We renew and enter into new leases in the ordinary course of our business. We lease office space in Hamilton, Bermuda, where our principal executive office is located. We also lease office space in a number of U.S. states, the United Kingdom, Australia, Ireland, Switzerland, Canada and several Continental European countries. We believe that this office space is sufficient for us to conduct our current operations for the foreseeable future, although in connection with future acquisitions from time to time, we may expand to different locations or increase space to support any such growth.
We are a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through our network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Our core focus is acquiring and managing insurance and reinsurance companies and portfolios of insurance and reinsurance business in run-off. Since the formation of our Bermuda-based holding company in 2001, we have completed or announced over 100 acquisitions or portfolio transfers. The substantial majority of our acquisitions have been in the non-life run-off business, which generally includes property and casualty, workers’ compensation, asbestos and environmental, construction defect, marine, aviation and transit, and other closed business.
During 2019, our book value per share on a fully diluted basis increased by 26.9% to $197.93 per share. The growth of our fully diluted book value per share since becoming a public company is shown in the table below.
In addition to presenting net earnings (losses) attributable to Enstar Group Limited ordinary shareholders and diluted earnings (losses) per ordinary share determined in accordance with U.S. GAAP, we believe that presenting non-GAAP operating income (loss) attributable to Enstar Group Limited ordinary shareholders and non-GAAP diluted operating income (loss) per ordinary share provides investors with valuable measures of our performance.
Our non-GAAP measure shown above, as defined in Item 10(e) of Regulation S-K, enables readers of the consolidated financial statements to more easily analyze our results in a manner more aligned with the manner in which our management analyzes our underlying performance. We believe that presenting this non-GAAP financial measure, which may be defined and calculated differently by other companies, improves the understanding of our consolidated results of operations. This measure should not be viewed as a substitute for those calculated in accordance with U.S. GAAP.
The Atrium segment also includes corporate expenses that are not directly attributable to the underwriting results in the segment. The corporate expenses include general and administrative expenses related to amortization of the definite-lived intangible assets in the holding company, and expenses relating to Atrium Underwriters Limited ("AUL") employee salaries, benefits, bonuses and current year share grant costs. The AUL general and administrative expenses are incurred in managing the syndicate. These are principally funded by the profit commission fees earned from Syndicate 609, which is a revenue item not included in the insurance ratios.
Our business operates in the insurance, reinsurance and investments markets. As with others in our industry, we are subject to economic factors such as interest rates, foreign exchange rates, underwriting events, regulation, tax policy changes, political risks and other market risks that can impact our strategy and operations. Economic conditions have recently been characterized by historically low interest rates, international trade tensions, signs of slowing global growth, significant catastrophe events, coronavirus, and other political and economic uncertainties. However, our business continued to perform well in 2019.
We experienced favorable investment conditions during 2019, and we expect that investment results will continue to be a key driver of our consolidated results going forward. However, we cannot be assured that the recent positive market conditions will continue into the future. We also anticipate that our consolidated earnings will be impacted by volatility in the investment markets. Our fixed income portfolio is prudently invested to earn us a reasonable return, whilst ensuring that funds will be available to pay our obligations when they become due. While it is possible that fixed income yields will improve over time, we anticipate that interest rates will remain low in the near-term which may adversely impact reinvestment yields. Our other investments, including equities, hedge funds and other non-fixed income investments carry higher expected returns, have a longer investment time horizon, and diversify against our fixed income portfolio. Our enterprise risk management framework enables us to hold sufficient capital for possible risk events and ensures our business strategies can be deployed through market cycles to deliver attractive returns for our capital providers.
Atrium has been a consistent top-quartile performing Lloyd's business and is currently seeing market opportunities that are resulting in an increase to premiums written.
StarStone, with the strong support from its shareholders, has undertaken a significant re-positioning of its underwriting portfolio, resulting in lower premiums written in 2019. StarStone's focus is to achieve consistent underwriting profitability from its core lines of business. We believe StarStone is better positioned for the future and we expect that StarStone will seek to write more premiums through selective growth opportunities.
Our significant strategic investments include Enhanzed Re, Monument Re, AmTrust, amongst others, more fully described in Note 21 - "Related Party Transactions" in the notes to our consolidated financial statements included within Item 8 of this Annual Report on Form 10-K.
Consolidated Results of Operations - For the Years Ended December 31, 2019 and 2018
The following table sets forth our consolidated statements of earnings for the years ended December 31, 2019 and 2018. For a discussion of the critical accounting policies that affect the results of operations, see "Critical Accounting Policies" below.
Consolidated net earnings of $902.2 million and basic and diluted earnings per share of $42.00 and $41.43, respectively;
Non-GAAP operating income of $553.4 million and diluted non-GAAP operating income per ordinary share of $25.42. For a reconciliation of non-GAAP operating income to net earnings (loss) calculated in accordance with GAAP and diluted non-GAAP operating income per ordinary share to diluted net earnings (loss) per ordinary share calculated in accordance with GAAP, see "Non-GAAP Financial Measure" above;
Combined ratio of 103.4% for StarStone's core business lines, and 111.9% for StarStone Group after intragroup reinsurance cessions.
Diluted book value per ordinary share of $197.93, an annual increase of 26.9%.
2019 versus 2018: We reported consolidated net earnings attributable to Enstar Group Limited ordinary shareholders of $902.2 million in 2019, a change of $1,064.5 million from net losses of $162.4 million in 2018. The comparability of our results across different periods was impacted by the acquisitions and loss portfolio transfer reinsurance transactions we completed during 2019 with Morse TEC, Zurich, Maiden Re, Amerisure and AmTrust and in 2018 with Maiden Re, Maiden Re North America, KaylaRe, Neon, Novae, Zurich, Coca-Cola and Allianz. The most significant drivers of the change in our financial performance during 2019 as compared to 2018 included:
Non-life Run-off Segment - Our Non-life Run-off segment is the predominant driver of our results, contributing $1,059.8 million of net income to our consolidated results in 2019, an increase of $1,034.6 million compared to 2018, primarily due to net realized and unrealized gains on both our fixed income portfolio and our other investments;
Net Realized and Unrealized Gains (Losses) - In 2019, net realized and unrealized gains were $1,031.4 million, compared to net losses of $412.9 million in 2018. The net realized and unrealized gains in 2019 were primarily attributable to an increase in the valuation of our fixed maturity investments due to declining interest rates and tighter credit spreads and gains on our other investments primarily due to strong performance in the global equity markets. Many insurance companies predominantly use available-for-sale accounting where unrealized amounts are recorded directly to shareholders’ equity and therefore do not impact earnings. Unrealized amounts would only become realizable in the event of a sale of the specific securities prior to maturity or a credit default. We have historically utilized trading accounting which is reflected
in earnings, however from October 1, 2019 we have been electing to use available-for-sale accounting for all new acquisitions and, where permissible, as trading fixed maturity securities mature, we are reinvesting the proceeds into available-for-sale securities for the Non-Life Run-off and StarStone segments;
Income Taxes - We recorded an income tax expense of $4.4 million in 2019, compared to an income tax benefit of $6.1 million in 2018, a change of $10.6 million. Our effective tax rate was 0.5% in 2019 compared with 2.8% in 2018, primarily relating to the geographic distribution of our pre-tax net earnings (losses) between our taxable and non-taxable jurisdictions in 2018; and
We have three reportable segments of business that are each managed, operated and reported on separately: (i) Non-life Run-off; (ii) Atrium; and (iii) StarStone. In addition, our other activities include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange and other miscellaneous items. For a description of our segments, see "Item 1. Business - Operating Segments." The following is a discussion of our results of operations by segment.
The following is a discussion and analysis of the results of operations for our Non-life Run-off segment for the years ended December 31, 2019 and 2018, which are summarized below:
Net earnings were $1,059.8 million in 2019, compared to $25.2 million in 2018, an increase of $1,034.6 million. This increase was primarily attributable to net realized and unrealized gains on both our fixed income portfolio and our other investments during 2019, compared to net unrealized losses during 2018. Net investment income increased due to higher assets under management from our completed transactions in 2019, as well as our asset allocation strategies. Our underwriting result included a favorable reduction in estimates of prior period net ultimate losses of $220.0 million in 2019, compared to $286.4 million in 2018. Our underwriting result also includes the amortization of deferred charge assets, amortization of fair value adjustments and the change in fair value for those liabilities where we elected the fair value option, representing an aggregate expense of $205.9 million in 2019 compared to an aggregate expense of $33.3 million in 2018. These amortization and fair value amounts relating to our underwriting were generally offset by our investment results.
The following table shows the gross and net premiums written and earned for the Non-life Run-off segment for the years ended December 31, 2019 and 2018:
Net premiums written in 2019 of $(25.3) million were primarily related to reductions in net written premium on legacy business for which corresponding unearned premium was also released. Net premiums earned in 2019 of $168.5 million were primarily related to the run-off business assumed as a result of the AmTrust RITC transactions and the acquisition of Maiden Reinsurance North America, Inc. ("Maiden Re North America"). Premiums written and earned in 2018 were primarily related to the run-off business assumed as a result of the RITC transaction with Novae.
The following table shows the components of net incurred losses and LAE for the Non-life Run-off segment for the years ended December 31, 2019 and 2018:
2019: Net incurred losses and LAE for the year ended December 31, 2019 of $51.6 million included net incurred losses and LAE of $123.6 million related to current period net earned premium. Excluding current period net incurred losses and LAE of $123.6 million, the reduction in net incurred losses and LAE liabilities relating to prior periods was $71.9 million, which was attributable to a reduction in estimates of net ultimate losses of $220.0 million and a reduction in provisions for unallocated LAE of $57.8 million relating to 2019 run-off activity, partially offset by an increase in the fair value of liabilities of $117.2 million related to our assumed retroactive reinsurance agreements for which we have elected the fair value option, amortization of fair value adjustments of $50.1 million and the amortization of deferred charge assets of $38.6 million. The reduction in estimates of prior period net ultimate losses of $220.0 million for the year ended December 31, 2019 included a net reduction in case and IBNR reserves of $1,402.8 million, partially offset by net losses paid of $1,182.8 million.
A $38.6 million reduction in estimates of net ultimate losses in our professional indemnity/directors’ & officers’ line of business arose based on the annual actuarial analysis which reflected the better than expected loss development during 2019. As part of the reserve analysis, an in-depth review of recently acquired portfolios’ ceded reinsurance programs led to an increase in the ceded reinsurance asset of $13.5 million, which is a reduction in net ultimate losses.
A $6.8 million increase in estimates of net ultimate losses in our asbestos line of business arose primarily due to changes in our actuarial assumptions related to dismissal rates. During 2019, the number of new defendants and filed claims was less than expected, but this was offset by a lowering of the dismissal rate. In asbestos, the dismissal rates are extremely high as many of the claims do not have merit against the insured. However, we have seen a trend in both US and UK exposure of the dismissal rate decreasing in the range of 2 to 3 percentage points.
The reduction in estimates of prior period net ultimate losses of $286.4 million for the year ended December 31, 2018 included a net reduction in case and IBNR reserves of $1,125.3 million, partially offset by net losses paid of $838.8 million.
The $154.6 million reduction in estimates of net ultimate losses in our workers' compensation line of business in 2018 arose across multiple portfolios, where reported incurred loss development was generally significantly less than expected. When actual development is less than expected for a sustained period of time across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR reserves. Updates to actuarial analysis, factoring in the less-than-expected reported incurred loss development for the year, is the primary driver of the $154.6 million reduction to Workers' Compensation net ultimate loss estimates.
The amortization of deferred charge assets of $13.8 million was associated with retroactive reinsurance contracts where, at the inception of the contract, the estimated ultimate losses payable was in excess of premium received.
The amortization of fair value adjustments of $12.9 million was related to the fair value adjustments associated with the acquisition of companies.
Acquisition costs for the Non-life Run-off segment were $73.6 million in 2019, compared to $4.0 million in 2018, an increase of $69.6 million. The increase in acquisition costs for 2019 primarily related to the run-off business assumed through the AmTrust RITC Transactions and the acquisition of Maiden Re North America.
Our management companies in the Non-life Run-off segment earned fees and commission income of $18.3 million in 2019, broadly consistent with income of $16.5 million in 2018. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group. These internal fees are eliminated upon consolidation of our results of operations.
General and administrative expenses for the Non-life Run-off segment increased by $72.6 million, from $197.8 million in 2018 to $270.4 million in 2019. The increase in expenses in 2019 was primarily attributable to an increase in performance-based salary and benefit expenses due to significantly higher net earnings of the Non-life Run-off segment in 2019 compared to lower earnings in 2018.
Net foreign exchange gains for the Non-life Run-off segment were $9.9 million in 2019 compared to $2.5 million in 2018. The increase of $7.4 million in net foreign exchange gains arose primarily as a result of increased volatility in exchange rates in 2019 and the resulting impact on our foreign currency denominated investments and subsidiaries, which was partially offset by the change in currency translation adjustment in the consolidated statement of comprehensive income.
We recorded an income tax expense of $7.3 million for our Non-life Run-off segment in 2019, compared to an income tax benefit of $3.6 million in 2018, a change of $10.8 million. The effective tax rate was 0.7% in 2019 compared with (14.5)% in 2018. Our tax rate was impacted by having proportionately higher net income in our tax paying subsidiaries in 2019 than in 2018. Income tax expense is primarily generated through our foreign operations outside of Bermuda, principally in the United States, the United Kingdom, Continental Europe and Australia. The effective tax rate, which is calculated as income tax expense or benefit divided by income before tax, is driven primarily by the geographic distribution of pre-tax net income between jurisdictions with comparatively higher tax rates and those with comparatively lower income tax rates and as a result may fluctuate significantly from period to period.
We recorded earnings from equity method investments of $56.1 million for our Non-life Run-off segment in 2019, compared to earnings of $42.1 million in 2018, an increase of $14.0 million. The increase in 2019 was primarily due to increased earnings from our investments in Monument and Enhanzed Re.
Net earnings attributable to noncontrolling interest in our Non-life Run-off segment were $6.4 million in 2019, compared to $3.1 million in 2018, a change of $3.3 million. The change of $3.3 million in 2019 was due primarily to the increase in earnings for those companies where there is a noncontrolling interest. The number of subsidiaries in this segment with a noncontrolling interest remained unchanged at two as of December 31, 2019 and December 31, 2018.
Gross premiums written for the Atrium segment were $192.4 million in 2019, compared to $171.5 million in 2018, an increase of $20.9 million. The increase was seen predominantly across the Marine, Aviation and Transit and Non-Marine Direct and Facultative lines of business. Both lines of business have benefited from an increase in rates. The Non-Marine Direct and Facultative class are continuing to see new opportunities to write new business.
Fees and commission income was $10.2 million in 2019, compared to $18.6 million in 2018, a decrease of $8.5 million. The fees represent management and profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The decrease of $8.5 million in 2019 was primarily due to profit commission on lower syndicate profits arising on the prior year underwriting profits in 2019 as compared with 2018, principally due to the large catastrophe losses, primarily hurricanes Harvey, Irma and Maria, in the third quarter of 2017, which continued to impact the profit commission in 2019.
Net earnings attributable to noncontrolling interest in our Atrium segment were $8.4 million in 2019, compared to $6.3 million in 2018, a change of $2.2 million, which was primarily due to higher earnings in the Atrium segment. As of December 31, 2019, Trident and Dowling had a combined 41.0% noncontrolling interest in the Atrium segment.
The results of our StarStone segment include the results of StarStone and StarStone Specialty Holdings Limited ("StarStone Group") and intragroup reinsurance cessions.
StarStone made significant progress in repositioning the underwriting portfolio during 2019 to focus on core lines of business, which have a track record of performing, and exiting under-performing lines of business in order to achieve improved underwriting profitability for StarStone Group. As part of the new strategy for the StarStone segment, we have exited or disposed of various operations and investments that are no longer considered to be key to the new strategy. The StarStone leadership has separated the book into "core lines" and "exited lines" to manage the performance during the repositioning phase. The exited lines represent segments or lines of business where new business has ceased and includes some aerospace, casualty and property lines.
Our StarStone segment also includes the results of intragroup reinsurance cessions. In partnership with StarStone's other shareholders, we completed the following transactions to provide strategic and capital support to StarStone in the form of:
(ii) a loss portfolio transfer, effective April 1, 2019, for which the StarStone shareholders agreed to contribute an aggregate amount of $48.0 million;
(iii) our wholly-owned subsidiary, KaylaRe, provided quota share reinsurance to StarStone's U.S., E.U. and U.K. affiliates. These were non-renewed as of January 1, 2018 for U.S. business, and January 1, 2019, for E.U. and U.K. business. However, losses in the earlier calendar years will continue to fall due under the previous quota share agreements. Effective May 14, 2018, Enstar completed the acquisition of the portion of KaylaRe it did not already own.
The following is a discussion and analysis of the results of operations for the StarStone segment for the years ended December 31, 2019 and 2018, which are summarized below:
The following table provides net premiums earned by line of business for the StarStone segment for the years ended December 31, 2019 and 2018:
Net premiums earned for the StarStone segment were $801.9 million and $715.0 million for the years ended December 31, 2019 and 2018, respectively, an increase of $87.0 million. The increase in net premiums earned in the StarStone Group was due to the impact of lower ceded premium earned related to KaylaRe after its acquisition.
Net premiums earned for the StarStone Group for 2019 were $708.2 million, an increase of $147.5 million compared to 2018. The increase was primarily driven by lower ceded premiums due to the non-renewal of the quota share arrangement with KaylaRe.
Net incurred losses and LAE for 2019 and 2018 were $727.6 million and $673.4 million, respectively. The increase in net incurred losses was due to lower reinsurance recoveries due to the non-renewal of the KaylaRe quota share arrangement and net unfavorable prior year loss development. Net unfavorable prior year loss development for 2019 was $129.2 million, compared to $94.5 million for 2018, primarily related to reserve strengthening for the U.S. casualty line of business, reflecting an increase in the frequency and severity of losses and social inflation, and lines of business which we have exited. Excluding prior year loss development, net incurred losses and LAE for 2019 and 2018 were $598.5 million and $578.9 million, respectively.
Acquisition costs for the StarStone segment were $174.7 million and $135.5 million for 2019 and 2018, respectively, an increase of $39.3 million. The acquisition cost ratios for 2019 and 2018 were 21.8% and 18.9%, respectively, an increase of 2.9 percentage points. The increase in the acquisition cost ratio was primarily attributable to the non-renewal of the quota share arrangement with KaylaRe, and as a result, the StarStone Group benefited less from the quota share ceding commission for 2019 than it did in 2018.
Acquisition costs for the StarStone Group were $139.0 million and $76.0 million for 2019 and 2018, respectively, an increase of $63.0 million. The acquisition cost ratios for December 31, 2019 and 2018 were 19.6% and 13.5%, respectively, an increase of 6.1 percentage points.
Operating expense ratios for the StarStone Group for 2019 and 2018 were 16.9% and 27.5%, respectively, a decrease of 10.6 percentage points. The decrease in the operating expense ratio is attributable to the withdrawal from certain lines of business and higher net premiums earned due to the non-renewal of KaylaRe.
Corporate expenses for StarStone segment were $7.8 million in 2019. These expenses primarily related to non-recurring expenses related to reorganization and remediation initiatives, which were not a cost of underwriting, as well as certain holding company expenses.
Our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, preferred share dividends, holding company income and expenses, foreign exchange and other miscellaneous items. On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument.
Net losses were $69.0 million for 2019 and $38.0 million for 2018, an increase in net losses of $31.0 million, which primarily resulted from a $23.8 million increase in dividends on preferred shares, a $17.8 million increase in corporate expenses, an $11.1 million decrease in net investment income, and a $1.0 million decrease in foreign exchange gains, partially offset by a $16.1 million increase in net realized and unrealized gains (losses) and a $5.0 million increase in interest income. The primary changes are discussed below.
Underwriting income was $3.6 million in 2019, compared to $4.3 million in 2018, a decrease of $0.7 million.
Corporate expenses were $45.9 million in 2019, compared to $28.1 million in 2018, an increase of $17.8 million, primarily due to an increase in performance-related compensation as a result of higher consolidated net earnings in 2019 compared to 2018.
We define investable assets as the sum of total investments, cash and cash equivalents, restricted cash and cash equivalents and funds held. Investments consist primarily of investment grade, liquid, fixed maturity securities of short-to-medium duration, equities and other investments. Cash and cash equivalents and restricted cash and cash equivalents is comprised mainly of cash, high-grade fixed deposits, and other highly liquid instruments such as commercial paper with maturities of less than three months at the time of acquisition and money market funds. Funds held primarily consists of investment grade, liquid, fixed maturity securities of short-to-medium duration.
Investable assets were $14.7 billion as of December 31, 2019 as compared to $12.5 billion as of December 31, 2018, an increase of 16.9%. The increase was primarily due to the investments and funds held balance acquired in relation to the Morse TEC, Zurich, Maiden Re Bermuda, Amerisure and the AmTrust RITC transactions.
Our fixed maturity securities include U.S. government and agency investments, highly rated sovereign and supranational investments, high-grade corporate investments, and mortgage-backed and asset-backed investments. We allocate a portion of our investment portfolio to other investments, including private equity funds, fixed income funds, hedge funds, equity funds, CLO equities, CLO equity funds, real estate debt fund and private credit funds.
We utilize and pay fees to various companies to provide investment advisory and/or management services. These fees, which are predominantly based upon the amount of assets under management, are included in net investment income.
Our investment performance is subject to a variety of risks, including risks related to general economic conditions, market volatility, interest rate fluctuations, foreign exchange risk, liquidity risk and credit and default risk. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. An increase in interest rates could result in significant losses, realized or unrealized, in the value of our investment portfolio. A portion of our non-investment grade securities consists of alternative investments that subject us to restrictions on redemption, which may limit our ability to withdraw funds for some period of time after the initial investment. The values of, and returns on, such investments may also be more volatile. For more information on these risks, refer to "Item 1A. Risk Factors - Risks Relating to Our Investments" and "
Consolidated Statements of Earnings for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Note 8 - Reinsurance Balances Recoverable on Paid and Unpaid Losses
As discussed in Notes 2 (c), 10 and 11 to the consolidated financial statements, the Company has recorded a liability for loss and loss adjustment expenses (loss reserves) and defendant asbestos and environmental liabilities (asbestos and environmental liabilities) of $7,808 million and $848 million, respectively, as of December 31, 2019. Included in loss reserves are claims that have been received by the Company but not yet paid, in addition losses that have been incurred, but not yet reported to the Company. Asbestos and environmental liabilities include amounts for indemnity and defense costs for pending and future claims, as well as estimated clean-up costs based on engineering reports. The Company established loss reserves and asbestos and environmental liabilities based on actuarially determined estimates of ultimate claims payments, using generally accepted actuarial methods, with the assistance of actuarial specialists.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate the loss reserves and asbestos and environmental liabilities, including controls over the assumptions listed above and actuarial methodologies used in the estimation of loss reserves and asbestos and environmental liabilities. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Evaluating expected trends in claim frequency and severity, by comparing them to historical results and industry trends used in the estimation process of asbestos and environmental liabilities;
Developing an independent actuarial estimate of loss reserves and asbestos and environmental liabilities for selected lines of business;
Evaluating the Company’s overall recorded loss reserves by assessing the movement of the recorded loss reserves within the Company’s range of actuarially determined reserves; and
Evaluating the Company’s overall recorded asbestos and environmental liabilities by assessing the movement of the recorded asbestos and environmental liabilities within the Company’s range of actuarially determined reserves.
As discussed in Notes 2 (c), 2(p), 10 and 12 to the consolidated financial statements, the Company used a discounted cash flow approach to estimate the liability for loss and loss adjustment expenses, fair value. The discounted cash flow approach used estimated nominal cash flows based on a payment pattern developed in accordance with standard actuarial techniques. Nominal loss reserves include claims that have been received by the Company but not yet paid, in addition to losses that have been incurred, but not yet reported to the Company. The Company estimated the nominal loss reserve based on actuarially determined estimates of ultimate loss and loss adjustment expenses, using generally accepted actuarial methods, with the assistance of actuarial specialists. The Company has recorded a liability for loss and loss adjustment expenses, fair value (loss reserves at fair value) of $2,621 million as of December 31, 2019.
We identified the assessment of the estimate of the nominal loss reserve used to develop the loss reserves at fair value as a critical audit matter. The evaluation of the estimate of the nominal loss reserves involved a high degree of auditor judgment due to the inherent uncertainty that exists in the losses incurred but not yet reported amounts, the outcome of coverage litigation on certain lines of business, and the significant amount of time that can lapse between the assumption of risk and ultimate payment of the claim. The key assumptions used in the estimation process included loss development factors and expected trends in claim frequency and severity. Specialized skills and knowledge were required to 1) evaluate the actuarial methodologies and certain assumptions used to estimate the nominal loss reserves; and 2) evaluate the projected payout, including timing, and amount of the nominal cash flows used in the fair value estimate.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to estimate nominal loss reserve, including controls over the assumptions and actuarial methodologies used in the 1) estimation of the nominal loss reserves; and 2) the estimation of the projected payout, including timing, and amount of the nominal cash flows used to develop the fair value. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Evaluating loss development factors and expected trends in claim frequency and severity, by comparing them to historical results and industry trends;
Developing an independent actuarial estimate of the nominal loss reserves for selected lines of business;
Evaluating the Company’s overall nominal loss reserves and assessing the movement of the nominal loss reserves within the Company’s range of actuarially determined reserves; and
Evaluating expected trends in claim frequency and severity, by comparing them to historical results and industry trends;
In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
Non-life Run-off: This segment comprises the operations of our subsidiaries that are running off their property and casualty and other non-life business. It also includes our management business, which manages the run-off portfolios of third parties through our service companies;
Atrium and StarStone, our active underwriting operations, are reported as separate segments because they are managed and operated in separate and distinct manners. Atrium employees are not involved in the management or strategy of StarStone, nor are StarStone employees involved in the management or strategy of Atrium. Atrium and StarStone are monitored and reported upon separately and distinctly and their strategies and business plans are determined independently of each other.
In addition to our three reportable segments, our other activities, which do not qualify as a reportable segment, include our corporate expenses, debt servicing costs, holding company income and expenses, foreign exchange and other miscellaneous items.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The consolidated financial statements include our assets, liabilities and results of operations as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
policy terms. We monitor the credit risk associated with premiums receivable, taking into consideration the impact of our contractual right to offset loss obligations or unearned premiums against premiums receivable. Amounts deemed uncollectible are charged to net earnings based on an expected loss approach. Changes in the estimates of premiums written will result in an adjustment to premiums receivable in the period they are determined.
Included within the total net incurred losses and LAE on our consolidated statement of earnings are the following items:
Net change in case and LAE reserves: the change in case reserves and associated LAE, net of related reinsurance recoveries.
Net change in IBNR reserves: the change in IBNR reserves, net of related reinsurance recoveries.
Increase (reduction) in estimates of net ultimate losses: the total of net losses paid, net change in case and LAE reserves and the net change in IBNR. This includes the net impact of commutations and policy buybacks on the liability for losses and LAE reserves and reinsurance recoveries.
Amortization of fair value adjustments: the amortization of the fair value adjustments associated with acquired companies, where the assumed losses and LAE reserves and the acquired reinsurance recoveries are fair valued on acquisition.
Changes in fair value - fair value option: the changes in the fair value for reinsurance agreements where we have elected the fair value option. The change in fair value component includes the changes in the discounted cash flows and risk margin. The underlying net losses paid, net change in case and LAE reserves and the net change in IBNR reserves relating to these reinsurance agreements for which we have elected the fair value option are included within the appropriate line items described above.
Amounts billed to, and due from, reinsurers resulting from paid movements in the underlying business are calculated in accordance with the terms of the individual reinsurance contracts. Similarly, reinsurance balances recoverable on paid and unpaid losses related to our case reserves are calculated by applying the terms of any applicable reinsurance coverage to movements in the underlying case reserves. Our estimate of reinsurance balances recoverable on paid and unpaid losses related to IBNR reserves is recognized on a basis consistent with the underlying IBNR reserves.
Our reinsurance balances recoverable on paid and unpaid losses are presented net of a provision for uncollectible amounts, reflecting the amount deemed not collectible due to credit quality, collection problems due to the location of the reinsurer, contractual disputes with reinsurers over individual contentious claims, contract language or coverage issues.
In evaluating credit losses, we consider a variety of factors in the assessment of a fixed maturity investment including: (1) the time period during which there has been a significant decline below cost; (2) the extent of the decline below cost and par; (3) the potential for the investment to recover in value; (4) an analysis of the financial condition of the issuer; (5) the rating of the issuer; and (6) failure of the issuer of the investment to make scheduled interest or principal payments.
We primarily use three types of share-based compensation arrangements: (i) restricted shares, restricted share units and performance share units, (ii) cash-settled stock appreciation rights ("SARs") and (iii) shares issued under our employee share purchase plans. With the exception of SARs and the incentive plan awards issued to certain employees of Atrium and StarStone, our share-based compensation awards qualify for equity classification. The fair value of the compensation cost is measured at the grant date and is expensed over the service period of the award. The SARs, the Atrium and StarStone incentive plan awards are classified as liability awards. Liability classified awards are recorded at fair value within other liabilities in the consolidated balance sheet with changes in fair value relating to the vested portion of the award recorded within general and administrative expenses in the consolidated statements of earnings.
Certain of our funds held arrangements also contain embedded derivatives as described above, which are carried at fair value. In addition, we also hold equity call options carried at fair value, as part of our investment strategy.
We use an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and the reinsurance balances recoverable on paid and unpaid losses. Note 12 - "Fair Value Measurements" describes the internal model, including the observable and unobservable inputs used in the model.
In connection with the acquisitions of Arden, Atrium and StarStone, certain subsidiaries issued shares to noncontrolling interests. These shares provide certain redemption rights to the holders, which may be settled in our own shares or cash or a combination of cash and shares, at our option. Redeemable noncontrolling interests with redemption features that are not solely within our control are classified within temporary equity in the consolidated balance sheets and carried at their redemption value, which is fair value. Change in the fair value is recognized through retained earnings as if the balance sheet date were also the redemption date.
We report a business as held-for-sale when certain criteria are met, which include (1) management has either approved the sale or is in the process of obtaining approval to sell the business and is committed to a formal plan to sell the business, (2) the business is available for immediate sale in its present condition, (3) the business is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (4) the sale is anticipated to occur within the next 12 months, among other specified criteria. A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less costs to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Assets and liabilities related to the businesses classified as held-for-sale are separately reported in our Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale. Refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinued Operations" for further information regarding our held-for-sale business.
Disposals that represent strategic shifts that have or will have a major effect on our operations and financial results are reported as discontinued operations.
In July 2019, the Financial Accounting Standards Board (the "FASB") issued ASU 2019-07 in response to the Securities and Exchange Commission's ("SEC's") disclosure update and simplification initiative. The ASU clarifies or improves the disclosure and presentation requirements of a variety of Codification Topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the Codification easier to apply. The adoption of the disclosure and presentation amendments included in this ASU and which are to be applied prospectively, did not have a material impact on our consolidated financial statements and disclosures.
In February 2018, the FASB issued ASU 2018-02, which gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income (“AOCI”) that are deemed stranded in AOCI as a result of the Tax Cuts and Jobs Act (the "Tax Act") enacted in the United States at the end of 2017. The amendments in this guidance eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. We adopted the new standard on January 1, 2019, and that adoption did not have a material impact on our consolidated financial statements and related disclosures.
leases guidance, including (1) the rate implicit in the lease, (2) impairment of the net investment in the lease, (3) lessee reassessment of lease classification, (4) lessor reassessment of lease term and purchase options, (5) variable payments that depend on an index or rate, and (6) certain transition adjustments.
In addition, in March 2019, the FASB issued ASU 2019-01 to clarify that in the year of initial adoption of ASC 842, entities are not subject to the transition disclosure requirements in ASC 250-10-50-3 related to the effect of an accounting change on certain interim period financial information. Prior to this clarification, the transition guidance in ASC 842 only excluded the annual disclosures required in ASC 250-10-50-1(b)(2).
We adopted ASU 2016-02 and the related amendments on January 1, 2019 using the modified retrospective transition method as required by the standard and recognized a right-of-use asset and an associated lease liability of $51.6 million on our consolidated balance sheet, relating primarily to office space and facilities that we have leased to conduct our business operations. Refer to Note 23 - "Commitments and Contingencies" for further details.
ASU 2020-01 - Clarifying the Interactions between ASC 321, ASC 323 and ASC 815
In December 2019, the FASB issued ASU 2019-12 which removes certain exceptions for (1) recognizing deferred taxes for investments, (2) performing intraperiod tax allocation, and (3) calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating income taxes to a legal entity that is not subject to income taxes. The ASU is effective for interim and annual reporting periods beginning after December 15, 2020, although early adoption is permitted, including adoption in any interim period. We are currently assessing the impact of adopting this guidance however we do not expect that the adoption will have a material impact on our consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, which is codified in ASC 326, amending the guidance on the impairment of financial instruments and significantly changing how entities measure credit losses for most financial assets and certain other financial instruments including reinsurance balances recoverable on paid and unpaid losses that are not measured at fair value through net income. The ASU will replace the existing “incurred loss” approach, with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale ("AFS") debt securities rather than reduce the carrying amount under the existing OTTI model. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans.
In May 2019, the FASB then issued ASU 2019-05, which amends ASU 2016-13 to provide entities with an option to irrevocably elect the fair value option for certain financial assets previously measured on an amortized cost basis. Entities that avail themselves of this transition relief will have the option to irrevocably elect the fair value option in ASC 825-10 on an instrument-by-instrument basis for eligible instruments, upon the adoption of ASC 326. The fair value option election, however, does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in ASC 820-10 and ASC 825-10 to the eligible instruments for which it has elected the fair value option.
The following table summarizes the fair values of the assets acquired and liabilities assumed in the Morse TEC transaction at the acquisition date, which have all been allocated to the Non-life Run-off segment.
The table below summarizes the results of the Morse TEC operations, which are included in our consolidated statement of earnings from the acquisition date to December 31, 2019:
The following unaudited pro forma condensed combined statement of earnings for the years ended December 31, 2019 and 2018 combines our historical consolidated statements of earnings with those of Morse TEC, giving effect to the business combination transaction as if it had occurred on January 1, 2019 and 2018, respectively. The unaudited pro forma financial information presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition of Morse TEC had taken place at the beginning of each period presented, nor is it indicative of future results.
The purchase price was allocated to the acquired assets and liabilities of Maiden Re North America based on their estimated fair values at the acquisition date.
On May 14, 2018, the Company acquired all of the outstanding shares and warrants of KaylaRe Holdings, Ltd. ("KaylaRe"). In consideration for the acquired shares and warrants of KaylaRe, the Company issued an aggregate of 2,007,017 ordinary shares to the shareholders of KaylaRe, comprising 1,501,778 voting ordinary shares and 505,239 Series E non-voting ordinary shares. Effective May 14, 2018, we consolidated KaylaRe into our consolidated financial statements, and any balances between KaylaRe and Enstar are now eliminated upon consolidation. Effective September 30, 2019, KaylaRe and KaylaRe Ltd. merged with Cavello Bay Reinsurance Limited, a wholly owned subsidiary of the Company, with Cavello Bay Reinsurance Limited as the surviving company. Refer to Note 21 - "Related Party Transactions" for additional information relating to KaylaRe.
The purchase price was allocated to the acquired assets and liabilities of KaylaRe based on their estimated fair values at the acquisition date. We recognized goodwill of $41.7 million on the transaction, primarily attributable to (i) the capital synergies from integrating KaylaRe into our group capital structure, (ii) investment management capabilities on a total return basis, and (iii) the incremental acquired capital to be utilized for future non-life run-off transactions.
On October 1, 2019, we completed a reinsurance transaction with Zurich Insurance Group ("Zurich"), pursuant to which we reinsured certain of Zurich's U.S. asbestos and environmental liability insurance portfolios. In the transaction, we assumed $622.9 million of gross reserves, relating to 1986 and prior year business, for reinsurance premium of $465.5 million and recorded a deferred charge of $115.8 million. We have ceded 10% of this transaction to Enhanzed Reinsurance Ltd. ("Enhanzed Re"), in which we have an investment, on the same terms and conditions as those received by Enstar.
On December 27, 2018, as part of the acquisition of Maiden Re North America as discussed in Note 3 - "Acquisitions", we also novated and assumed certain reinsurance agreements from Maiden Re Bermuda, including certain affiliate reinsurance agreements with Maiden Re North America. We assumed total gross unaffiliated reserves of $72.1 million for total assets of $70.4 million on a funds held basis and recorded a deferred charge asset of $1.7 million.
On February 23, 2018, we entered into a reinsurance agreement with Zurich Australian Insurance Limited, a subsidiary of Zurich Insurance Group ("Zurich"), to reinsure its New South Wales Vehicle Compulsory Third Party ("CTP") insurance business. Under the agreement, which was effective as of January 1, 2018, we assumed gross loss reserves of AUD$359.4 million ($280.8 million) in exchange for consideration of AUD$343.9 million ($268.7 million). We elected the fair value option for this reinsurance contract and recorded an initial fair value adjustment of AUD$15.5 million ($12.1 million) on the assumed gross loss reserves. Refer to Note 12 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich also completed a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), effective December 31, 2018, which provided legal finality for Zurich's obligations.
On February 16, 2018, we completed a reinsurance-to-close (“RITC”) transaction with Neon Underwriting Limited ("Neon"), under which we reinsured to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468, with effect from January 1, 2018. We assumed gross loss reserves of£403.9 million ($546.3 million) and net loss reserves of £342.1 million ($462.6 million) relating to the portfolio in exchange for consideration of £329.1 million ($445.1 million). We elected the fair value option for this reinsurance contract and recorded initial fair value adjustments of $20.6 million and $17.5 million on the gross and net loss reserves assumed, respectively. Refer to Note 12 - "Fair Value Measurements" for a description of the fair value process and the assumptions made.
On February 7, 2017, we entered into an agreement to reinsure the U.K. employers' liability legacy business of RSA Insurance Group PLC ("RSA"). Pursuant to the transaction, our subsidiary assumed gross insurance reserves of £1,046.4 million ($1,301.8 million), relating to 2005 and prior year business. Net insurance reserves assumed were £927.5 million ($1,153.9 million) and the reinsurance premium received was £801.6 million ($997.2 million). We elected the fair value option for this reinsurance contract. The initial fair value adjustment on the gross reserves was $174.1 million, and on the net reserves was $156.7 million. Refer to Note 12 - "Fair Value Measurements" for a description of the fair value process and assumptions.
In addition to the initial reinsurance transaction, which transferred the economics of the portfolio up to the policy's limits, we and RSA completed a portfolio transfer of the business under Part VII of the Financial Services and Markets Act 2000 on July 1, 2019, which provided legal finality for RSA's obligations.
On January 11, 2017, we closed a transaction to reinsure multi-line property and casualty business of QBE Insurance Group Limited ("QBE"). We assumed gross reinsurance reserves of approximately $1,019.0 million (net reserves of $447.0 million) relating to the portfolio, which primarily includes workers' compensation, construction defect, and general liability discontinued lines of business. The reinsurance premium received was $403.8 million, comprised of $227.6 million in restricted cash and $176.2 million in funds held. We elected the fair value option for this reinsurance contract. The initial fair value adjustment was $180.0 million on the gross reserves and $43.2 million on the net reserves. Refer to Note 12 - "Fair Value Measurements" for a description of the fair value process and assumptions. In addition, we pledged a portion of the premium as collateral to a subsidiary of QBE, and we have provided additional collateral and a limited parental guarantee.
On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument Insurance Group Limited ("Monument"). Our life and annuities operations do not qualify for inclusion in our reportable segments and are therefore included within other activities. The related assets, as well as the results from these operations, were not significant to our consolidated operations and therefore were not classified as a discontinued operation. In addition, our transfer of these life assurance polices to Monument was not classified as a held-for-sale business transaction since the underlying contracts did not meet the definition of a business. We have an equity method investment in Monument, as described further in Note 21 - "Related Party Transactions".
Included within residential and commercial mortgage-backed securities as of December 31, 2019 were securities issued by U.S. governmental agencies with a fair value of $356.9 million (as of December 31, 2018: $656.6 million). Included within corporate securities as of December 31, 2019 were senior secured loans of $31.4 million (as of December 31, 2018: $20.4 million).
The contractual maturities of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following table sets forth the credit ratings of our short-term investments and fixed maturity investments, classified as trading and available-for-sale, and the fixed maturity investments included within our funds held - directly managed balance as of December 31, 2019:
The following tables summarize our fixed maturity and short-term investments classified as available-for-sale in a gross unrealized loss position, as of December 31, 2019 and 2018:
The following table summarizes our equity investments classified as trading as of December 31, 2019 and 2018:
The following table summarizes our other investments carried at fair value as of December 31, 2019 and 2018:
The valuation of our other investments is described in Note 12 - "Fair Value Measurements". Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:
Hedge funds may invest in a wide range of instruments, including debt and equity securities, and utilize various sophisticated strategies to achieve their objectives. We invest in a mixture of fixed income, equity and multi-strategy hedge funds.
Fixed income funds comprise a number of positions in diversified fixed income funds that are managed by third-party managers. Underlying investments vary from high-grade corporate bonds to non-investment grade senior secured loans and bonds, but are generally invested in liquid fixed income markets. These funds have regularly published prices.
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities.
The increase in our other investments carried at fair value between December 31, 2019 and December 31, 2018 was primarily attributable to unrealized gains of $441.6 million and net additional subscriptions of $214.3 million to CLO equity, CLO equity funds, fixed income funds and private equity funds.
Refer to Note 21 - "Related Party Transactions" for further information regarding our investments in Clear Spring, Citco, Monument and Enhanzed Re.
The following table summarizes the fixed maturity investment components of funds held - directly managed as of December 31, 2019 and 2018:
Funds held by reinsured companies, where we received a fixed crediting rate, are carried at cost on our consolidated balance sheets. As of December 31, 2019 and 2018, we had funds held by reinsured companies of $408.7 million and $321.3 million, respectively.
Components of net realized and unrealized gains (losses) for the years ended December 31, 2019, 2018 and 2017 were as follows:
(1)The gross realized gains and losses on available-for-sale investments included in the table above resulted from sales of $310.4 million, $11.4 million and $40.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
We utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. We are also required to maintain investments and cash and cash equivalents on deposit with regulatory authorities and Lloyd's to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. Collateral generally takes the form of assets held in trust, letters of credit or funds held. The assets used as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $352.7 million and $380.5 million, as of December 31, 2019 and 2018, respectively, was as follows:
The following table presents the gross notional amounts and the estimated fair values recorded within other assets and liabilities related to our qualifying foreign currency forward exchange rate contracts as of December 31, 2019 and 2018:
The following table presents the amounts of the net gains and losses deferred in the cumulative translation adjustment ("CTA") account, which is a component of accumulated other comprehensive income (loss) ("AOCI"), in shareholders' equity, relating to our foreign currency forward exchange rate contracts for the years ended December 31, 2019, 2018 and 2017:
In 2019 we entered into a forward interest rate swap, with a notional amount of AUD$120.0 million, to partially mitigate the risk associated with declining interest rates until the receipt of the assets related to the Munich Re transaction, as discussed in Note 3 - "Significant New Business", which is expected to close in 2020. The carrying value of the forward interest rate swap, recorded in other liabilities, was $0.3 million as of December 31, 2019. We recorded unrealized losses in net earnings of $0.3 million on the instrument for the year ended December 31, 2019.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and LAE recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the acquired reinsurance balances recoverable on paid and unpaid losses plus a spread to reflect credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements. The determination of the fair value adjustments on the retroactive reinsurance contracts for which we have elected the fair value option is described in Note 12 - "Fair Value Measurements".
Provisions for Uncollectible Reinsurance Balances Recoverable on Paid and Unpaid Losses
We evaluate and monitor concentration of credit risk among our reinsurers. Provisions are made for amounts considered potentially uncollectible.
The following table shows our reinsurance balances recoverable on paid and unpaid losses by rating of reinsurer and our provisions for uncollectible reinsurance balances recoverable on paid and unpaid losses ("provisions for bad debt") as of December 31, 2019 and 2018. The majority of the provisions for bad debt relate to the Non-life Run-off segment.
Deferred charge assets relate to retroactive reinsurance policies providing indemnification of losses and LAE with respect to past loss events in the Non-life Run-off segment. For insurance and reinsurance contracts for which we do not elect the fair value option, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received at the initial measurement. The premium consideration that we charge the ceding companies may be lower than the undiscounted estimated ultimate losses payable due to the time value of money. After receiving the premium consideration in full from our cedents at the inception of the contract, we invest the premium received over an extended period of time thereby generating investment income. We expect to generate profits from these retroactive reinsurance policies when taking into account the premium received and expected investment income, less contractual obligations and expenses. Further information on deferred charge assets recorded during the years ended December 31, 2019, 2018 and 2017 is included in Note 4 - "Significant New Business".
Deferred charge assets are included in other assets on our consolidated balance sheets. The following table presents a reconciliation of the deferred charge assets for the years ended December 31, 2019, 2018 and 2017:
The overall increase in the liability for losses and LAE between December 31, 2018 and December 31, 2019 was primarily attributable to the assumed reinsurance agreements with Zurich, Maiden Re Bermuda, Amerisure and AmTrust, as described in Note 4 - "Significant New Business" in our Non-life Run-off segment.
The tables below provide the components of net incurred losses and LAE by segment and for our other activities for the years ended December 31, 2019, 2018 and 2017:
basis, respectively, and increased by $374.7 million and decreased by $159.6 million on a net basis, respectively. The increase in 2019 was primarily due to acquisition activity and the decrease in 2018 was primarily due to net paid losses, foreign exchange and net favorable development, partially offset by acquisition activity.
Disclosures of Incurred and Paid Loss Development, IBNR, Claims Counts and Payout Percentages
For each acquisition year and/or line of business for which incurred losses and allocated loss adjustment expenses, net of reinsurance tables have been provided below, the disclosure approach and format adopted reflects the following:
The incurred loss development tables include both reported case reserves and IBNR liabilities, as well as cumulative paid losses;
Both the incurred and cumulative paid loss development tables include allocated LAE (i.e. claims handling costs allocated to specific individual claims) but exclude unallocated LAE (i.e. the costs associated with internal claims staff and third party administrators as well as consultants that cannot be allocated to specific individual claims);
The amounts relating to the increase (reduction) in provisions for unallocated LAE are excluded from the loss development tables;
In the incurred loss development tables, the incurred effect of agreeing a commutation or policy buyback is included in the period in which the commutation or policy buyback is contractually agreed. We reflect the net incurred loss development arising from a commutation or policy buyback in the fiscal year in which a commutation or policy buyback is contractually agreed, and the net incurred loss development is allocated to the appropriate accident year. The claim will generally have been adjusted throughout its lifetime and the amounts recorded in prior years (supplementary information) remain unchanged in our tables, such that the incurred amount that we recognize in the year in which a commutation or policy buyback is contractually agreed represents the effect of the commutation or policy buyback settlement compared to the carried net loss and LAE reserve balance in the prior year. We do not recast prior years to remove commuted or bought back
In the cumulative paid losses tables, we reflect the amount of the commutation or policy buyback settlements in the year in which they are actually paid or received, and the net payment is allocated to the appropriate accident year. The claim or recoverable may have recorded payments or receipts throughout its lifetime and amounts recorded in prior years (supplementary information) remain unchanged in our tables, such that the amounts paid or received that we recognize in the year in which a commutation or policy buyback is paid or received represents the amount actually paid or received. We do not recast prior years to remove payments or receipts related to commutations or policy buybacks, as we consider commutations and policy buybacks a key component of our business and reflective of our ability to effectively manage acquired losses and LAE liabilities. Payments relating to commutations and policy buybacks are not adjusted in future years but the payments remain in our total cumulative paid losses;
The IBNR reserves included within each incurred loss development table by accident year, reflect the net IBNR recorded as of December 31, 2019, including expected development on reported losses;
For the Non-life Run-off segment we have also presented the net incurred and paid losses and ALAE information by calendar year as well as IBNR and claim counts for accident years older than 10 years on a single row within the loss development tables. This presentation differs from the typical approach where only the net outstanding losses and LAE reserves are presented as a reconciling item at the bottom of the loss development tables. The additional detailed disclosures are provided on a voluntary basis and the inclusion of the disclosures is to provide additional information to the users of our financial statements and to also enable the reconciliation of our total loss reserves by acquisition year and by significant line of business.
The historical amounts disclosed within the loss development tables for all lines of business presented below
are on a constant-currency basis, which is achieved by using constant foreign exchange rates between periods in the loss development tables, and translating prior period amounts denominated in currencies other than the U.S. dollar, which is our reporting currency, using the closing exchange rates as of December 31, 2019.
Atrium and StarStone - The average annual percentage payout disclosures for our Atrium and StarStone segments are based on the payout of incurred claims by age, net of reinsurance.
A $136.4 million reduction in estimates of net ultimate losses in our workers' compensation line of business arose across multiple portfolios, where reported loss development was generally significantly less than expected development. The lower than expected actual development was driven by significant proactive settlement activity on individual claimants where we were able to settle claims lower than the case reserve estimates. For example, in two of our portfolios we observed favorable reported loss development, where we paid $39.3 million in loss payments to release a corresponding $53.6 million of associated case reserves for $14.3 million in favorable reported loss development. These settlement activities and the favorable actual loss development versus expected loss development, lead to a change in the actuarial assumptions in the annual reserve study that reflect this favorable loss development. For workers compensation, we paid $209.0 million offset by a reduction in case reserves of $156.4 million and reduction in IBNR reserve of $188.9 million.
We also continue to actively seek to commute policies when possible, and where the commutation of the policy is settled at a level below the carried value of the loss reserves, we record a reduction in our estimates of net ultimate losses. During the year ended December 31, 2019, we completed 6 commutations across several portfolios that contributed to a $6.1 million reduction in estimates of net ultimate losses.
A $6.8 million increase in estimates of net ultimate losses in our asbestos line of business arose primarily due to changes in our actuarial assumptions related to dismissal rates. During 2019, the number of new defendants and filed claims was less than expected but this was offset by a lowering of the dismissal rate. In asbestos, the dismissal rates are extremely high as many of the claims do not have merit against the insured. However, we have seen a trend in both US and UK exposure of the dismissal rate trending down in the range of 2 to 3 percentage points.
The increase in the fair value of liabilities for which we have elected the fair value option of $117.2 million was primarily due to changes in the discount rate and the application of the discount rate to the updated expected cash flow patterns.
The amortization of deferred charge assets of $38.6 million was associated with retroactive reinsurance contracts where, at the inception of the contract, the estimated ultimate losses payable was in excess of premium received. Deferred charge assets are amortized over the estimated claim payment period of the related contract and are adjusted periodically to reflect new estimates of the amount and timing of the remaining loss payments.
The significant drivers of the results in the table above are explained below.
The $155.0 million reduction in estimates of net ultimate losses in our workers' compensation line of business arose primarily in five separate portfolios. Across these five portfolios, the reported incurred loss development was generally significantly lower than expected. When actual development is less than expected for a sustained period of time, across a significant volume of exposures, an updated actuarial analysis tends to indicate reductions in IBNR reserves. In addition, we continue to proactively manage and settle claims where possible, commute policies if appropriate and, through Paladin, we are able to achieve significant savings on medical costs through active claims management strategies over the life of the reported claims. All of these items reduce the estimates of net ultimate losses.
The $33.0 million reduction in estimates of net ultimate losses in our construction defect line of business arose primarily due to lower than expected actual incurred development in one portfolio. The active claims management approach that our claims team adopted for the assumed exposures within this portfolio led to a significant reduction loss in the inventory of the assumed open claims of 73% during 2017. This reduction in exposure, when incorporated into our updated actuarial analysis, resulted in a reduction in estimates of net ultimate losses for this line of business.
All other line of business changes in estimates of net ultimate losses were primarily due to the application of our reserving methodologies, favorable actual versus expected loss development, claim management and commutations.
The amortization of fair value adjustment of $10.1 million was related to the fair value adjustments associated with the acquisition of companies. On acquisition, we are required to fair value the net assets acquired, including the reinsurance balances recoverable and the liability for losses and LAE. The resulting fair value adjustments are then amortized over the expected life of the reinsurance balances recoverable and the liability for losses and LAE.
The following tables provides a breakdown of gross and net losses and LAE reserves, consisting of Outstanding Loss Reserve ("OLR") and IBNR by line of business and adjustments for fair value resulting from business combinations, adjustments for where we elected the fair value option, deferred charge assets and ULAE, as of December 31, 2019 and 2018:
The table below reconciles the net loss reserves, prior to provisions for bad debt, fair value adjustments, deferred charge assets and ULAE as of December 31, 2019, by significant line of business to the line of business table presented above:
Our non-life run-off segment is unique within the insurance industry in that legacy reserves are continuously being acquired and added to this segment through business acquisitions or through retroactive reinsurance agreements.
Business Acquired and Contracts Incepting in the Year Ended December 31, 2015 - Workers' Compensation
Business Acquired and Contracts Incepting in the Year Ended December 31, 2016 - Workers' Compensation
Business Acquired and Contracts Incepting in the Year Ended December 31, 2018 - Workers' Compensation
The Atrium segment comprises only 2% of the total consolidated gross liability for losses and LAE as of December 31, 2019 and therefore has not been disaggregated further for purposes of presenting the accident year disclosures below.
The following tables set forth information about incurred and paid loss development information for the Atrium segment as of December 31, 2019. The information related to incurred and paid loss development for the years ended December 31, 2010 through 2018 is presented as supplementary information and is therefore unaudited. Information about total IBNR reserves and cumulative loss frequency as of December 31, 2019, including expected development on reported losses included within the net incurred losses and allocated LAE amounts for the Atrium segment, are set forth in the table below.
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented in the tables above for the Atrium segment for the year ended December 31, 2019 is set forth below:
The reconciliation of incurred and paid loss development to the liability for unpaid losses and LAE as presented in the tables above for the year ended December 31, 2019 is set forth below:
We acquired DCo on December 30, 2016, and Morse TEC on October 30, 2019, as described in Note 3 - "Acquisitions". DCo and Morse TEC hold liabilities associated with personal injury asbestos claims and environmental claims arising from their legacy manufacturing operations. These companies continue to process asbestos personal injury claims in the normal course of business. Defendant asbestos liabilities on our consolidated balance sheets include amounts for loss payments and defense costs for pending and future asbestos-related claims, determined using standard actuarial techniques for asbestos exposures. Defendant environmental liabilities include estimated clean-up costs associated with the acquired companies' former operations based on engineering reports.
Insurance balances recoverable on our consolidated balance sheets include estimated insurance recoveries relating to these liabilities. The recorded asset represents our assessment of the capacity of the insurance agreements to indemnify our subsidiaries for the anticipated defense and loss payments for pending claims and projected future claims. The recognition of these recoveries is based on an assessment of the right to recover under the respective contracts and on the financial strength of the insurers. The recorded asset does not represent the limits of our insurance coverage, but rather the amount we would expect to recover if the accrued and projected loss and defense costs were paid in full.
The table below provides a consolidated reconciliation of the beginning and ending liability for defendant asbestos and environmental exposures for the years ended December 31, 2019, 2018 and 2017:
The fair values for all securities in the fixed maturity investments and funds held - directly managed portfolios are independently provided by the investment accounting service providers, investment managers and investment custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment accounting service providers, investment managers or investment custodians and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Our privately held equity investments in common and preferred stocks are direct investments in companies that we believe offer attractive risk adjusted returns and/or offer other strategic advantages. Each investment may have its own unique terms and conditions and there may be restrictions on disposals. The market for these investments is illiquid and there is no active market. We use a combination of cost, internal models, reported values from co-investors/managers and observable inputs, such as capital raises and capital transactions between new and existing shareholders to calculate the fair value of the privately held equity investments. The fair value estimates of our investments in privately held equities are based on unobservable market data and, as a result, have been categorized as Level 3.
We have ongoing due diligence processes with respect to the other investments carried at fair value in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values ("NAV").
For our investments in hedge funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third-party administrator. The fair values of these investments are measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
In providing valuations, the independent pricing service providers, CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase or decrease in either of these significant inputs in isolation would result in lower or higher fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less subjective inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase or decrease in either of these significant inputs in isolation would result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the independent pricing providers, external CLO manager and brokers and then review the underlying cash flows and key assumptions used by them. We review and update the significant unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants, monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
For our investments in the CLO equity funds, we measure fair value by obtaining the most recently available NAV as advised by the external fund manager or third party administrator. The fair value of these investments is measured using the NAV as a practical expedient and therefore have not been categorized within the fair value hierarchy.
The Company uses an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and reinsurance balances recoverable on paid and unpaid losses for certain retroactive reinsurance contracts where we have elected the fair value option in our Non-life Run-off segment. The fair value was calculated as the aggregate of discounted cash flows plus a risk margin. The discounted cash flow approach uses (i) estimated nominal cash flows based upon an appropriate payment pattern developed in accordance with standard actuarial techniques and (ii) a discount rate based upon a high quality rated corporate bond plus a credit spread for non-performance risk. The model uses corporate bond rates across the yield curve depending on the estimated timing of the future cash flows and specific to the currency of the risk. The risk margin was calculated using the present value of the cost of capital. The cost of capital approach uses (i) projected capital requirements, (ii) multiplied by the risk cost of capital representing the return required for non-hedgeable risk based upon the weighted average cost of capital less investment income and (iii) discounted using the weighted average cost of capital.
(5) It was assumed that the collateral manager would reinvest into collateral with a similar weighted-average spread and a similar ratings composition to the current collateral pool.
The following table presents a reconciliation of the beginning and ending balances for all insurance contracts measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2019 and 2018:
The following tables provide a summary of net premiums written and earned for the years ended December 31, 2019, 2018 and 2017:
Gross premiums written for the year ended December 31, 2019 and 2018 were $1,103.4 million and $1,316.1 million, respectively, a decrease of $212.7 million. The decrease was primarily due to a decrease in gross written premiums in our StarStone segment due to our strategy to exit certain lines of business, and reductions in gross written premiums in our Non-life Run-off segment due to unearned premium acquired in various transactions.
Goodwill as of December 31, 2019 and 2018, related to our Non-life Run-off, Atrium and StarStone segments, was as follows:
Intangible assets with a definite life includes the distribution channel, technology and brand related to our acquisitions of Atrium and StarStone. These assets are amortized on a straight-line basis over a period ranging from four to fifteen years. The following table provides a summary of the amortization recorded on the intangible assets for the years ended December 31, 2019, 2018 and 2017:
The gross carrying value, accumulated amortization and net carrying value of intangible assets by type as of December 31, 2019 and 2018 was as follows:
The net carrying value of intangible assets by segment and by type as of December 31, 2019 and 2018 was as follows:
We primarily utilize debt facilities for funding acquisitions and significant new business, investment activities and, from time to time, for general corporate purposes. Our debt obligations are as follows:
On March 10, 2017, we issued the 2022 Senior Notes for an aggregate principal amount of $350.0 million. The 2022 Senior Notes pay 4.5% interest semi-annually and mature on March 10, 2022. The 2022 Senior Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the 2022 Senior Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally subordinate to all liabilities of our subsidiaries.
On May 28, 2019, we issued the 2029 Senior Notes for an aggregate principal amount of $500.0 million. The 2029 Senior Notes pay 4.95% interest semi-annually and mature on June 1, 2029. The 2029 Senior Notes are unsecured and unsubordinated obligations that rank equal to any of our other unsecured and unsubordinated obligations, senior to any future obligations that are expressly subordinated to the 2029 Senior Notes, effectively subordinate to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness, and contractually subordinate to all liabilities of our subsidiaries.
On August 16, 2018, we and certain of our subsidiaries, as borrowers and guarantors, entered into a new five-year unsecured $600.0 million revolving credit agreement. The revolving credit agreement expires in August 2023 and we have the option to increase the commitments under the facility by up to an aggregate amount of $400.0 million from the existing lenders, or through the addition of new lenders subject to the terms of the agreement. Borrowings under the facility will bear interest at a rate based on the Company's long term senior unsecured debt ratings.
As of December 31, 2019, we were permitted to borrow up to an aggregate of $600.0 million under the facility. As of December 31, 2019, there was $600.0 million of available unutilized capacity under the facility. Subsequent to December 31, 2019, we drew down $5.0 million bringing the unutilized capacity under this facility to $595.0 million.
We incurred costs of $1.5 million associated with closing the 2018 EGL Term Loan Facility. These costs included bank, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the facility and are included in interest expense in our consolidated statements of earnings. The unamortized costs as of December 31, 2019 and December 31, 2018 were $1.0 million and $1.5 million, respectively.
We use this facility to support certain reinsurance collateral obligations of our subsidiaries. On December 6, 2019, we reduced the facility size from $170.0 million to $120.0 million. Pursuant to the facility agreement, we have the option to increase commitments under the facility by an additional $60.0 million. As of December 31, 2019 and December 31, 2018, we had issued an aggregate amount of letters of credit under this facility of $115.3 million and $78.4 million, respectively.
We have both redeemable noncontrolling interest and noncontrolling interest on our consolidated balance sheets. Redeemable noncontrolling interest with redemption features that are not solely within our control are classified within temporary equity in the consolidated balance sheets and carried at redemption value, which is fair value. The change in fair value is recognized through retained earnings as if the balance sheet date were also the redemption date. In addition, we also have noncontrolling interest, which does not have redemption features and is classified within equity in the consolidated balance sheets.
On May 14, 2018, 1,501,778 Voting Ordinary Shares were issued as consideration for the acquisition of KaylaRe Holdings Ltd, as described in Note 3 - "Acquisitions".
The Non-Voting Ordinary Shares are comprised of several different series as of December 31, 2019:
As of December 31, 2019, there were warrants outstanding to acquire 175,901 Series C Non-Voting Ordinary Shares for an exercise price of $115.00 per share, subject to certain adjustments (the "Warrants"). The Warrants were issued in April 2011 and expire in April 2021. The Warrant holder may, at its election, satisfy the exercise price of the Warrants on a cashless basis by surrender of shares otherwise issuable upon exercise of the Warrants in accordance with a formula set forth in the Warrants.
On June 28, 2018, the Company raised $400.0 million of gross proceeds through the public offering of 16,000 shares of its 7.00% non-cumulative fixed-to-floating rate Series D perpetual preferred shares ("Series D Preferred Shares") (equivalent to 16,000,000 depositary shares, each of which represents a 1/1,000th interest in a Series D Preferred Share), $1.00 par value and $25,000 liquidation preference (the "Liquidation Preference") per share (equivalent to $25.00 per depositary share). The Company received net proceeds of $389.2 million which was used to repay debt obligations. The depositary shares are listed and trade on the NASDAQ Global Select Market. The Series D Preferred Shares are not redeemable prior to September 1, 2028, except in specified circumstances relating to certain tax, corporate, capital or rating agency events as described in the prospectus supplement relating to the offering. On and after September 1, 2028, the Series D Preferred Shares, represented by the depositary shares, will be redeemable at the Company’s option, in whole or from time to time in part, at a redemption price equal to $25,000 per Series D Preferred Share (equivalent to $25.00 per depositary share), plus any declared and unpaid dividends.
On November 21, 2018, the Company raised $110.0 million of gross proceeds through the public offering of 4,400 shares of its 7.00% fixed rate non-cumulative Series E perpetual preferred shares ("Series E Preferred Shares") (equivalent to 4,400,000 depositary shares, each of which represents a 1/1,000th interest in a Series E Preferred Share), $1.00 par value and $25,000 liquidation preference (the "Series E Liquidation Preference") per share (equivalent to $25.00 per depositary share). The Company received net proceeds of $106.1 million which was used to fund operations within our Non-life Run-off segment. The depositary shares are listed and trade on the NASDAQ Global Select Market. The Series E Preferred Shares are not redeemable prior to March 1, 2024, except in specified circumstances relating to certain tax, corporate, capital or rating agency events as described in the prospectus supplement relating to the offering. On and after March 1, 2024, the Series E Preferred Shares, represented by the depositary shares, will be redeemable at the Company’s option, in whole or from time to time in part, at a redemption price equal to $25,000 per Series E Preferred Share (equivalent to $25.00 per depositary share), plus any declared and unpaid dividends.
Holders of Series D and Series E Preferred Shares are entitled to receive, only when, as and if declared, non-cumulative cash dividends, paid quarterly in arrears on the 1st day of March, June, September and December of each year, commencing on September 1, 2018 for the Series D Preferred Shares and March 1, 2019 for the Series E Preferred Shares, of 7.00% per annum. Commencing on September 1, 2028, the Series D Preferred Shares will convert to a floating rate basis and dividends will be payable on a non-cumulative basis, when, as and if declared, at three-month LIBOR plus 4.015% per annum. Dividends that are not declared will not accumulate and will not be payable. During 2019, we declared and paid $28.0 million of dividends on the Series D Preferred Shares, and declared and paid $7.9 million of dividends on the Series E Preferred Shares. During 2018, we declared and paid $12.1 million of dividends on the Series D Preferred Shares. During February 2020, we declared $7.0 million and $1.9 million of dividends on the Series D and E Preferred Shares, respectively, to be paid on March 2, 2020 to shareholders of record as of February 15, 2020.
Any payment of dividends must be approved by our Board of Directors. Our ability to pay dividends is subject to certain restrictions, as described in Note 22 - "Dividend Restrictions and Statutory Financial Information".
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2019, 2018 and 2017:
The unrecognized compensation cost related to our unvested restricted share and restricted share unit awards as of December 31, 2019 was $6.0 million. This cost is recognizable over the next 2.10 years, which is the weighted average contractual life.
The following table summarizes the awards granted, the unvested PSU awards at December 31, 2019, and the performance criteria and associated performance multipliers at various levels of achievement.
An increase of Target to Maximum or more in FDBVPS results in a settlement of 100% to a maximum of 150% of the units granted, respectively. An increase of Threshold to Target in FDBVPS results in a settlement of 50% to 100% of the units granted, respectively for 2017 and 2018 awards, and settlement of 60% to 100% for the 2019 awards. Straight-line interpolation applies within these ranges, and no settlement occurs if the increase in FDBVPS is less than the Threshold.
The unrecognized compensation cost related to our unvested PSU share awards as of December 31, 2019 was $7.9 million. This cost is recognizable over the next 1.51 years, which is the weighted average contractual life.
The following table summarizes the activity related to PSUs during 2019:
Cash-settled stock appreciation right awards ("SARs") give the holder the right, upon exercise, to receive in cash the difference between the market price per share of our ordinary shares at the time of exercise and the exercise price of the SARs. The exercise price of each SAR is equal to the market price of our ordinary shares on the date of the grant. Vested SARs are exercisable for periods not to exceed either 4 years or 10 years from the date of grant. We have not granted any new SAR awards since 2015.
(1) The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of our ordinary shares of $206.86 on December 31, 2019.
Compensation expense for SARs is based on the estimated fair value on the date of grant using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk-free interest rate. SARs are liability-classified awards for which compensation expense and the liability are re-measured using the then-current Black Scholes assumptions at each interim reporting date based upon the portion of the requisite service period rendered. The unrecognized compensation cost related to our SARs as of December 31, 2019 was less than $0.1 million.
Under the JSOP, we have the ability to make equity awards to our U.K.-based staff through which a recipient acquires jointly held interests in a set number of our Voting Ordinary Shares together with the independent trustee of the EB Trust at fair market value, pursuant to the terms of a joint ownership agreement. The Voting Ordinary Shares underlying any JSOP award remain in the EB Trust, and the recipient ultimately receives the value of the appreciation above a threshold on those shares, measured between date of grant and a pre-set measuring date that follows a vesting period (typically three years). JSOP awards are generally settled in Voting Ordinary Shares and may include performance and other conditions, typically related to share price appreciation above a hurdle, that must be met in order for the award to vest. Voting rights in respect of shares held in the EB Trust are contractually waived. Shares held in the EB Trust are classified as treasury shares.
1, 2020 and December 31, 2022. The grant date fair value of the award was approximately $13.6 million.
Our subsidiary, Northshore, has long-term incentive plans that award time-based restricted shares of Northshore to certain Atrium employees. Shares generally vest over two to three years. These share awards have been classified as liability awards. The unrecognized compensation cost related to the Northshore incentive plan at December 31, 2019 was $0.9 million. This cost is expected to be recognized over the next 0.36 years, which is the weighted average contractual life of the awards.
Our subsidiary, StarStone, has long-term incentive plans that are cash-settled plans for StarStone employees. The awards are based on StarStone's performance over two to three years. These share awards have been classified as liability awards. The unrecognized compensation cost related to the StarStone incentive plan at December 31, 2019 was $1.8 million. This cost is expected to be recognized over the next 2 years.
We provide an Employee Share Purchase Plan whereby eligible employees may purchase Enstar shares at a 15% discount to market price, in an amount of share value limited to the lower of $21,250 or 15% of the employee's base salary. The 15% discount is expensed as compensation cost.
The following table summarizes the number of shares issued to employees under the Employee Share Purchase Plan for the years ended December 31, 2019, 2018 and 2017:
We provide retirement benefits to eligible employees through various plans that we sponsor. Pension expense can be affected by changes in our employee headcount. The table below summarizes the pension expenses related to our Defined Contribution Plans and our Defined Benefit Plan for the years ended December 31, 2019, 2018 and 2017.
During 2019, an actuarial review was performed on the defined benefit plan, which determined that the plan’s unfunded liability, as of December 31, 2019 and 2018 was $8.9 million and $8.4 million, respectively. As of December 31, 2019 and 2018, we had an accrued liability of $8.9 million and $8.4 million, respectively, for this plan.
The following table presents earnings (loss) before income taxes by jurisdiction from continuing operations, including earnings (loss) from equity method investments, for the years ended December 31, 2019, 2018 and 2017:
The following table presents our current and deferred income tax expense (benefit) from continuing operations by jurisdiction for the years ended December 31, 2019, 2018 and 2017:
The actual effective income tax rate differs from the statutory rate of 0% under Bermuda law to earnings (loss) from continuing operations before income taxes, including earnings (loss) from equity method investments for the years ended December 31, 2019, 2018 and 2017 as shown in the following reconciliation:
(1) Relates to the Morse TEC acquisition as described in Note 3 - "Acquisitions".
As of December 31, 2019, we had net operating loss carryforwards that could be available to offset future taxable income, as follows:
The U.S. net operating loss carryforwards are also subject to certain utilization limitations based upon their nature and the specific legal entity that holds them.
As of December 31, 2019 and 2018, we had deferred tax asset valuation allowances of $117.4 million and $212.1 million, respectively, related to foreign subsidiaries. We recorded a decrease of $94.7 million in our deferred tax valuation allowance primarily due to utilization of deferred tax asset in the amount of $69.7 million as well as a partial deferred tax asset valuation allowance release in the amount of $25.0 million during 2019.
The realization of deferred tax assets is dependent on generating sufficient taxable income in future periods in which the tax benefits are deductible or creditable. The amount of the deferred tax asset considered realizable, however, could be revised in the future if estimates of future taxable income change. Taxes are determined and assessed jurisdictionally by legal entity or by filing group. Certain jurisdictions require or allow combined or consolidated tax filings. We have estimated future taxable income of our foreign subsidiaries and provided a valuation allowance in respect of those assets where we do not expect to realize a benefit. We have considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance. We considered the following evidence: (i) net earnings or losses in recent years; (ii) the future sustainability and likelihood of positive net earnings of our subsidiaries; (iii) the carryforward periods of tax losses including the effect of reversing temporary differences; and (iv) tax planning strategies, in making our determination. The assumptions used in determining future taxable income require significant judgment and any changes in these assumptions could have an impact on earnings.
During the years ended December 31, 2019, 2018 and 2017, there were no unrecognized tax benefits. There were no accruals for the payment of interest and penalties related to unrecognized tax benefits as of December 31, 2019, 2018 and 2017.
Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. Tax authorities may propose adjustments to our income taxes. Listed below are the tax years that remain subject to examination by a major tax jurisdiction as of December 31, 2019:
(i) a contribution to its contributed surplus account and a loss portfolio transfer, effective October 1, 2018. To fund the transaction, the North Bay shareholders contributed an aggregate amount of $135.0 million to North Bay in proportion to their ownership interests. Trident’s proportionate contribution of $53.1 million was temporarily funded by North Bay and was reimbursed in the first quarter of 2019; and
Investments in funds (carried within other investments) managed by Stone Point, with respect to which we recognized net unrealized gains (losses);
Investments in funds (carried within other investments) managed by Sound Point Capital, an entity in which Mr. Carey has an indirect minority ownership interest and serves as a director, with respect to which we recognized net unrealized gains (losses);
A separate account managed by Sound Point Capital, with respect to which we incurred management fees in prior periods; and
In the fourth quarter of 2018, we invested $25.0 million in Mitchell TopCo Holdings, the parent company of Mitchell International and Genex Services, as a co-investor alongside certain Trident funds.
The following table presents the amounts included in our consolidated balance sheet related to our related party transactions with Stone Point and its affiliated entities:
On December 15, 2016, KaylaRe completed an initial capital raise of $620.0 million. We originally owned approximately 48.2% of KaylaRe's common shares and recorded our investment in KaylaRe using the equity method basis of accounting, pursuant to the conclusion that we were not required to consolidate following an analysis based on the guidance in ASC 810 - Consolidation.
Our consolidated statement of earnings for the years ended December 31, 2018 and 2017 included the following balances related to transactions between us and KaylaRe and KaylaRe Ltd. up until May 14, 2018, the date of acquisition:
Our consolidated balance sheet as of December 31, 2019 and 2018 included the following balances related to transactions with Hillhouse:
On January 1, 2020 Enhanzed Re invested an additional $54.0 million into funds managed by Hillhouse.
Monument Insurance Group Limited ("Monument") was established in October 2016 and Enstar has invested a total of $26.6 million in the common and preferred shares of Monument. We have approximately a 26.6% interest in Monument. In connection with our investment in Monument, we entered into a Shareholders Agreement with the other shareholders. We recorded the investment in Monument using the equity method basis of accounting, as we concluded that we are not required to consolidate based on the guidance in ASC 810 - Consolidation.
On August 29, 2017, we sold our wholly-owned subsidiary, Laguna, to a subsidiary of Monument for a total consideration of €25.6 million (approximately $30.8 million). The total loss recorded on the sale of Laguna, for the year ended December 31, 2017 was $16.3 million, which has been included in earnings from continuing operations before taxes in our consolidated statement of earnings. This loss includes a cumulative currency translation adjustment balance of $6.3 million, which has been reclassified from accumulated other comprehensive income and included in earnings as a component of the loss on sale of Laguna during the year ended December 31, 2017, following the closing of the sale.
On May 31, 2019, we completed the transfer of our remaining life assurance policies written by our wholly-owned subsidiary Alpha Insurance SA to a subsidiary of Monument. In this transaction, we transferred policy benefits for life and annuity contracts with a carrying value of €88.8 million (or approximately $99.1 million) and total assets with a fair value of €91.1 million (or approximately $101.6 million) to a subsidiary of Monument.
Our investment in the common and preferred shares of Monument, carried in equity method investments on our consolidated balance sheet, as of December 31, 2019 and 2018 was as follows:
Our consolidated balance sheet as of December 31, 2019 and 2018 included the following balances between us and Clear Spring:
Following the closing of the second transaction, Enstar owns approximately 8.5% of the equity interest in Evergreen and Trident Pine owns approximately 21.8%. Evergreen owns all of the equity interest in AmTrust. In addition, upon the successful closing of the transaction we received a fee of $3.3 million, half of which was payable upon closing and the other on the first anniversary of the closing. The fee has been recorded in full in other income within our consolidated statements of earnings for the year ended December 31, 2018.
During the years ended December 31, 2019 and 2018 we recorded net investment income of $7.7 million and $0.3 million, respectively, and net realized and unrealized gains of $10.1 million and $nil, respectively, related to our indirect equity investment in AmTrust.
In June 2018, we made a $50.0 million indirect investment in the shares of Citco III Limited ("Citco"), a fund administrator with global operations. Pursuant to an investment agreement and in consideration for participation therein, a related party of Hillhouse provided us with investment support. In a private transaction that preceded our co-investment opportunity, certain Citco shareholders, including Trident, agreed to sell all or a portion of their interests in Citco. As of December 31, 2019, Trident owned an approximate 3.4% interest in Citco. Mr. Carey currently serves as an observer to the board of directors of Citco in connection with Trident's investment therein.
Enhanzed Reinsurance Ltd. ("Enhanzed Re") is a joint venture between Enstar, Allianz SE and Hillhouse that was capitalized in December 2018. Enhanzed Re is a Bermuda-based Class 4 and Class E reinsurer of life, non-life run-off, and property and casualty insurance business, initially sourced from Allianz SE and Enstar. Enstar, Allianz and Hillhouse affiliates have made equity investment commitments in aggregate of $470.0 million to Enhanzed Re. Enstar owns 47.4% of the entity, Allianz owns 24.9%, and an affiliate of Hillhouse owns 27.7%. As of December 31, 2019, Enstar contributed $154.1 million of its total capital commitment to Enhanzed Re and had an uncalled amount of $68.7 million. We have accounted for our equity interest in Enhanzed Re as an equity method investment as we have significant influence over its operating and financial policies.
We have ceded 10% of the Zurich transaction, as discussed in Note 4 - "Significant New Business", to Enhanzed Re on the same terms and conditions as those received by Enstar.
Our ability to pay dividends to our shareholders is dependent upon the ability of our insurance and reinsurance subsidiaries to distribute capital and pay dividends to us. Our insurance and reinsurance subsidiaries are subject to certain regulatory restrictions on the distribution of capital and payment of dividends in the jurisdictions in which they operate, as described below. The restrictions are generally based on net income or levels of capital and surplus as determined in accordance with the relevant statutory accounting practices. Failure of these subsidiaries to meet their applicable regulatory requirements could result in restrictions on any distributions of capital or retained earnings or stricter regulatory oversight of the subsidiaries.
The statutory capital and surplus amounts for the years ended December 31, 2019 and 2018 and statutory net income amounts for the years ended December 31, 2019, 2018 and 2017 for our insurance and reinsurance subsidiaries based in Bermuda, the United Kingdom, Australia, the United States and Continental Europe are summarized in the table below which includes information relating to acquisitions from the year of acquisition:
Each of our regulated Bermuda subsidiaries would be prohibited from declaring or paying any dividends if it were in breach of its minimum solvency margin or liquidity ratio or if the declaration or payment of such dividends would cause it to fail to meet such margin or ratio. In addition, each of our regulated Bermuda subsidiaries is prohibited, without the prior approval of the BMA, from reducing by 15% or more its total statutory capital, or from reducing by 25% of more its total statutory capital and surplus, as set out in its previous year’s statutory financial statements. Our Bermuda insurance companies that are in run-off are required to seek BMA approval for any dividends or distributions.
As of December 31, 2019 and 2018, each of our Bermuda-based insurance and reinsurance subsidiaries exceeded their respective minimum solvency and liquidity requirements. The Bermuda insurance and reinsurance subsidiaries in aggregate exceeded minimum solvency requirements by $1.9 billion as of December 31, 2019 (2018: $2.1 billion) and were in compliance with their liquidity requirements.
Our U.K. based insurance subsidiaries are regulated by the U.K. Prudential Regulatory Authority (the "PRA") and the Financial Conduct Authority (the "FCA", together with the PRA, the "U.K. Regulator").
The calculation of the minimum capital resources requirements in any particular case depends on, among other things, the type and amount of insurance business written and claims paid by the insurance company. As of December 31, 2019 and 2018, all of our U.K. insurance subsidiaries maintained capital in excess of the minimum capital resources requirements and complied with the relevant U.K. Regulator requirements. The U.K.-based insurance subsidiaries, in aggregate, maintained capital in excess of the minimum capital resources requirements by $695.6 million and $60.7 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, we participated in the Lloyd’s market through our interests in: (i) Atrium’s Syndicate 609, which is managed by Atrium Underwriters Limited, a Lloyd's managing agent, and the Atrium corporate member; (ii) StarStone’s Syndicate 1301, which is managed by StarStone Underwriting Limited ("SUL"), a Lloyd’s managing agent, and the StarStone corporate member; and (iii) Syndicate 2008, a wholly aligned syndicate that has permission to underwrite RITC business and other run-off or discontinued business type transactions with other Lloyd’s syndicates, and its corporate member. During 2015, SUL assumed the role of managing agent for Syndicate 2008 in place of Shelbourne Syndicate Services Limited as we streamlined our organizational structure and combined Shelbourne and
Our Liechtenstein insurance subsidiary (StarStone Insurance SE) is regulated by the Liechtenstein Financial Market Authority ("FMA") pursuant to the Liechtenstein Insurance Supervisory Act. This subsidiary is obligated to maintain a minimum solvency margin based on the Solvency II regulations. As of December 31, 2019, this subsidiary exceeded the Solvency II requirements by $119.0 million (2018: $133.9 million). The amount of dividends that this subsidiary is permitted to distribute is restricted to freely distributable reserves, which consist of retained earnings, the current year profit and legal reserves. Any dividend exceeding the current year profit requires the FMA’s approval. Solvency and capital requirements for this subsidiary are based on the Solvency II framework and must continue to be met following any distribution.
Our Belgian insurance subsidiary files financial statements and returns with the National Bank of Belgium. This subsidiary was in compliance with its solvency and capital requirements under Solvency II.
Harper Insurance Limited, which was previously regulated in Switzerland, was re-domiciled to Bermuda on January 1, 2019. It is now required to file regulatory returns in both Bermuda and for its branch in the UK. The UK requirements are more constrictive then those in Bermuda thus these have been included in the "United Kingdom" section above.
prescribed capital adequacy requirements to enable their insurance obligations to be met under a wide range of circumstances.
As of December 31, 2019, we had unfunded commitments of $482.3 million and $93.1 million to private equity funds and equity method investments, respectively.
As of December 31, 2019 and 2018, parental guarantees and capital instruments supporting subsidiaries' insurance obligations were $1,031.5 million and $614.5 million, respectively. We also have a FAL facility, which on February 12, 2019, we increased to issue an aggregate amount of $375.0 million of letters of credit, and we maintained the provision to further increase the facility up to $400.0 million. The FAL Facility is available to satisfy our Funds at
Lloyd’s requirements and expires in 2023. As of December 31, 2019 there were $252.0 million letters of credit issued under this facility which have a parental guarantee.
We have entered into transaction agreements that are expected to become effective subsequent to December 31, 2019. Refer to Note 4 - "Significant New Business" above.
We adopted the new leasing standard and the related amendments on January 1, 2019 using the modified retrospective transition method as required by the standard, and based on the detailed analysis of our operating lease arrangements we have recognized a right-of-use asset and an offsetting lease liability on our consolidated balance sheet, relating primarily to office space and facilities that we have leased to conduct our business operations. On an ongoing basis we determine whether an arrangement is a lease or contains a lease at inception and also complete an assessment to determine the classification of each lease as either a finance lease or an operating lease. Our leases are all currently classified as operating leases.
We also adopt a portfolio approach as permitted by ASC 842 whereby we use attributes such as the lease term to determine the appropriate incremental borrowing rate to be used to determine the present value of lease payments. In this regard, we use the same incremental borrowing rate for leases with a similar term while ensuring that the use of this portfolio approach does not result in an outcome that would materially differ from applying the lease accounting guidance on a lease-by-lease basis.
As part of our adoption of the new leasing standard, we elected the practical expedient package as well as the hindsight practical expedient permitted by the FASB in ASC 842. The practical expedient package covers the application of the new leasing standard to leases that commenced before January 1, 2019, the effective date of the standard and gives an entity the option of not reassessing, (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The hindsight practical expedient permits an entity to consider changes in facts and circumstances from commencement through to the effective date of the new standard when determining the lease term and assessing any potential impairment of the recorded right-of-use asset. All these practical expedients were consistently applied to our leases as required by the leasing standard.
The table below provides a summary of the maturity of the operating lease liabilities for the year ended December 31, 2019:
As discussed in Note 2 - Significant Accounting Policies, on adoption of ASU 2016-02 as codified in ASC 842 on January 1, 2019, we elected the transition option in ASU 2018-11 which amended ASU 2016-02 to allow entities not to apply the new leases standard in the comparative periods presented in the financial statements in the year of adoption. Under the transition option, entities can instead opt to continue to apply the legacy guidance in ASC 840 - Leases, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard.
Pursuant to the transition option provided in ASU 2018-11 which we elected on adoption of ASU 2016-02 on January 1, 2019 as discussed above, the following is a schedule of future minimum rental payments that were required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018:
The following table summarizes our gross premiums written for the year ended December 31, 2019 by geographic area. Geographic distribution in future years is subject to variation based upon market conditions and business strategies.
The difference in the amount of other investments shown at fair value and the other investments shown in our consolidated balance sheet relates to the fair value of $1,741.4 million as of December 31, 2019 for our other investments in funds or companies owned by or affiliated with certain related parties. Refer to Note 21 - "Related Party Transactions" of the notes to the consolidated financial statements.
As of December 31, 2019 and 2018, retained earnings were $2,887.9 million and $1,976.5 million, respectively, an increase of $911.4 million. This increase was primarily attributable to the net earnings of $902.2 million.