2013 as a result of the strategic re-underwriting and re-balancing of the Company's underwriting portfolios, driven in part by the impact of underwriting teams added during the past two years.
The Company's investment portfolio was valued at $8.9 billion as of December 31, 2015 compared to $6.6 billion as of December 31, 2014. The Company's investment portfolio contains cash and cash equivalents, fixed maturity investments, short-term investments, equity securities and other investments, comprised of alternative funds and specialty funds. Alternative funds include investments in hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity. Specialty funds currently include high yield loan funds.
The following tables set forth the types of securities and fair values of the Company's fixed maturity investments, short-term investments and equity securities as of December 31, 2015 and 2014:
U.S. Government and Agencies Securities. U.S. government and agencies securities are comprised of bonds issued by the U.S. Treasury, the Federal Home Loan Bank, Freddie Mac and Fannie Mae.
U.S. State and Municipal Securities. U.S. state and municipal securities are debt securities issued by a state, municipality, or county, in order to finance its capital expenditures. Most municipal bonds are exempt from federal taxes and from most state and local taxes.
Asset-Backed Securities. Asset-backed securities are diversified both by type of collateral and issuer. The majority of our asset-backed securities are AAA-rated bonds backed by pools of automobile loan receivables, credit card receivables, student loans and other collateral originated by a variety of financial institutions. The principal risks in holding asset-backed securities are structural and credit risks. Structural risks include the security's priority in the issuer's capital structure, the adequacy of and ability to realize proceeds from the collateral and the potential for prepayments. Credit risks include performance of the underlying consumer or corporate loans, which act as collateral for these securities.
Equity securities in the Company's investment portfolio consist of publicly traded common stocks, preferred stocks, and mutual funds. The Company's equity exposure is diversified across both dividend growth oriented strategies and a global mix of index strategies. A portion of our equity securities are comprised of shares of institutional mutual funds which are invested in emerging market debt, convertible bonds and other targeted strategies.
The investment ratings (provided by major rating agencies) for the fixed income investments held as of December 31, 2015 and 2014 and the percentage of our fixed income investments they represented at such date were as follows:
Includes agency mortgage-backed securities of $1,335.7 million and $1,133.1 million at December 31, 2015 and 2014, respectively.
The contractual maturity distribution for our fixed maturity portfolio held as of December 31, 2015 and 2014 was as follows:
Other investments are accounted for under the equity method of accounting. Adjustments to the carrying value of these investments are made based upon the net valuation criteria established by the managers of the other investments, which in turn are established based upon the valuation criteria in the governing documents of the other investments. Such valuations may differ significantly from the values that would have been used had liquid markets existed for the shares or partnership interests of the other investments. Due to a delay in the valuations reported by certain of the fund managers, valuations of certain alternative funds and specialty funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements. Many of the other investments are subject to restrictions on redemptions and sale that limit our ability to liquidate these investments in the short-term. Interest income, income distributions and realized and unrealized gains and losses on other investments included in net investment income were losses of $13.6 million for the year ended 2015, and gains of $19.6 million and $64.3 million for the years ended 2014 and 2013, respectively.
Our investment returns for the years ended December 31, 2015, 2014 and 2013 were as follows:
The Company's diversified portfolio of investments includes exposures to the debt of various European countries. The Company continuously monitors its exposures through review of its portfolio and has established investment guidelines that restrict the amount of investment exposure to any one issuer or country depending on specific ratings of such issuer or country as stated by credit rating agencies. The Company's aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) was $820.1 million at December 31, 2015 (2014 - $606.8 million).
Ability of Subsidiaries to Pay Dividends. The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of December 31, 2015, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling approximately $1,034.4 million without prior regulatory approval based upon the Bermuda insurance and corporate regulations. In 2011, Endurance Holdings loaned Endurance Bermuda $200.0 million, which remains outstanding and is callable on demand.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and American Agri-Business is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders' surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2015, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2016 without the prior approval of the applicable insurance regulator. At December 31, 2015, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.5 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.
Cash and Invested Assets. The Company's aggregate invested assets as of December 31, 2015 totaled $8.9 billion compared to aggregate invested assets of $6.6 billion as of December 31, 2014. The increase in invested assets since December 31, 2014 resulted primarily from the Company's acquisition of Montpelier and net income generated during 2015 and 2014.
At December 31, 2015, the Company's available for sale investments had gross unrealized gains of $40.8 million and gross unrealized losses of $72.6 million compared to gross unrealized gains of $107.4 million and gross unrealized losses of $19.9 million at December 31, 2014. The increase in gross unrealized losses on the Company's available for sale investments at December 31, 2015 compared to December 31, 2014 was primarily due to widening of credit spreads and broad equity market declines during the year, rather than any actual credit losses on these securities. At December 31, 2015, the Company had the intent to sell certain of the fixed maturity investments and equity securities in an unrealized loss position and therefore recognized in earnings total other-than-temporary impairments of $3.7 million for the year (2014 - $0.6 million; 2013 - $1.6 million).
Endurance Bermuda is party to a multi-beneficiary Reinsurance Trust originally established by Montpelier Re (the "Montpelier Reinsurance Trust") domiciled in New York. The Montpelier Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re’s U.S. cedants. Endurance Bermuda is also party to a multi-beneficiary reinsurance trust originally established by Montpelier Re (the "FL Trust") in connection with a reduction in its Florida collateral requirements. With the consent of the New York Department of Financial Services, all assets in excess of the statutory minimum required amounts in the Montpelier Reinsurance Trust and the FL Trust were transferred to the Endurance Reinsurance Trust upon the merger of Montpelier Reinsurance Ltd. with and into Endurance Bermuda, with Endurance Bermuda as the surviving entity, on December 29, 2015.
The Company's cash and cash equivalents increased by $432.3 million to $1,177.8 million at December 31, 2015, compared to $745.5 million at December 31, 2014, and increased by $331.9 million compared to $845.9 million at December 31, 2013.
Cash flows provided by (used in) investing activities. During the year ended December 31, 2015, cash flows provided by investing activities were $486.8 million, compared to cash flows used in investing activities of $236.9 million for 2014 and cash flows used in investing activities of $347.8 million in 2013. The Company actively manages its investment portfolio on a fair value basis to generate attractive economic returns and income. Movements in financial markets and interest rates influence the timing of investment sales and purchases. The increase in cash flows provided by investing activities in 2015 principally reflected the cash balance assumed in the acquisition of Montpelier. Additionally, cash flows provided by investing activities were higher in 2015 compared to both 2014 and 2013 due to higher net proceeds from sales and purchases of trading and available for sale investments, offset by higher purchases of other investments.
Cash flows used in financing activities. The Company's cash flows used in financing activities for the year ended December 31, 2015 were $274.8 million, compared to $99.7 million and $74.4 million in 2014 and 2013, respectively. The 2015 cash flows used in financing activities increased compared to 2014 and 2013 due to the repayment of our 6.15% Senior Notes and redemption of the Company's 7.75% Non-Cumulative Preferred Shares, Series A, partially offset by the proceeds from issuance of the 6.35% Non-Cumulative Preferred Shares, Series C.
Credit Facilities. On April 19, 2012, the Company and certain designated subsidiaries of the Company entered into a $700.0 million four-year revolving credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent ("Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $1,175.0 million amended and restated credit agreement dated May 8, 2007 with JPMorgan as administrative agent. As of December 31, 2015 and 2014, there
At December 31, 2015, the carrying value of the Senior Notes stood at $717.5 million while the fair value as determined by quoted market valuation was $738.0 million. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2015.
BCRH Credit Agreement. Upon closing of the acquisition of Montpelier on July 31, 2015, the Company became a guarantor of the BCRH 364-day unsecured credit agreement (the "BCRH Credit Agreement"), which permits BCRH to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company receives an annual guarantee fee from BCRH equal to 0.125% of the facility's total capacity. See Note 8 to the Company's Consolidated Financial Statements, Debt and financing arrangements.
1.48%, and $4.0 million must be repaid or extended, in the form of a new borrowing, no later than March 11, 2016 and is subject to an annual interest rate of 1.51%.
The BCRH Credit Agreement contains covenants that limit BCRH's ability to, among other things, grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. The BCRH Credit Agreement also contains covenants that require BCRH to maintain a debt to total capitalization ratio less than or equal to 22.5% and to maintain at least 70% of its total shareholders’ equity as of the date of the BCRH Credit Agreement. In addition, an uncured default by the Company of the covenants contained in the Credit Facility would result in a default under the BCRH Credit Agreement. If BCRH or the Company were to fail to comply with any of the applicable covenants, the lender could revoke the facility and exercise remedies against BCRH or the Company. The Company was in compliance with all covenants applicable to the Company in the BCRH Credit Agreement as of December 31, 2015.
The BCGR Credit Agreement contains covenants that limit the BCGR Listed Fund's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. In addition, an uncured default by the Company of the covenants contained in the Credit Facility would result in a default under the BCGR Credit Agreement. If BCGR or the Company were to fail to comply with any of the applicable covenants, the lender could revoke the facility and exercise remedies against BCGR or the Company. The Company was in compliance with all covenants applicable to the Company in the BCGR Credit Agreement as of December 31, 2015.
Endurance Holdings received net proceeds of $224.0 million from its offering of Series B Preferred Shares and $222.0 million from its offering of Series C Preferred Shares, in each case after expenses and underwriting discounts. The proceeds from the Series B Preferred Share offering was used to provide additional capital to Endurance Holdings' subsidiaries and for other general corporate purposes. The proceeds from the Series C Preferred Share offering was used to redeem all of Endurance Holdings' outstanding 7.75% Non-Cumulative Preferred Shares, Series A and for other general corporate purposes, including repurchases of Endurance Holdings' outstanding ordinary shares and debt and to support the underwriting activities of Endurance Holdings' insurance and reinsurance subsidiaries.
Dividends on the Series B Preferred Shares and Series C Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the Board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 7.5% in the case of the Series B Preferred Shares and an annual rate of 6.35% in the case of the Series C Preferred Shares. Dividends on the Series B Preferred Shares and Series C Preferred Shares are not cumulative.
On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the Credit Facility, capital generated from the offering and sale of its Senior Notes, Series B Preferred Shares, Series C Preferred Shares and ordinary shares, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity or hybrid securities in order to implement its business strategy or pay claims.
The following table summarizes the components of our capital resources at December 31, 2015 and 2014:
Impact of Montpelier Acquisition on Liquidity and Capital Resources. On March 31, 2015, the Company announced the signing of the Merger Agreement with Montpelier and Merger Sub pursuant to which the Company, through Merger Sub,
acquired all of the outstanding common shares of Montpelier. The acquisition of Montpelier was completed on July 31, 2015. See the section "Acquisition of Montpelier" above for additional information.
The Company incurred $76.6 million of transaction and integration related corporate expenses associated with the acquisition of Montpelier for the year ended December 31, 2015.
Certain of our ongoing obligations to Selective in connection with the sale of MUSIC and the Company's guarantee of BCGR's obligations under the BCGR Credit Agreement constitute off-balance sheet arrangements. Excluding these specific transactions, as of December 31, 2015, we were not party to any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K, to which an entity unconsolidated with us is a party that management believes is reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we believe is material to investors.
The Company's functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K. which was valued at £367.0 million as of December 31, 2015 ($541.0 million in U.S. dollars). Endurance U.K. is subject to the United Kingdom's Prudential Regulation Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.'s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company's results of operations. The Company's investment in Endurance at Lloyd's is primarily through the FAL, which is denominated in U.S. dollars.
Assets and liabilities of foreign operations whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date. Revenues and expenses of such foreign operations are translated at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in accumulated other comprehensive (loss) income.
For the year ended December 31, 2014, as part of the Company's periodic review of key inputs and parameters it uses to establish its reserve for losses and loss expenses and in order to recognize accumulated historical experience and other relevant industry information, the Company adjusted the loss reporting patterns used for a limited number of business units within the Insurance and Reinsurance segments. For the Insurance segment, the loss reporting patterns were accelerated for the healthcare business within the casualty and other specialty line of business, and slowed for the professional liability business within the professional line of business. For the Reinsurance segment, the loss reporting pattern used for the U.S. and international property catastrophe business within the catastrophe line of business was accelerated for the most recent accident year and slowed for subsequent accident years. For the year ended December 31, 2014, the Company did not materially alter initial expected loss ratios for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2014 for those reserve categories were within the range of possible results anticipated by the Company.
Property, marine/energy and aviation. The favorable loss emergence within the property, marine/energy and aviation line of business during 2015 and 2014 was primarily due to lower than expected reported claim emergence within the Company's U.K. and Bermuda-based property businesses.
Catastrophe. The Company recorded favorable loss emergence within the catastrophe line of business during 2015 primarily due to lower than expected claims activity within the U.S. and international property catastrophe businesses. During 2014, the favorable loss reserve development was primarily due to lower than expected claims activity and a reduction of IBNR for worker's compensation catastrophe business for accident years 2005-2013.
Casualty. The Company recorded favorable prior period development within this line of business during 2015 and 2014 primarily due to lower than expected claims activity within the casualty treaty business.
(1) Gross reserve for losses and loss expenses and reinsurance recoverable on unpaid losses include amounts acquired from Montpelier at December 31, 2015. Years prior to 2015 exclude the gross reserve for losses and loss expenses and reinsurance recoverable on unpaid losses acquired from Montpelier. As such, the cumulative redundancy on gross reserves for years prior to 2015 relate only to the Company and its subsidiaries not acquired in connection with the acquisition of Montpelier.
(1) Cumulative paid losses for 2014 excluded paid losses on prior year reserves for the acquired Montpelier entities.
Ceded premiums written were $1,370.4 million for the year ended December 31, 2015, $959.9 million for the year ended December 31, 2014 and $616.3 million for the year ended December 31, 2013. The increase in ceded premiums written was primarily due to decreased retentions across our entire Insurance segment as the Company increased the whole account quota share treaty providing protection across the Insurance segment's book of business for 2015. In addition, the Company purchased additional quota share, facultative and excess of loss reinsurance across most Insurance lines of business, and increased quota share coverage on the agriculture Insurance line of business. In the Reinsurance segment, ceded premium written increased as the Company purchased increased levels of protection, including additional proportional and excess of loss retrocessional coverage on the catastrophe line of business, and additional proportional coverage on the specialty line of business.
Goodwill and other intangibles that arise from business combinations are accounted for by the Company in accordance with the applicable accounting guidance on "Business Combinations" and "Goodwill and Other Intangible Assets." The accounting literature requires that identifiable intangible assets are amortized in accordance with their useful lives and goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually.
During the fourth quarter of 2015, the Company performed its annual impairment testing of goodwill and voluntarily changed the date of its annual goodwill and indefinite-lived intangible asset impairment testing date from December 31 to October 1. This voluntary change does not represent a material change to the Company's method of applying current accounting guidance and is preferable as it is in better alignment with the Company’s strategic planning and forecasting
During the fourth quarter of 2015, the Company performed its annual impairment testing of its intangible assets with indefinite useful lives. The Company's intangible assets with indefinite lives are its insurance licenses and the Lloyd's syndicate capacity. For the year ended December 31, 2015, no impairment was recognized for the Company's intangible assets with indefinite lives. For the year ended December 31, 2014, the carrying value for the excess and surplus lines licenses held by one of the Company's legal entities was in excess of the fair value of these licenses as estimated by a third party valuation appraisal. Therefore, an impairment loss of $5.5 million was included within the net realized and unrealized gains line item in the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2014.
Net income tax payments in 2015 and 2014 totaled $2.4 million and $0.9 million, respectively. The Company received net income tax refunds totaling $8.4 million for the year ended December 31, 2013. Net operating loss carryforwards in the amount of $155.4 million, $112.3 million, $49.9 million, and $56.6 million are available for application against future taxable income in the United States, United Kingdom, Singapore and Switzerland, respectively. These net operating loss carry forwards have no expiration date in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carry forwards expire through 2016 and 2028, respectively.
Pre-tax income for our non-U.S. operations was higher than that of our U.S. operations for the years ended December 31, 2015, 2014 and 2013. The higher pre-tax income for the year ended December 31, 2015 resulted primarily from the more volatile catastrophe business underwritten in our non-U.S. operations during 2015 being relatively free of losses and thus generating higher levels of net underwriting income during the period compared to the years ended December 31, 2014 and 2013. In addition, our non-U.S. operations hold a substantial amount of our invested assets and thus a larger portion of the Company’s investment income is earned in our non-U.S. operations as compared to our U.S. operations.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2014, the United States Internal Revenue Service ("IRS") completed audits of income tax returns of the Company's U.S. subsidiaries for 2009, 2010 and 2011. The audit results were immaterial to the operations of the Company. On July 13, 2015, the IRS commenced an examination of the 2012 income tax return of Endurance Bermuda. On February 9, 2016, the IRS commenced an examination of the 2013 income tax return of Endurance Bermuda. Although the timing and ultimate resolution of the IRS examinations is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations or cash flows. As of December 31, 2015, none of the Company's other operating subsidiaries or branch operations are under an examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2009 through 2015. As of December 31, 2015 and 2014, the Company had no uncertain tax positions.
will reassess the valuation allowance against the net deferred tax assets and record any changes to income tax expense in the period determined.
As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Montpelier Re Holdings Ltd., which is included in the 2015 consolidated financial statements of Endurance Specialty Holdings Ltd. Montpelier Re Holdings Ltd.'s total revenues and net income attributable to common shareholders represented approximately 11% and 18%, respectively, of Endurance Specialty Holdings Ltd.'s related financial statement amounts as of and for the year ended December 31, 2015. Our audit of internal control over financial reporting of Endurance Specialty Holdings Ltd. also did not include an evaluation of the internal control over financial reporting of Montpelier Re Holdings Ltd.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015 of Endurance Specialty Holdings Ltd. and our report dated February 26, 2016 expressed an unqualified opinion thereon.
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Endurance Specialty Holdings Ltd. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
(In thousands of United States dollars, except share and per share amounts)
Endurance Holdings writes specialty lines of insurance and reinsurance on a global basis through its wholly-owned operating subsidiaries:
BCGR is a closed-ended mutual fund incorporated in Bermuda and managed by BCML that serves as the feeder fund for the Blue Capital Global Reinsurance SA-1 cell (the "BCGR Cell"). BCGR's shares are listed on the Specialist Fund Market of the London Stock Exchange and on the Bermuda Stock Exchange.
The Company's reinsurance premiums are earned in proportion to the amount of reinsurance protection provided over the applicable risk period established in the reinsurance contract. Reinsurance contracts written on a losses occurring basis cover losses which occur during the term of the reinsurance contract, typically 12 months. Accordingly, the Company earns the premium on a losses occurring reinsurance contract evenly over the reinsurance contract term. Reinsurance contracts written on a policies attaching basis cover losses from the underlying insurance policies incepting during the terms of the reinsurance contracts. Losses under a policies attaching reinsurance contract may occur after the end date of the reinsurance contract, so long as they are losses from policies that began during the reinsurance contract period. The Company typically earns the premiums for policies attaching reinsurance contracts over a 24-month period in proportion to the amount of reinsurance protection provided to reflect the extension of the risk period past the term of the contract and the varying levels of reinsurance protection provided during the reinsurance contract period.
In addition to the applicable risk period, the Company's estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract's written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. For proportional reinsurance contracts, the Company estimates premium, commissions and related expenses based on broker and ceding company estimates and also utilizes judgment in establishing proportional reinsurance contract estimates.
Premiums receivable are recorded at amounts due less any allowance for estimated uncollectible premiums receivable. At December 31, 2015, the Company had an allowance for estimated uncollectible premiums receivable of $7.4 million (2014 - $2.6 million).
For equity securities classified as available for sale, the Company considers its ability and intent to hold the equity security in an unrealized loss position for a reasonable period of time to allow for a full recovery. When the Company determines that the decline in value of an equity security is other-than-temporary, the Company reduces the cost of the equity security to its fair value and recognizes the loss in the Consolidated Statements of Income and Comprehensive Income. The new cost basis is not changed for subsequent recoveries in fair value.
Other investments within the Company's investment portfolio are comprised of (i) hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity ("alternative funds") and (ii) high yield loan funds ("specialty funds"). Other investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying values of these investments are increased or decreased to reflect the Company's share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by the managers of certain of our alternative and specialty funds, our investments in those funds are estimated based on the most recently available information including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
Margin balances required of counterparties are included in cash and cash equivalents. Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions may be netted by the counterparty.
The Company accounts for income taxes for its subsidiaries operating in taxable jurisdictions. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The accounting guidance allows for the recognition of tax benefits of uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is established for any tax benefit claimed in a tax return in excess of this threshold. Income tax related interest and penalties are included as income tax expense.
The Company has a share-based employee and non-employee director equity incentive plan ("2007 Equity Incentive Plan") and other share plans, which are described more fully in Note 16, Stock-based employee compensation and other stock plans. The fair value of the compensation cost incurred under these plans is measured at the grant date and is expensed over the period for which the employee is required to provide services in exchange for the award. Forfeiture benefits are estimated at the time of grant and incorporated in the determination of share-based compensation costs. Awards under the 2007 Equity Incentive Plan generally vest over four years for employees and one year for non-employee directors.
Entities that do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as variable interest entities ("VIE"). A VIE is consolidated by the variable interest holder that is determined to have the controlling financial interest (primary beneficiary) as a result of having both the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company reassesses its VIE determination with respect to an entity on an ongoing basis. See also Note 4, Investments.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis" ("ASU 2015-02"). Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 is effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption is permitted. ASU 2015-02 may be applied retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
In May 2015, the FASB issued ASU 2015-09, "Disclosures about Short-Duration Contracts" ("ASU 2015-09"). The objective of ASU 2015-09 is to make targeted improvements to disclosure requirements for insurance companies that issue short-duration contracts. The guidance requires additional disclosures of claims development tables, frequency of reported claims, and history of claims duration. This information is required to be disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail, or the aggregation of items that have significantly different characteristics. ASU 2015-09 is effective for public business entities in annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. ASU 2015-09 should be applied retrospectively. The Company is currently evaluating the impact of this guidance; however, it is not expected to have a material impact on the Company's Consolidated Financial Statements.
Deferred tax liability - To reflect the deferred tax liability on identifiable intangible assets;
Non-controlling interest - To reflect Montpelier's non-controlling interest at fair value; and
Identifiable intangible assets at July 31, 2015 consisted of the following, and are included in goodwill and other intangible assets on the Company's consolidated balance sheets:
Key non-contractual relationships - these relationships included Montpelier's top brokers and consideration was given to the expectation of the renewal of these relationships and the associated expenses;
Lloyd's syndicate distribution channel - the value of sales of insurance policies that result directly from relationships between Lloyd's and the brokers in the Lloyd's marketplace;
The following table summarizes the composition and redemption restrictions of other investments as of December 31, 2015 and 2014:
Other investment funds - Other investment funds includes funds on deposit with Lloyd's, which are restricted, and the Company's investment in BCGR, which represents the net liability of the Company's investment in BCGR that has not been deployed into the BCGR cell.
High yield loan funds - There are generally no restrictions on the Company's right to redeem its interest in high yield loan funds with the exception of certain redemption frequency and notice requirements. The redemption frequency of these funds ranges from monthly to quarterly with notice periods from 30 to 90 days.
Realized and unrealized gains and losses are recognized in earnings using the first in, first out method. The analysis of gross realized gains and losses, net unrealized gains and losses on trading securities, intangible asset impairment loss, and the change in the fair value of investment-related derivative financial instruments for the years ended December 31, 2015, 2014 and 2013 are as follows:
The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2015 and 2014, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive (loss) income at December 31, 2015.
As of December 31, 2015, 1,310 available for sale securities were in an unrealized loss position aggregating $72.6 million. Of those, 158 securities with aggregated unrealized losses of $12.7 million at December 31, 2015 had been in a continuous unrealized loss position for twelve months or greater.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive (loss) income at December 31, 2014.
The Company is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company determined that it was not the primary beneficiary for any of these investments as of December 31, 2015 and 2014. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company's Consolidated Balance Sheets and any unfunded investment commitments.
As of December 31, 2015, Endurance Bermuda owned 25.1% of BCGR's ordinary shares. BCGR is considered a "voting interest entity" under U.S. GAAP and, because the Company owns less than 50% of its outstanding ordinary shares, the Company does not consolidate BCGR's assets, liabilities or operations within its Consolidated Financial Statements. However, the BCGR Cell and Blue Water Re, the Company's wholly-owned Bermuda-based special purpose insurance vehicle, are considered VIEs under U.S. GAAP and the Company has determined that it is the primary beneficiary of these entities. Therefore, as funds held in BCGR are deployed into the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company's consolidated financial statements. Conversely, as funds previously deployed by BCGR and the BCGR Cell into Blue Water Re are returned to BCGR, they are no longer included in the Company's consolidated financial statements. The interests in the BCGR Cell and Blue Water Re that the Company fully consolidate that are attributable to third-party investors are reported within the Company's consolidated financial statements as non-controlling interests. BCGR's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determinations with respect to the BCGR Cell and Blue Water Re on an ongoing basis.
The following table sets forth the Company's fixed maturity investments, equity securities, short-term investments, other assets and liabilities and debt categorized by the level within the hierarchy in which the fair value measurements fall at December 31, 2015:
Level 3 assets represented 2.2% and 0.7% of the Company's total available for sale and trading investments and derivative instruments at December 31, 2015 and 2014, respectively. At December 31, 2015, Level 3 securities were primarily comprised of corporate securities and weather derivatives. At December 31, 2014, Level 3 securities were primarily comprised of corporate securities, mortgage-backed securities, collateralized loan and debt obligations, asset-backed securities, and weather derivatives. There were no material changes in the Company's valuation techniques for the year ended December 31, 2015.
Other assets and other liabilities measured at fair value included assets of $41.5 million (2014 - $25.6 million) and liabilities of $42.0 million (2014 - $35.4 million) related to proprietary, non-exchange traded derivative-based risk management products used in the Company's weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.
Observable inputs: contract price, notional, option strike, term to expiry, interest rate, contractual limits;
Changes in any or all of the unobservable inputs listed above may contribute positively or negatively to the overall portfolio fair value depending upon the underlying position. In general, movements in weather curves are the largest contributing factor that impacts fair value.
Below is a summary of quantitative information regarding the significant observable and unobservable inputs used in determining the fair value of the net weather and energy related derivative liabilities classified in Level 3 that are measured at fair value on a recurring basis at December 31, 2015 and 2014:
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2015 and 2014.
Activity in the reserve for losses and loss expenses for the years ended December 31, 2015, 2014 and 2013 is summarized as follows:
During 2015, the Company's estimated ultimate losses for prior accident years were reduced by $243.5 million (2014 - $233.8 million; 2013 - $222.4 million) due to lower claims emergence than originally estimated by the Company. During 2015, the Company experienced favorable development in the Reinsurance segment of $161.5 million across each line of business. In the Insurance segment, the Company experienced $82.0 million of favorable development across each line of business. During 2014, the Company experienced favorable development in the Reinsurance segment of $153.2 million across each line of business. In the Insurance segment, the Company experienced $80.6 million of favorable development across each line of business. During 2013, the Company experienced favorable development in the Reinsurance segment of $188.5 million across each line of business. In the Insurance segment, the Company experienced $33.9 million of favorable development across each line of business.
The effects of reinsurance on premiums earned and written during the years ended December 31, 2015, 2014 and 2013 are as follows:
On June 25, 2014, the Company entered into the First Amendment (the "Amendment") to the Credit Facility. The Amendment also amends the Security Agreement, dated as of April 19, 2012 (the "Security Agreement"), among the Company and various designated subsidiaries of the Company, Deutsche Bank Trust Company America, as collateral agent, and JPMorgan. The Amendment contained certain administrative amendments to the Credit Facility and the Security Agreement as well as certain amendments applicable to the proposed acquisition of Aspen Insurance Holdings Limited.
The indentures governing the 7% Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the 7% Senior Notes as of December 31, 2015.
The 4.7% Senior Notes are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings' existing and future unsecured and unsubordinated debt. The 4.7% Senior Notes are also effectively junior to claims of creditors of Endurance Holdings' subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
Upon closing of the acquisition of Montpelier, the Company became a party to the LIBOR Swap, which will result in the future net cash flows in connection with the Trust Preferred Securities for the 5-year period beginning March 30, 2012 being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the LIBOR Swap to its maturity. Net realized and unrealized gains and losses associated with the LIBOR Swap are reported within net realized and unrealized gains on the Company's Consolidated Statements of Income and Comprehensive Income, as opposed to interest expense.
The Company made aggregate interest payments of $40.5 million during the year ended December 31, 2015 (2014 - $40.4 million; 2013 - $35.7 million).
The BCRH Credit Agreement contains covenants that limit BCRH's ability to, among other things, grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. The BCRH Credit Agreement also contains covenants that require BCRH to maintain a debt to total capitalization ratio less than or equal to 22.5% and to maintain at least 70% of its total shareholders' equity as of the date of the BCRH Credit Agreement. In addition, an uncured default by the Company of the covenants contained in the Credit Facility would result in a default under the BCRH Credit Agreement. If BCRH or the Company were to fail to comply with any of the applicable covenants, the lender could revoke the facility and exercise remedies against BCRH or the Company. The Company was in compliance with all covenants applicable to the Company in the BCRH Credit Agreement as of December 31, 2015.
As of December 31, 2015, BCGR had $6.0 million of outstanding borrowings under the BCGR Credit Agreement. With respect to BCGR's outstanding borrowings at December 31, 2015, $3.0 million was repaid on February 1, 2016 and was subject to an annual interest rate of 1.54%, and $3.0 million was repaid February 12, 2016 and was subject to an annual interest rate of 1.51%.
In 2004, prior to the issuance of the 7% Senior Notes, the Company entered into an interest rate lock on a notional amount of $125.0 million to protect against interest rate increases before the anticipated issuance of the Senior Notes. The objective of the interest rate lock was to protect 50% of the forecasted receipt of proceeds from the issuance of the 7% Senior Notes offering, which was subject to change prior to issuance due to fluctuations in the benchmark 30 year U. S. Treasury rate. Upon issuance of the 7% Senior Notes, the interest rate lock was settled through payment by the Company of $2.7 million. The interest rate lock agreement was designated as a "cash flow hedge" under current accounting guidance and accordingly, the fair value of the derivative was recorded in other comprehensive income and is being recognized as a component of interest expense in the Consolidated Statements of Income and Comprehensive Income as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.
None of the Company's derivatives are designated as hedges under current accounting guidance, with the exception of the interest rate lock. The Company's objectives for holding these derivatives are as follows:
Foreign Exchange Forwards, Futures and Options - as part of its overall currency risk management and investment strategies.
At December 31, 2015, the Company held $30.0 million (December 31, 2014 - nil) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented as part of cash and cash equivalents in the Consolidated Balance Sheets. The required collateral for these loans is either cash or U.S. treasury securities at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income.
The gains and losses on the Consolidated Statements of Income and Comprehensive Income for derivatives for the years ended December 31, 2015, 2014 and 2013 were as follows:
(1) Total general and administrative expense ratio includes general and administrative expenses and corporate expenses.
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2015, 2014 and 2013:
unpaid losses (2014 - $542.5 million) was due from reinsurers rated A- or better by A.M. Best or S&P. An additional $234.6 million (2014 - $339.6 million) of reinsurance recoverable on paid and unpaid losses was due from a U.S. government sponsored reinsurance program as of December 31, 2015. At December 31, 2015 and 2014, the Company held collateral of $321.5 million and $199.7 million, respectively, related to its ceded reinsurance agreements.
As of December 31, 2015, substantially all the Company's cash and investments were held by six custodians.
Major production sources. The following table shows the percentage of gross premiums written generated through the Company's largest brokers for the years ended December 31, 2015, 2014 and 2013:
Letters of credit. As of December 31, 2015, the Company had issued letters of credit of $341.6 million (2014 - $209.9 million) under its credit facilities and letter of credit reimbursement agreements in favor of certain ceding companies to collateralize obligations.
The Company is subject to certain commitments with respect to other investments at December 31, 2015 and 2014. See Note 4, Investments.
Endurance Bermuda is also party to a multi-beneficiary reinsurance trust originally established by Montpelier Re (the "Reduced Collateral Trust") domiciled in Delaware. The Reduced Collateral Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states. As of December 31, 2015, the fair value of the assets held in the Reduced Collateral Trust exceeded $10.8 million, the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC to Selective. As of December 31, 2015, the fair value of the assets held in the MUSIC Trust exceeded $21.3 million, the minimum value required on that date.
The Company is party to a Lloyd's Deposit Trust Deed (the "Lloyd's Capital Trust") in order to meet Endurance Corporate Capital Limited ("ECCL")'s ongoing funds at Lloyd's ("FAL") requirements. The minimum value of cash and investments held by the Lloyd’s Capital Trust is determined on the basis of ECCL's Individual Capital Assessment, which is used to determine the required amount of FAL. As of December 31, 2015, the fair value of assets held in the Lloyd's Capital Trust was $276.8 million, which met the minimum value required on that date.
Lloyd's New Central Fund. The Lloyd's New Central Fund is available to satisfy claims if a member of Lloyd's is unable to meet its obligations to policyholders. The Lloyd's New Central Fund is funded by an annual levy imposed on members, which is determined annually by Lloyd's as a percentage of each member's written premiums (0.5% with respect to 2015). In addition, the Council of Lloyd's has power to call on members to make an additional contribution to the Lloyd's New Central Fund of up to 3% of their underwriting capacity each year should it decide that such additional contributions are necessary. The Company currently estimates that its 2015 obligation to the Lloyd's New Central Fund will be approximately $1.0 million and accrues for this obligation ratably throughout the year on a quarterly basis.
Reinsurance commitments. In the ordinary course of business, the Company enters into reinsurance agreements that may include terms which could require the Company to collateralize certain of its obligations.
On October 10, 2005, Endurance Holdings issued 8,000,000 shares of its 7.75% Non-Cumulative Preferred Shares, Series A (the "Series A Preferred Shares"). On June 1, 2011, Endurance Holdings issued 9,200,000 shares of its 7.5% Non-Cumulative Preferred Shares, Series B (the "Series B Preferred Shares"). On November 24, 2015, Endurance Holdings issued 9,200 shares of its 6.35% Non-Cumulative Preferred Shares, Series C (the "Series C Preferred Shares") (equivalent to 9,200,000 Depositary Shares), each of which represents a 1/1,000th interest in a Series C Preferred Share, $1.00 par value and $25,000.00 liquidation preference per share (equivalent to $25.00 per Depositary Share). The Series A Preferred Shares, Series B Preferred Shares and
Dividends on the Series B Preferred Shares and Series C Preferred Shares, when, as and if declared by the Board of Directors of Endurance Holdings or a duly authorized committee of the board, accrue and are payable on the liquidation preference amount from the original issue date, quarterly in arrears on each dividend payment date, at an annual rate of 7.5% in the case of the Series B Preferred Shares and an annual rate of 6.35% in the case of the Series C Preferred Shares. Dividends on the Series B Preferred Shares and Series C Preferred Shares are not cumulative.
The following table presents the changes in accumulated other comprehensive (loss) income balances by component for the years ended December 31, 2015 and 2014:
The following tables present the significant items reclassified out of accumulated other comprehensive (loss) income during the years ended December 31, 2015 and 2014:
Pyramis Global Advisors, a subsidiary of FMR, LLC ("Fidelity"), provides investment management services to the Company. Fidelity and its affiliates owned 3.5 million or 5.2% of Endurance Holdings' ordinary shares outstanding at December 31, 2015 and were therefore considered a related party. The Company incurred investment management fees totaling $1.3 million (2014 - $1.4 million; 2013 - $1.4 million) to this investment manager of which $0.2 million was accrued at December 31, 2015 (2014 - $0.3 million).
Since 2002, subsidiaries of BlackRock Inc. ("BlackRock") have provided the Company and certain of its subsidiaries with various investment management, investment accounting and risk analysis services. BlackRock owned approximately 4.1 million or 6.1% of Endurance Holdings' ordinary shares outstanding at December 31, 2015 and were therefore considered a related party. The Company incurred expenses totaling $3.6 million (2014: $3.2 million; 2013: $2.9 million) for the year ended December 31, 2015 in relation to investment services rendered by BlackRock, of which $1.6 million was accrued at December 31, 2015 (December 31, 2014: $1.5 million).
At its meeting on February 28, 2007, the Company's Board of Directors adopted the 2007 Equity Incentive Plan ("2007 Plan") to allow for the issuance of equity incentives to non-employee directors of the Company and eligible employees of the Company and its subsidiaries. The 2007 Plan was approved by the Company's shareholders at the Annual General Meeting of Shareholders held on May 9, 2007. At that time, the Company's existing Amended and Restated 2002 Stock Option Plan and the Amended and Restated 2003 Non-Employee Director Incentive Plan were merged into the new 2007 Plan.
Upon completion of the acquisition of Montpelier, the number of Montpelier restricted share units that were outstanding immediately prior to the completion of the acquisition of Montpelier that were not Montpelier Fixed RSUs ("Montpelier Variable RSUs") was equal to the greater of:
(i) the number of Montpelier Variable RSUs determined by using Montpelier’s actual performance as of the last completed quarter prior to the completion of the acquisition of Montpelier, as determined by the Compensation and Nominating Committee of the Montpelier board of directors prior to the completion of the acquisition of Montpelier after reasonable consultation with the Company, and
The Company has issued restricted share units to employees in select jurisdictions where the issuance of restricted shares results in unfavorable tax treatment for employee recipients. Restricted shares granted to employees generally vest pro rata over a four-year period. Restricted share units are forfeited upon departure from the Company for any reason prior to the applicable vesting date other than in cases where an employee meets certain retirement eligibility criteria which allow for continuing post-employment vesting of restricted share units, subject to compliance with certain non-competition obligations.
No options were granted during the years ended December 31, 2015 and 2014. During the year ended December 31, 2013, 800,000 options were granted with a weighted average grant date fair value of $10.2 million. The Company uses the Black-Scholes-Merton formula to estimate the value of stock options granted. No options expired during the years ended December 31, 2015, 2014 and 2013. During the years ended December 31, 2015, 2014 and 2013, 160,000, 160,000 and 160,000 options vested, respectively. The total intrinsic value of options exercised during the years ended December 31, 2015, 2014 and 2013 was $9.5 million, $0.3 million, and $0.5 million, respectively. The Company received proceeds of $23.1 million from the exercise of options during the year ended December 31, 2015. The Company issued new ordinary shares in connection with the exercise of the above options.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2015, is presented below:
For the years ended December 31, 2015, 2014 and 2013, compensation costs recognized in earnings for all restricted shares and restricted share units were $53.9 million, $27.9 million, and $23.5 million, respectively. At December 31, 2015, compensation costs not yet recognized related to non-vested awards was $26.7 million (2014 - $23.3 million). This expense is expected to be recognized between 2016 and 2019, with approximately 65.3% expected to be recognized during 2016.
The combined statutory capital and combined statutory net income (loss) for the Company's principal operating subsidiaries, excluding Syndicate 5151, in their respective jurisdictions were as follows:
Bermuda includes the statutory capital of Endurance Bermuda and its foreign branches.
Endurance Bermuda's ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the Enhanced Capital Requirement, limits on the amount of Endurance Bermuda's premiums written and net reserves for losses and loss expenses and a minimum general capital and surplus requirement of $100.0 million. At December 31, 2015, Endurance Bermuda can pay dividends of $1,034.4 million (2014 - $719.2 million) to Endurance Holdings without prior approval under Bermuda law.
Blue Capital Re is registered with the BMA as a Class 3A insurer. The Bermuda Insurance Act requires Blue Capital Re to maintain minimum levels of statutory capital and surplus to maintain minimum liquidity ratios and to meet minimum solvency margins. At December 31, 2015, Blue Capital Re exceeded these minimum requirements. At December 31, 2015, Blue Capital Re can pay dividends of $50.6 million to it's parent without prior approval under Bermuda law.
Endurance U.S. Reinsurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the Delaware Department of Insurance. American Agri-Business is subject to regulation by the Texas Department of Insurance. Endurance Holdings' Delaware and Texas domiciled entities must maintain a minimum level of statutory capital as established by such jurisdictions. The amount of required capital is determined through the use of the Risk Based Capital model established by the National Association of Insurance Commissioners and adopted by Delaware and Texas. The required capital noted in the table above has been based on the Risk Based Capital model and represents the authorized control level risk based capital for these entities.
Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders' surplus or statutory net income, excluding realized capital gains for Endurance Holdings' Delaware domiciled entities. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2015, Endurance U.S. Reinsurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2015 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2015, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.5 million (2014 - $3.7 million) without prior regulatory approval.
The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distribution. At December 31, 2015 Endurance U.K did not have retained profits available for distribution.
ECCL is required to deposit cash, securities or letters of credit (or a combination of these assets) with Lloyd's in order to satisfy its FAL requirements, which are met through the Lloyd's Capital Trust. At December 31, 2015, ECCL had total FAL of $276.8 million which was provided by Endurance Bermuda.
Endurance Bermuda's Singapore branch ("Singapore Branch") is subject to Fund Solvency and Capital Adequacy requirements by the Monetary Authority of Singapore as a foreign company in Singapore and is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act in Singapore. At December 31, 2015 and 2014, the Singapore Branch complied with the capital requirements promulgated by the Monetary Authority of Singapore.
In 2008, Endurance Bermuda established a branch in Zurich, Switzerland named Endurance Specialty Insurance Ltd. Pembroke (Bermuda) Zurich Branch. In 2015, Endurance U.K. established a branch in Zurich named Endurance Worldwide Insurance Limited, London, Zurich Branch. Swiss law does not impose additional regulation upon a Swiss branch of a foreign reinsurer.
The income tax expense was as follows for the years ended December 31, 2015, 2014 and 2013, respectively:
Of the 2015 current income tax expense, $4.2 million related to taxes incurred in the United States (2014 - $1.8 million; 2013 - $3.1 million), $2.2 million related to taxes incurred in the United Kingdom (2014 and 2013 - nil) and $0.1 million related to a tax benefit in Switzerland (2014 and 2013 - nil). Of the deferred income tax benefit (expense), $0.7 million related to deferred income tax benefit in the United States (2014 - $1.4 million; 2013 - $(2.8) million), $0.2 million related to deferred income tax benefit in the United Kingdom (2014 and 2013 - nil) and $1.0 million related to deferred income tax benefit in Bermuda (2014 and 2013 - nil). The deferred income tax benefit in Bermuda related to amortization of intangible assets from the acquisition of Montpelier which the Company elected not to push down to Endurance at Lloyd's under current accounting guidance. A full valuation allowance has been recorded against the net asset position of Endurance Bermuda's foreign branches and a United Kingdom subsidiary.
The actual income tax expense attributable to income for the years ended December 31, 2015, 2014 and 2013 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income taxes, as a result of the following:
The Company's non-U.S. (foreign) operating subsidiaries write business that is exposed to risks originating in the United States.
Management has concluded that valuation allowances are required against the net operating loss and net capital loss carryforwards assumed as part of the Montpelier acquisition. The valuation allowances have been established as Internal Revenue Code Section 382 limits the application of net operating loss and net capital loss carryforwards following an ownership change. Accordingly, a tax effected valuation allowance of $11.3 million and $0.7 million, respectively, is required as of August 1, 2015. The loss carryforwards available per year are $0.2 million as required by Internal Revenue Code Section 382.
The following is a summary of the unaudited quarterly data for the year ended December 31, 2015: