Selected consolidated statement of operations data, ending consolidated balance sheet data and share data at December 31, 2015, 2014 and 2013, for the years ended December 31, 2015 and 2014, and for the period from June 24, 2013 to December 31, 2013 follows. These historical results are not necessarily indicative of results to be expected from any future period.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2015, 2014 and the period from June 24, 2013 to December 31, 2013, and our financial condition as of December 31, 2015 and 2014. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this report.
We ended 2014 with a FCBVPS of $20.62, an increase of 8.7% for the year after taking into account dividends declared on Common Shares and RSUs during the year. Our net income for 2014 was $15.1 million, which included $17.1 million of loss and LAE, nearly all of which represented net losses from U.S. and European wind and hail events. Our 2014 GAAP combined ratio was 67.2% .
(1) Computed as the change in FCBVPS plus dividends declared on Common Shares and RSUs of $1.56 per share during 2015.
(2) Computed as the change in FCBVPS plus dividends declared on Common Shares and RSUs of $0.90 per share during 2014.
We are a Bermuda exempted limited liability company that, through our subsidiaries, provides collateralized reinsurance in the property catastrophe market and invests in various insurance-linked securities. Our principal objective is to maximize the expected total return for our shareholders, primarily by underwriting a diversified portfolio of short-tail reinsurance contracts and investing in insurance-linked securities with what we believe to be attractive risk and return characteristics. We provide our shareholders with the opportunity to own an alternative asset class whose returns we believe have historically been largely uncorrelated to those of other asset classes, such as global equities, bonds and hedge funds.
During 2015, our second full year of operations, we generated $20.7 million of net income and achieved an 11.4% increase in our FCBVPS for the year after taking into account dividends declared on Common Shares and RSUs.
The Manager monitors our net exposure to any one catastrophe loss event in any single zone within certain broadly defined major catastrophe zones. Our January 1, 2016 projected net exposures by zone were in compliance with our underwriting guidelines. Namely, our projected net exposure to any one zone was below 50% of our shareholders’ equity at December 31, 2015.
Our projections of the net impact from single event losses may vary considerably within a particular territory depending on the specific characteristics of the event.
During 2015 and 2014 we earned $38.3 million and $43.9 million of reinsurance premiums, respectively. Our reinsurance premiums earned are primarily a function of the amount and timing of reinsurance premiums previously written.
Our reinsurance premiums written and earned during 2015 and 2014 included less than $0.1 million and $0.3 million, respectively of reinstatement premiums.
During 2015, our in-force derivative contracts included the 2015 Inward ILW Swap and the 2015 Outward ILW Swap. During 2014, our in-force derivative contracts included the 2013 Inward ILW Swap and the 2014 Outward ILW Swap. Through
2015 and 2014, we were not aware of any industry loss events occurring that would have triggered a payment obligation, or receipt, under any of these derivative instruments.
During the year ended December 31, 2015, we recognized $0.2 million of net loss from derivative instruments. During the year ended December 31, 2014, we recognized $0.7 million of net income from derivative instruments.
During 2014 we incurred $17.1 million of losses and LAE, nearly all of which represented losses in connection with 2014 U.S. and European wind and hail events.
The expenses we have incurred pursuant to the Investment Management Agreement, the Administrative Services Agreement and the Credit Agreement have remained consistent in 2015 and 2014. During 2015 we incurred $1.3 million of performance fees pursuant to the Underwriting and Insurance Management Agreement which reflects: (i) significantly better underwriting results during 2015 compared to 2014; and (ii) the elimination of a prior period deficit in the rolling high water mark associated with the computation of performance fees payable to the Manager.
During 2015 and 2014, we incurred interest expense on our borrowings under the Credit Agreement of $0.1 million and of less than $0.1 million, respectively.
As of December 31, 2015, we had $13.0 million of outstanding borrowings under the Credit Agreement which were subject to annual interest rates ranging between 1.32% and 1.48%. See Contractual Obligations and Commitments below.
The Company intends to ultimately repay its outstanding borrowings under the Credit Agreement with funds it expects to receive from Blue Capital Re, which are expected to be made available to Blue Capital Re in the normal course through scheduled releases of funds currently held as collateral.
The Credit Agreement, which expires on April 30, 2016, contains covenants that limit the Company’s ability to, among other things, grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. The Credit Agreement also contains covenants that require: (i) the Company to maintain a debt to total capitalization ratio of less than or equal to 22.5%; (ii) the Company to maintain a consolidated tangible net worth of no less than 70% of its consolidated tangible net worth as of May 2, 2014 (the original closing date of the Credit Agreement); (iii) Endurance to maintain a debt to total capitalization ratio of less than 35.0%; (iv) Endurance to maintain a consolidated tangible net worth of no less than $1.8 billion; and (v) each of Endurance’s regulated insurance subsidiaries that has a claims paying rating from A.M. Best to maintain a rating of at least "B++." If the Company or Endurance were to fail to comply with any of these covenants, the lender could revoke the facility and exercise remedies against the Company or Endurance. As of December 31, 2015, the Company and Endurance were in compliance with all of their respective covenants associated with the Credit Agreement.
We intend to renew the Credit Agreement prior to its scheduled expiration in April 2016, and we currently believe that we will be able to do so on similar terms and conditions to those in the existing agreement.
We intend to distribute a minimum of 90% of annual Distributable Income by continuing to make regular quarterly dividend payments for each of the first three fiscal quarters of each fiscal year, followed by either repurchases of Common Shares or payment of a fourth "special" dividend after the end of our fiscal year. Any future determination to pay dividends or repurchase Common Shares will remain at the discretion of the Board and will be dependent upon many factors, including: (i) our financial condition, liquidity, results of operations (including our ability to generate cash flow in excess of our expenses) and capital requirements; (ii) general business conditions, (iii) legal, tax and regulatory limitations; (iv) contractual prohibitions and other restrictions; (v) trading price of the Company's Common Shares as compared to the Company's book value per share; and (vi) any other factors that the Board deems relevant. We currently expect that our dividends will be subject to customary
dividend tax treatment in the U.S., but if our total dividends paid during any given year exceed our current and accumulated earnings and profits as of the end of such year (determined under U.S. tax principles), a portion of our dividends paid in that year will be treated: (i) first, as a nontaxable return of capital, to the extent of a shareholder’s tax basis in Common Shares (on a dollar-for-dollar basis); and (ii) subsequently, as capital gain.
As of December 31, 2015, the Company had $13.0 million of outstanding borrowings under the Credit Agreement. Of these borrowings, $4.0 million was repaid on February 2, 2016, $5.0 million was repaid on February 22, 2016 and $4.0 million must be repaid or extended, in the form of a new borrowing, no later than March 11, 2016.
During the year ended December 31, 2015 the modest increase in cash from operating activities was generated by net operating profits and the decrease in cash from financing activities was from the payment of dividends partially offset by increased borrowings under the Credit Agreement.
Since we rely on ceding company estimates of case and IBNR reserves in the process of establishing our own loss and LAE reserves, we maintain certain procedures designed to mitigate the risk that this information is incomplete or inaccurate. These procedures may include: (i) ceding company audits to facilitate loss reporting and identify inaccurate or incomplete claim reporting; and (ii) underwriting reviews to ascertain that the losses ceded are covered as provided under the contract terms. We also utilize catastrophe model outputs and industry market share information to evaluate the reasonableness of reported losses,
We have determined that our best estimates for our gross and net loss and LAE reserves at December 31, 2015 and 2014 were $4.0 million and $7.9 million respectively. The following table summarizes the composition of these reserves at December 31, 2015 and 2014:
The following table represents the development of the GAAP balance sheet loss and LAE reserves for 2014 through December 31, 2015. This table does not present accident or policy year development data. The top line of the table shows the loss and LAE reserves at the balance sheet date for each of the indicated years. This represents the estimated amounts of loss and LAE reserves arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy" represents the aggregate change to date from the original estimate. The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. Development in each column is shown relative to the GAAP reserves held at the original year end.
We have also determined that, as an emerging growth company, we will not: (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b); (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act; (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; or (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of our CEO’s compensation to median employee compensation.