The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Some of the information contained in this discussion and analysis or included elsewhere in this annual report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Statement Regarding Forward-Looking Statements", "Item 1A. Risk Factors" and elsewhere in this annual report.
Results of Operations by Segment - for the Years Ended December 31, 2017, 2016, and 2015
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 over 80 acquisitions or portfolio transfers.
Our primary corporate objective is growing our fully diluted book value per share. This is driven primarily by growth in our net earnings, which is in turn driven in large part by successfully completing new acquisitions, effectively managing companies and portfolios of business that we have acquired, and executing on our active underwriting strategies. The drivers of our book value growth are discussed in "Item 1. Business - Business Strategy."
As a result of the number of transactions we have completed over the years, we have a complex organizational structure consisting of licensed entities across many jurisdictions. In managing our group, we continue to look for opportunities to simplify our legal structure by way of company amalgamations and mergers, reinsurance, or other transactions to improve capital efficiency and decrease ongoing compliance and operational costs over time. In addition, we seek to pool risk in areas where we maintain the expertise to manage such risk to achieve operational efficiencies, which will allow us to most efficiently manage our assets and to achieve capital diversification benefits.
For the year ended December 31, 2017 compared to 2016, total gross premiums written were relatively consistent in our Atrium segment and marginally higher in our StarStone segment as we selectively grew in certain lines, which included the development of additional underwriting capabilities. StarStone's net earned premium, net incurred losses and acquisition costs decreased significantly as a result of the 35% quota share reinsurance agreement with our equity method investee KaylaRe Holdings Ltd. ("KaylaRe"), which covers the 2016 and subsequent underwriting years.
The insurance and reinsurance industry was significantly impacted by large losses in the second half of 2017, notably hurricanes Harvey, Irma and Maria, as well as the Mexico earthquake and the wildfires in California. Given the nature and complexity of these events it may take some time before the full extent of the losses is known, and the initial reported losses may develop favorably or adversely in the future. Additionally, the losses may have an impact on capacity and pricing. However at this time we cannot estimate with any certainty whether any such impacts would be significant.
Our industry continues to experience challenging underwriting market conditions, and our strategy is to maintain our disciplined underwriting approach and strong risk management practices, which may result in us writing less premium in certain lines of business than we wrote in 2017. However, we will seek to mitigate these challenging conditions through our diversified book of business, established distribution channels and geographic reach. We will continue to seek growth in certain areas where we have identified opportunities for expansion and the opportunity for increases in premium rates. In addition, our underwriting operations are well-positioned to capture profitable active business from our run-off transactions, where such business is in attractive specialty lines. In both our Atrium and StarStone segments we will maintain our focus on underwriting for profitability.
Markets are inherently uncertain and investment performance may be impacted with changes in market volatility. We expect to maintain our investment strategy, which is to seek superior risk adjusted returns while preserving liquidity and capital and maintaining a prudent diversification of assets. We are implementing strategies to more closely align the duration in certain investment portfolios to the duration of our reserves. We will continue allocating a portion of our portfolio to non-investment grade securities or alternative investments, in accordance with our investment guidelines, which carry significant diversification and return benefits.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), as described in "Item 1A. Risk Factors - Risk Relating to Taxation." The Tax Act makes broad changes to the U.S. tax code, some of which were applicable in 2017 and others effective for tax years ending after December 31, 2017. The impact of the Tax Act to Enstar in 2017 is described in "Consolidated Results of Operations - Consolidated Overview" below.
In response to the introduction of the Tax Act, as of January 1, 2018 we non-renewed certain of our active underwriting affiliate reinsurance transactions ceded from our U.S. operating entities to our non-U.S. affiliates. We will continue to assess the impact of the Tax Act on our business as the regulations develop. Our subsidiaries' reinsurance strategies may be different than in the past, which may result in more risk being retained in our U.S. insurance companies, which would have the effect of requiring more capital in those companies and potentially increase our overall group effective tax rate over time.
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost ratio, operating expense ratio, and the combined ratio of our active underwriting operations within these segments. Management believes that these ratios provide the most meaningful measure for understanding our underwriting profitability. These measures are calculated using GAAP amounts presented on the statements of earnings for both Atrium and StarStone.
The Atrium segment also includes corporate expenses which 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.
Consolidated net earnings of $311.5 million and basic and diluted earnings per share of $16.06 and $15.95, respectively
Net premiums earned of $613.1 million, including $134.7 million and $459.4 million in our Atrium and StarStone segments, respectively
Shareholders' equity of $3,136.7 million and redeemable noncontrolling interest of $479.6 million
2017 versus 2016: We reported consolidated net earnings attributable to Enstar Group Limited shareholders of $311.5 million in 2017, an increase of $46.7 million from $264.8 million in 2016. Our results were impacted by the loss portfolio transfer reinsurance transactions we completed during 2017 with RSA and QBE, and during 2016 with Allianz, Coca-Cola and Neon. The most significant drivers of the change in our financial performance during 2017 as compared to 2016 included:
Net Incurred Losses and LAE in our Non-life Run-off Segment - Net reduction in the liability for net incurred losses and LAE within our Non-life Run-off segment continued to be one of the predominant drivers of our consolidated earnings in 2017, contributing $190.7 million to consolidated net earnings. Although this was a decrease of $95.2 million from 2016, net earnings provided by the Non-life Run-off segment increased by $82.2 million in 2017 compared to 2016 primarily due to improved investment results, increased fee income and higher other income, partially offset by higher expenses and other items;
StarStone - Net earnings attributable to the StarStone segment were $2.8 million in 2017, compared to $25.2 million in 2016. The decrease in earnings was primarily due to catastrophe loss events, partially offset by improved investment returns. The combined ratio was 108.5% in 2017 compared to 98.2% in 2016. The underwriting performance was impacted by the large losses in the third quarter of 2017, primarily hurricanes Harvey, Irma and Maria. Excluding the impact of hurricanes Harvey, Irma and Maria, the combined ratio was 96.7% for 2017;
Other Activities - The other activities were driven by higher corporate expenses and a loss on the sale of Laguna, our Irish life insurance company;
Income Taxes - We recorded an income tax benefit of $6.4 million in 2017, compared to an income tax expense of $34.9 million in 2016, a change of $41.3 million. The effective tax rate was (2.0)% in 2017 compared with 10.7% in 2016, with the change primarily due to significant decreases in the valuation allowance on our deferred tax assets in the U.S. in 2017 compared to 2016, including changes relating to U.S. Tax Reform which resulted in a tax benefit of $5.7 million, as well as the geographic distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions.
Net Incurred Losses and LAE in our Non-life Run-off Segment - Net reduction in the liability for net incurred losses and LAE within our Non-life Run-off segment continued to be the predominant driver of our consolidated earnings in 2016, contributing $285.9 million to consolidated net earnings which is an increase of $15.1 million from 2015. Net earnings provided by the Non-life Run-off segment were higher by $76.0 million in 2016 compared to 2015, primarily due to improved investment results, partially offset by higher earnings attributable to noncontrolling interest, lower other income and other items;
Other activities - The other activities were primarily driven by higher corporate expenses and higher interest expense, partially offset by higher fee and commission income and higher income from discontinuing operations;
Change in Net Realized and Unrealized Gains (Losses) - In 2016, net realized and unrealized gains were $77.8 million, compared to net realized and unrealized losses of $41.5 million in 2015. The net realized and unrealized gains in 2016 were primarily attributable to an increase in the valuation of our other investments, as well as tighter credit spreads in the fixed income markets, while the losses in 2015 were driven by unrealized losses on our fixed maturity and equity portfolios;
Income Taxes - Income tax expense was $34.9 million in 2016, compared to $12.7 million in 2015, an increase of $22.2 million. The effective tax rate was 10.7% in 2016, compared to 5.6% in 2015, with the increase primarily due to the geographic distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions.
In the second half of 2017, following the completion of the sale of our Laguna and Pavonia businesses, which significantly reduced the size of our life and annuities business, we undertook a review of our reportable segments. Following this review we determined that 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, our remaining life business 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 below table provides a split by operating segment of the net earnings attributable to Enstar Group Limited:
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, 2017, 2016 and 2015, which are summarized below:
2017 versus 2016: Net earnings were $343.8 million in 2017, compared to $261.6 million in 2016, an increase of $82.2 million. The increase of $82.2 million was primarily attributable to an increase of $101.9 million in net realized and unrealized gains in 2017, an increase of $26.4 million in fees and commission income, an increase of $24.6 million in other income, an increase in net investment income of $21.4 million, and a decrease in operating expenses of $19.1 million. These items were partially offset by a lower reduction in net incurred losses and LAE of $95.2 million and an increase in corporate expenses of $40.0 million. Income taxes were a benefit of $7.0 million in 2017, compared to a tax expense of $28.6 million in 2016, a change of $35.6 million.
2016 versus 2015: Net earnings were $261.6 million in 2016 compared to $185.7 million in 2015, an increase of $76.0 million. The increase of $76.0 million was primarily attributable to an increase in net realized and unrealized gains of $109.1 million, an increase in net investment income of $56.2 million, a higher reduction in net incurred losses and LAE of $15.1 million, and a decrease in operating expenses of $7.5 million, partially offset by an increase in the net earnings attributable to noncontrolling interest of $51.3 million, a decrease in net premiums earned of $27.6 million, a decrease in other income of $26.8 million and an increase of $16.0 million in income taxes.
Net change in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims.
Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
2017 versus 2016: The net reduction in incurred losses and LAE for the year ended December 31, 2017 of $190.7 million included net incurred losses and LAE of $5.9 million related to current period net earned premium, primarily for the portion of the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $5.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $196.5 million, which was attributable to a reduction in estimates of net ultimate losses of $181.3 million, a reduction in provisions for bad debt of $1.5 million and a reduction in provisions for unallocated LAE of $54.1 million, relating to 2017 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $10.1 million and a change in fair value of $30.3 million related to our assumed retroactive reinsurance agreements with RSA and QBE completed in 2017 and for which we have elected the fair value option. The reduction of estimates in net ultimate losses for the year ended December 31, 2017 was reduced by amortization of the deferred charge of $14.4 million. Overall, the reduction in net incurred losses and LAE was lower by $95.2 million in 2017 compared with 2016, primarily due to experiencing approximately $82.0 million of adverse net loss reserve development on certain asbestos reserves relating to increases in our estimates of ultimate losses as well as certain claims judgments.
The reduction in estimates of net ultimate losses relating to prior periods of $181.3 million comprised reductions in IBNR reserves of $393.1 million partially offset by net incurred loss development of $211.8 million, which includes amortization of deferred charges of $14.4 million. The decrease in the estimate of net IBNR reserves of $393.1 million (compared to $349.7 million during the year ended December 31, 2016), comprised a decrease of $70.0 million relating to asbestos liabilities (compared to an increase of $39.4 million in 2016), an decrease of $7.5 million relating to environmental liabilities (compared to an increase $35.5 million in 2016), a decrease of $7.2 million relating to general casualty liabilities (compared to $0.8 million in 2016), a decrease of $156.2 million relating to workers' compensation liabilities (compared to $333.2 million in 2016) and a decrease of $152.2 million relating to all other remaining liabilities (compared to $90.6 million in 2016).
The reduction in provisions for bad debt of $1.5 million was a result of the favorable resolution of contractual disputes with reinsurers, the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received and the reduction of specific provisions held for potential disputes with reinsurers.
2016 versus 2015: The net reduction in incurred losses and LAE in 2016 of $285.9 million included current period net incurred losses and LAE of $5.8 million related to current period net earned premium of $7.1 million (primarily for the portion of the run-off business acquired with Sussex). Excluding current period net incurred losses and LAE of $5.8 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $291.7 million, which was attributable to a reduction in estimates of net ultimate losses of $259.1 million, a reduction in provisions for bad debts of $13.8 million and a reduction in provision for unallocated LAE of $44.2 million, relating to 2016 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $25.4 million.
The reduction in estimates of net ultimate losses relating to prior periods of $259.1 million comprised reductions in IBNR reserves of $349.7 million partially offset by net incurred loss development of $90.6 million, which includes amortization of deferred charges of $168.8 million. The decrease in the estimate of net IBNR reserves of $349.7 million (compared to $377.7 million in 2015) was comprised of an increase of $39.4 million relating to asbestos liabilities (compared to a decrease of $32.0 million in 2015), an increase of $35.5 million relating to environmental liabilities (compared to a decrease of $1.6 million in 2015), a decrease of $0.8 million relating to general casualty liabilities (compared to a decrease $3.0 million in 2015), a decrease of $333.2 million relating to workers' compensation liabilities (compared to a decrease of $243.4 million in 2015) and a decrease of $90.6 million relating to all other remaining liabilities (compared to a decrease in $97.7 million in 2015).
an increase in bank charges relating to the early repayment of the Sussex Facility and the FAL facility entered into at the end of 2016; and
2017 versus 2016: Other income was $27.1 million in 2017, compared to $2.5 million in 2016. The increase of $24.6 million is primarily attributable to an increase in our share of the net earnings of our equity method investees and an increase in recoveries of other assets.
2016 versus 2015: Other income was $2.5 million in 2016, compared to $29.3 million in 2015. The decrease of $26.8 million is primarily attributable to a reduction in recoveries of other assets in 2016.
2017 versus 2016: Interest expense was $29.0 million in 2017, compared to $22.3 million in 2016, an increase of $6.7 million. The increase in interest expense was primarily due to the issuance of Senior Notes in the first quarter of 2017.
2017 versus 2016: We recorded an income tax benefit of $7.0 million for our Non-life Run-off segment in 2017, compared to an income tax expense of $28.6 million in 2016, a change of $35.6 million. The effective tax rate was (2.0)% in 2017 compared with 9.3% in 2016. The valuation allowance was decreased in relation to (i) the decrease of the deferred tax asset due to the reduction in the U.S. income tax rate from 35% to 21%, (ii) the current year utilization of deferred tax assets, partially offset by an increase relating to deferred tax assets for which we have deemed are not likely to be realized. In addition our tax rate was impacted by U.S. Tax Reform resulting in a tax benefit of $5.7 million, as well as having proportionately lower net income in our tax paying subsidiaries in 2017 than in 2016. 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.
2016 versus 2015: Income tax expense for our Non-life Run-off segment was $28.6 million in 2016, compared to $12.6 million in 2015, a change of $16.0 million. The effective tax rate was 9.3% for 2016, compared to 7.6% in 2015 due to having proportionately higher net income in our tax paying subsidiaries in 2016 than in 2015 as well as an increase in the valuation allowance on our deferred tax assets in the United States.
2017 versus 2016: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment were $14.7 million in 2017, compared to $17.6 million in 2016, a decrease of $2.9 million. The decrease of $2.9 million in 2017 was due primarily to the decrease 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 at December 31, 2017 and December 31, 2016.
2016 versus 2015: Net earnings attributable to noncontrolling interest in our Non-life Run-off segment was $17.6 million in 2016, compared to the net loss attributable to noncontrolling interest of $33.7 million in 2015. The change of $51.3 million in net earnings attributable to noncontrolling interest in 2016 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 at December 31, 2016 and 2015.
The higher combined ratio in 2017 is primarily due to increases in the net loss and operating expense ratios. The increase in the net loss ratio is primarily attributable to the large losses in 2017, namely those attributable to hurricanes Harvey, Irma and Maria, which have impacted the current year loss experience. The impact of these losses on the net loss ratio has been reduced by higher favorable prior year loss development in 2017 as compared to 2016. The increase in the operating expense ratio is primarily attributable to profit-related expenses arising on favorable prior year loss development.
(1) The Marine, Aviation and Transit line of business includes marine, upstream energy, aviation and terrorism lines previously disclosed as separate lines of business.
See below for a discussion of the drivers of the increase in net premiums earned for 2017 as compared with 2016, which also explain the increase in gross premium written for the same periods.
The following table provides net premiums earned by line of business for the Atrium segment for the years ended December 31, 2017, 2016 and 2015:
(2) The Binding Authorities line of business includes Liability and Property & Casualty Binding Authorities lines previously disclosed as separate lines of business.
property reinsurance underwriters who joined Atrium during 2016. Offsetting these increases was a reduction in premium for the marine, aviation and transit class, where continued pressure on premium rates and terms and conditions led to the non-renewal of certain business in order to maintain underwriting discipline.
2016 versus 2015: Net premiums earned for the Atrium segment were $124.4 million in 2016, compared to $134.7 million in 2015, a decrease of $10.3 million. The decrease of $10.3 million in 2016 was primarily due to the non-renewal of certain business that no longer met our underwriting standards, particularly in the marine, aviation and transit and reinsurance lines. We saw continued pressure on premium rates and terms and conditions due to overcapacity in many markets for insurable risks. We continued to focus on risk selection and underwriting for profitability. These premium decreases were partially offset by the increase in the binding authorities lines, which reflects the continued success of AU Gold, Atrium's proprietary online underwriting platform.
2017 versus 2016: Net incurred losses and LAE were $69.4 million in 2017, compared to $58.4 million in 2016, an increase of $11.0 million. Net favorable loss development in 2017 and 2016 was $20.9 million and $13.0 million, respectively. Net favorable loss development in 2017 and 2016 was experienced across most lines of business. Excluding prior year loss development, net incurred losses and LAE in 2017 and 2016 were $90.4 million and $71.4 million, respectively. The losses in 2017 included $18.5 million in respect of the large catastrophe events that occurred in the third quarter of 2017, primarily hurricanes Harvey, Irma and Maria. Excluding the large catastrophe events the current year losses were $71.9 million in 2017, broadly consistent with 2016. The large catastrophe events impacted the binding authorities, non-marine direct and facultative and reinsurance lines of business.
2017 versus 2016: Acquisition costs were $47.7 million in 2017, compared to $44.7 million in 2016, an increase of $3.0 million. The Atrium acquisition cost ratios for 2017 and 2016 were 35.4% and 35.9%, respectively, a decrease of 0.5%. The decrease in the ratio was primarily due to changes in the business mix.
2016 versus 2015: Acquisition costs were $44.7 million in 2016, compared to $45.5 million in 2015, a decrease of $0.8 million. The acquisition cost ratios in 2016 and 2015 were 35.9% and 33.8%, respectively, an increase of 2.1%. The increase of 2.1% in the ratio was primarily due to less premium written in lines of business with lower acquisition ratios.
2016 versus 2015: Operating expenses for the Atrium segment were $14.2 million in 2016, compared to $18.5 million in 2015, a decrease of $4.3 million. The decrease of $4.3 million in 2016 primarily relates to lower bonus accruals resulting from lower net earnings in 2016 compared to 2015 as well as the foreign exchange impact of the stronger U.S. dollar in 2016 compared with 2015.
2017 versus 2016: Fees and commission income was $22.8 million in 2017, compared to $18.2 million in 2016, an increase of $4.6 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 increase of $4.6 million in 2017 is primarily due to profit commission on higher syndicate profits arising on the prior year underwriting profits in 2017 as compared with 2016.
2016 versus 2015: Fees and commission income was $18.2 million in 2016, compared to $28.4 million in 2015, a decrease of $10.2 million. The decrease of $10.2 million in 2016 was primarily due to management and profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The decrease was due primarily to profit commission on lower syndicate profits in 2016 as compared with 2015.
2016 versus 2015: Corporate expenses for the Atrium segment were $10.9 million in 2016, compared to $13.1 million in 2015, a decrease of $2.2 million. The decrease of $2.2 million in 2016 primarily relates to the Atrium employee share schemes as well as reduced costs for legal and professional fees.
2016 versus 2015: Net foreign exchange losses for the Atrium segment were $3.3 million in 2016 compared to $0.2 million in 2015. Net foreign exchange losses in 2016 resulted primarily from recognizing realized losses on the foreign currency available for sale investment portfolio, that were mostly reclassified from accumulated other comprehensive income.
2016 versus 2015: We recorded income tax expense of $2.6 million in 2016, compared to $6.0 million in 2015, a decrease of $3.4 million, primarily due to lower earnings in the Atrium segment. The effective tax rates for the Atrium segment in 2016 and 2015 were 19.1% and 16.2%, respectively.
The results of our StarStone segment include the results of StarStone Insurance Bermuda Limited and its subsidiaries ("StarStone") and StarStone Specialty Holdings Limited. StarStone results represent the active underwriting operations.
The following is a discussion and analysis of the results of operations for the StarStone segment for the years ended December 31, 2017, 2016 and 2015, which are summarized below.
The increase of 11.2 percentage points in the operating expense ratio is a result of the combination of an increase in operating expenses and lower net premiums earned after the reinsurance cession to KaylaRe.
2017 versus 2016: Gross premiums written increased by $40.5 million during 2017 as a result of new business written in the U.S. and Europe for casualty, marine and property lines. Our largest line of business, casualty, experienced growth in U.S. excess casualty, partially offset by a reduction in U.S. healthcare resulting from a change in underwriting strategy. Marine includes diversified lines, with most of the growth in gross premiums written occurring in the marine cargo line. Our property line experienced the most growth; this was a combination of growth in the international property business and also includes a new line of business for mortgage reinsurance where we wrote $5.7 million in respect of two quota share reinsurance treaties covering U.S. mortgages. The aerospace and workers' compensation lines of business decreased, the latter due to the timing of contract renewals, and some opportunistic business written in 2016 that was not renewed in 2017.
The following table provides net premiums earned by line of business for the StarStone segment for the years ended December 31, 2017, 2016 and 2015:
2016 versus 2015: Net premiums earned for the StarStone segment were $676.6 million in 2016, compared to $573.1 million in 2015, an increase of $103.5 million. The increase of $103.5 million in 2016 was primarily due to growth in the marine, casualty, property and workers' compensation lines of business.
2017 versus 2016: Net incurred losses and LAE were $314.8 million in 2017, compared to $401.6 million in 2016, a decrease of $86.8 million. The movement for 2017 includes $53.4 million of net incurred losses in respect of the large catastrophe events that occurred in the third quarter of 2017, for hurricanes Harvey, Irma and Maria. Excluding these large catastrophe events, the movement was a decrease of $139.8 million. The decrease is primarily due to business ceded to KaylaRe under the 35% quota share cession for underwriting years 2016 and 2017. The loss ratio for 2017 was 68.5% (or 56.8% excluding the impact of the catastrophe losses), compared to a loss ratio of 59.4% in 2016. Excluding net prior year loss development, net incurred losses and LAE were $341.6 million in 2017, compared to $415.8 million in 2016.
Net favorable prior year loss development in 2017 was $26.8 million, compared to $14.2 million in 2016. Net favorable prior year loss development in 2017 was primarily related to U.S. excess casualty and workers’ compensation. Net favorable prior year loss development in 2016 was primarily related to marine liability, offshore and terrorism.
2017 versus 2016: Acquisition costs of the StarStone segment were $48.0 million in 2017, compared to $138.8 million in 2016, a decrease of $90.8 million. The decrease of $90.8 million in 2017 was primarily due to the ceding commission of $99.5 million earned on the KaylaRe quota share reinsurance contract. The acquisition cost ratios for 2017 and 2016 were 10.5% and 20.5%, respectively. The ratio decreased by 10.0% in 2017 compared to 2016, primarily due to the ceding commission earned discussed above. Excluding the impact of the KaylaRe ceding commission, the acquisition cost ratio was 21.2%, which is a slight increase on the prior year ratio of 20.5%.
2016 versus 2015: Acquisition costs of the StarStone segment were $138.8 million in 2016, compared to $109.3 million in 2015, an increase of $29.5 million. The increase of $29.5 million in 2016 was primarily due to an increase of $103.5 million in net premiums earned. The acquisition cost ratio was 20.5% in 2016, compared to 19.1% in 2015, an increase of 1.4%. The increase was primarily due to higher gross premiums written in property and marine, which have higher acquisition cost ratios, partially offset by writing less aerospace, which has a lower acquisition cost ratio.
2017 versus 2016: Operating expenses were $135.6 million in 2017, compared to $124.2 million in 2016, an increase of $11.3 million. The increase of $11.3 million in 2017 was primarily due to an increase in compensation costs in respect of additional headcount for our growth strategies in certain lines of business, and the prior year included the impact of favorable foreign exchange rates.
2016 versus 2015: Operating expenses were $124.2 million in 2016, compared to $128.5 million in 2015, a decrease of $4.3 million. The 2016 decrease in operating expenses was partially due to favorable foreign exchange movement in the U.S. Dollar, resulting in a reduction in expenses in the United Kingdom and Continental Europe in U.S. dollar terms, partially offset by an increase in valuation of stock appreciation right awards outstanding in 2016 as a result of the increase in our share price.
2017 versus 2016: Other income was $0.6 million in 2017, broadly consistent with $0.7 million in 2016.
2017 versus 2016: Interest expense was $1.9 million in 2017, compared to $nil in 2016, an increase of $1.9 million. The increase of $1.9 million was due to interest charged by KaylaRe in respect of the whole account quota share which is on a funds-withheld basis.
2016 versus 2015: Interest expense in 2016 was immaterial and broadly consistent with 2015.
2016 versus 2015: Net foreign exchange gains of $0.8 million in 2016 were broadly consistent with net foreign exchange gains of $0.5 million in 2015.
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, our remaining life business and other miscellaneous items. The presentation of the results of our other activities reflect the classification of Pavonia as discontinuing operations and held-for-sale. Following the sale of Pavonia and Laguna, we no longer have any annuity products and our continuing life business will comprise of term life products in Alpha Insurance SA and the life settlements business.
Net losses were $40.6 million for 2017 and $28.5 million for 2016, an increase in net losses of $12.1 million which primarily resulted from a loss on sale of our Laguna subsidiary of $16.3 million, a $9.0 million decrease in underwriting income from our remaining Life business and a $4.9 million decrease in net investment income, partially offset by a $15.8 million decrease in stock compensation expense which was higher in 2016 due to the valuation of stock appreciation right awards due to an increase in the share price.
Net losses were $28.5 million in 2016 compared to net earnings of $4.4 million in 2015, a change in net losses of $32.9 million, primarily due to an increase in stock compensation expense of $18.3 million as described above, and $5.3 million of impairment charges on investments in life settlements in 2016 compared to $nil in 2015.
For 2017, 2016 and 2015, the contribution to net earnings from our Pavonia life and annuities business, classified as discontinuing operations, was $11.0 million, $12.0 million and $(2.0) million, respectively. For further information refer to Note 5 - "Divestitures, Held-for-Sale Businesses and Discontinuing Operations" in the Consolidated Financial Statements within Item 8 of this Annual Report on Form 10-K.
2016 versus 2015: Underwriting income was $8.9 million in 2016, compared to $2.1 million in 2015, an increase of $6.8 million which primarily results from a $5.1 million increase in underwriting income in respect of Alpha and Laguna.
2016 versus 2015: Net foreign exchange gains were $0.2 million in 2016, broadly consistent with net gains of $0.7 million in 2015.
Loss of Sale on Subsidiary and Net Earnings (Losses) from Discontinued Operations, Net of Tax:
During 2017 we sold our wholly-owned Irish life subsidiary Laguna and recorded a loss on sale of $16.3 million.
For 2017, 2016 and 2015, the contribution to net earnings from our Pavonia life and annuities business, classified as discontinuing operations, was $11.0 million, $12.0 million and $(2.0) million, respectively.
In the Non-life Run-off, Atrium and StarStone segments, we maintain investment portfolios that are shorter duration than the liabilities in order to provide liquidity for the settlement of losses and, where possible, to avoid having to liquidate longer-dated investments. In the Non-life Run-off segment, the commutations of liabilities also have the potential to accelerate the natural payout of losses, which requires liquidity.
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, fixed income hedge funds, equity funds, CLO equities, CLO equity funds and private credit funds.
Consolidated Statements of Earnings for the years ended December 31, 2017, 2016 and 2015
(Tabular information expressed in thousands of U.S. dollars except share and per share data)
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, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant intercompany transactions and balances have been eliminated.
fair value estimates associated with loss portfolio transfer reinsurance agreements for which we have elected the fair value option; and
The liability for losses and LAE in the Non-life Run-off segment includes an amount determined from reported claims and an amount, based on historical loss experience and industry statistics, for losses incurred but not reported ("IBNR") determined using a variety of actuarial methods. These estimates are continually reviewed and are necessarily subject to the impact of future changes in factors such as claim severity and frequency, changes in economic conditions including the impact of inflation, legal and judicial developments, and medical cost trends. While we believe that the amount is adequate, the ultimate liability may be in excess of, or less than, the amounts provided. Adjustments will be reflected as part of net increase or reduction in losses and LAE liabilities in the periods in which they become known. Premium and commission adjustments may be triggered by incurred losses, and any amounts are recorded in the same period that the related incurred loss is recognized.
Commutations of acquired companies’ exposures have the effect of accelerating the payout of claims compared to the probability-weighted ranges of actuarially projected cash flows that we apply when estimating the fair values of assets and liabilities at the time of acquisition. Any material acceleration of payout together with the impact of any material loss reserve savings in any period will also accelerate the amortization of fair value adjustments in that period. Gains or losses on settlement of losses and LAE liabilities by way of commutation or policy buy-back are recognized upon execution of a commutation or policy buyback with the insured or reinsured.
Since the development of the policy benefits is based upon projections of future cash flows, we are required to make assumptions for mortality, longevity and morbidity rates, lapse rates, expenses and investment income. The assumptions used to determine policy benefits are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition, as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. These locked-in assumptions are based on a best estimate view of experience at the time they are established
and may include a provision for adverse deviation. Assumptions are established based upon a combination of historical and industry experience, when available, and management judgment. Actual results could differ from these estimates.
Fixed maturity investments classified as available-for-sale are reviewed quarterly to determine if they have sustained an impairment of value that is, based on our judgment, considered to be other than temporary. The process includes reviewing each fixed maturity investment that is below cost and: (1) determining if we have the intent to sell the fixed maturity investment; (2) determining if it is more likely than not that we will be required to sell the fixed maturity investment before its anticipated recovery; and (3) assessing whether a credit loss exists, that is, whether we expect that the present value of the cash flows expected to be collected from the fixed maturity investment is less than the amortized cost basis of the investment.
Other investments include investments in limited partnerships and limited liability companies (collectively "private equities") and fixed income funds, hedge funds, equity funds, private credit funds and collateralized loan obligation ("CLO") equity funds that carry their investments at fair value, as well as direct investments in CLO equities. These other investments are stated at fair value, which ordinarily will be the most recently reported net asset value as advised by the fund manager or administrator. Many of our fund investments publish net asset values on a daily basis and provide daily liquidity; others report on a monthly basis. Private equities typically report quarterly. The change in fair value is included in net realized and unrealized gains and losses on investments and recognized in net earnings.
The investments are subject to quarterly impairment review on a contract-by-contract basis. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds from the investment in life settlements are not sufficient to recover the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired contracts are written down to their estimated fair value, which is determined on a discounted cash flow basis using current market longevity assumptions and market yields, with any impairment charges included within net realized and unrealized gains (losses).
companies are carried at cost. Funds held - directly managed, carried at fair value, represents the aggregate of funds held at cost and the value of an embedded derivative. The embedded derivative relates to our contractual right to receive the return on the underlying investment portfolio economics. The investment returns on both categories of funds held are recognized in net investment income and net realized and unrealized gains (losses). The revaluation of the embedded derivative is included in net unrealized gains (losses).
We have primarily used three types of share-based compensation: (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, 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 and the Atrium 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.
We utilize derivative instruments in our foreign currency risk management strategy and recognize all derivatives as either assets or liabilities in the consolidated balance sheets and carry them at the fair value of the specific instrument utilized. Changes in the fair value as well as realized gains or losses on derivative instruments are recognized in net earnings if they are not designated as qualifying hedging instruments or if the criteria for establishing a perfectly effective designated hedging relationship for our net investment hedges has not been met. However, if a designated net investment hedge is deemed to be perfectly effective, then we recognize the changes in the fair value of the underlying hedging instrument in accumulated other comprehensive income (loss) until the application of hedge accounting is discontinued. Any cumulative gains or losses arising on designated net investment hedges are deferred in accumulated other comprehensive income (loss) until the CTA from the underlying hedged net investment is recognized in net earnings due to a disposal, deconsolidation or substantial liquidation.
Intangible assets represent the fair value adjustments related to unpaid losses and LAE, reinsurance balances recoverable and policy benefits for life and annuity contracts along with the intangible assets arising from the acquisitions of Atrium and StarStone. Definite-lived intangible assets are amortized over their useful lives. Amortization of intangible assets is recognized in the consolidated statement of earnings. Indefinite-lived intangible assets are not subject to amortization. The carrying values of intangible assets are reviewed for indicators of impairment at least annually. Impairment is recognized if the carrying values of the definite-lived intangible assets are not recoverable from their undiscounted cash flows and are measured as the difference between the carrying value and the fair value.
Retroactive reinsurance policies provide indemnification of losses and LAE with respect to past loss events.
In our Non-life Run-off segment we use the balance sheet accounting approach for assumed loss portfolio transfers, whereby at the inception of the contract there are no premiums or losses recorded in earnings. At the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received. Deferred charges, recorded in other assets, are amortized over the estimated claim payment period of the related contract with the periodic amortization reflected in earnings as a component of losses and LAE.
Deferred charges amortization is adjusted at each reporting period to reflect new estimates of the amount and timing of remaining loss payments. Changes in the estimated amount and the timing of payments of unpaid losses may have an effect on the unamortized deferred charges and the amount of periodic amortization. Deferred charges are assessed at each reporting period for impairment. If the asset is determined to be impaired, it is written down in the period in which the determination is made.
In our Non-life Run-off and StarStone segments we have ceded business to KaylaRe Ltd., an affiliated reinsurer, as described in Note 21 - "Related Party Transactions". The reinsurance ceded by StarStone to KaylaRe Ltd. during the year ended December 31, 2016 was mostly recognized as retroactive reinsurance, except for the unearned ceded premium as at December 31, 2016 which was recognized as prospective reinsurance. The reinsurance ceded by StarStone to KaylaRe Ltd. from January 1, 2017 was recognized as prospective reinsurance.
We use an internal model to calculate the fair value of the liability for losses and loss adjustment expenses and the reinsurance balances recoverable asset. Note 8 - "Fair Value Measurements" describes the internal model, including the observable and unobservable inputs used in the model.
Derivatives and Hedging. The guidance (1) improves the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities, and (2) reduces the complexity of and simplify the application of hedge accounting by preparers. We early adopted this guidance and that adoption did not have an impact on our consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business in ASC 805 - Business Combinations, with the intent of making the application of the guidance more consistent and cost-efficient. This clarification is expected to result in fewer acquired sets of assets and liabilities being identified as businesses. We early adopted this guidance and that adoption did not have an impact on our consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The impact of adopting this guidance on our consolidated financial statements was a cumulative-effect adjustment of $4.9 million to opening retained earnings for the year ended December 31, 2017 for the excess tax benefit not previously recognized.
In March 2016, the FASB issued ASU 2016-07, which simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. Entities are therefore required to apply the guidance prospectively to increases in the level of ownership interest or degree of influence occurring after the ASU’s effective date. The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The adoption of this guidance did not have any impact on our consolidated financial statements.
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 ("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. The ASU is effective for interim and annual reporting periods beginning after December 15, 2018 but early adoption is permitted in any interim or annual period for which financial statements have not yet been issued. Entities also have the option of applying the ASU either (1) in the period of adoption or (2) retrospectivel
y to each period in which the income tax effects of the Tax Act related to items in AOCI, are recognized. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and disclosures.
In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The ASU requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the statement of earnings, and (2) present the other components elsewhere in the statement of earnings and outside of income from operations if such a subtotal is presented. The ASU also requires entities to disclose the captions within the statement of earnings that contain the other components if they are not presented on appropriately described separate lines. In addition, only the service-cost component of the net benefit cost is eligible for capitalization, which is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable. The ASU’s amendments are effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and disclosures.
In October 2016, the FASB issued ASU 2016-16, which requires immediate recognition of the tax consequences of many intercompany asset transfers other than inventory. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements and disclosures.
ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
In June 2016, the FASB issued ASU 2016-13, which amends the guidance on impairment of financial instruments and significantly changes how entities will measure credit losses for most financial assets and certain other financial instruments including reinsurance balances recoverable 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 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. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019.
While we anticipate an increase in our allowances for credit losses for the financial instruments and assets that are within the scope of the ASU in view of the objective of the new guidance, the magnitude of any increase will depend largely on the composition of our investment portfolio at the date of adoption of the ASU as well as on the prevailing economic conditions and forecasts at the time of adoption.
We are continuing to review all our operating lease arrangements to quantify the right-of-use asset and the offsetting lease liability to be recorded on our Consolidated Balance Sheet upon adoption of this guidance. We however, do not anticipate that the adoption of the ASU will have a material impact on our consolidated financial statements and related disclosures.
We are required to adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 together with ASU 2014-09, which is effective for interim and annual reporting periods beginning after December 15, 2017. We adopted this guidance on January 1, 2018. The two permitted transition methods under the new revenue standard are the full retrospective method, in which case the guidance would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial adoption. We expect to adopt the guidance using the modified retrospective method.
The purchase price was allocated to the acquired assets and liabilities of the two companies acquired based on estimated fair values at the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.
From the date of acquisition to December 31, 2015, we recorded $16.5 million in net earnings attributable to Enstar Group Limited related to the life settlement contract business.
The net unearned premiums acquired included a decrease of $34.6 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at December 31, 2017, $16.1 million has been amortized to acquisition costs and $16.0 million has been amortized to net premiums earned in the consolidated statements of earnings and comprehensive income. As at December 31, 2017, the remaining balance of the fair value adjustment was $2.5 million, which will be amortized to net premiums earned over the remaining terms of the underlying policies.
Following the initial reinsurance transaction, which transferred the economics of the CTP insurance business, we and Zurich are pursuing a portfolio transfer of the CTP insurance business under Division 3A Part III of Australia's Insurance Act 1973 (Cth), which will provide legal finality for Zurich's obligations. The transfer is subject to court, regulatory and other approvals.
On February 16, 2018, we closed the previously announced reinsurance-to-close transaction with Neon Underwriting Limited ("Neon"), under which we will reinsure to close the 2015 and prior underwriting years of account (comprising underwriting years 2008 to 2015) of Neon's Syndicate 2468. We have assumed gross reserves of £402.2 million (approximately $543.4 million) or net reinsurance reserves of £337.8 million (approximately $456.4 million) relating to the portfolio for cash consideration equal to the net amount of reserves assumed. Following the closing of the transaction, Enstar has taken responsibility for claims handling and will provide complete finality to Neon's obligations.
On December 28, 2017, we entered into a reinsurance agreement with Allianz SE (“Allianz”) to reinsure a portfolio of Allianz’s run-off business, effective December 31, 2017. Pursuant to the reinsurance agreement, we reinsured 50% of certain U.S. workers' compensation, asbestos, and toxic tort business originally held by San Francisco Reinsurance Company, an affiliate of Allianz, and in the process assumed net reinsurance reserves of $81.4 million. Affiliates of Allianz retained $81.4 million of reinsurance premium as funds withheld collateral for the obligations under the reinsurance agreement and we transferred $8.1 million to a reinsurance trust to further support our obligations. We will also provide ongoing consulting services with respect to the entire $162.8 million portfolio, including the 50% share retained by affiliates of Allianz.
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 8 - "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 November 30, 2015, we completed the assignment and assumption of a portfolio of primarily workers' compensation business from The Doctors Company and its affiliates. Total assets and liabilities assumed were $29.5 million.
Pavonia owns Pavonia Life Insurance Company of Michigan (“PLIC MI”) and Enstar Life (US), Inc. Pursuant to the amended stock purchase agreement between the Company and Southland, which partially restructured the transaction, Southland will acquire Pavonia Life Insurance Company of New York ("PLIC NY") for $13.1 million in a second closing that is expected to occur in the first or second quarter of 2018, subject to regulatory approval. The additional purchase price represents the cash consideration we paid to PLIC MI when we acquired PLIC NY from PLIC MI as a result of the restructuring of the first closing of the transaction.
As of December 31, 2017 and 2016, included in the table above were restricted investments of $1.4 million and $786.0 million, respectively.
The following table presents the cash flows of Pavonia whilst under our ownership for the years ended December 31, 2017, 2016 and 2015:
Following the closing of the sale of Laguna, we recorded a loss on sale of $16.3 million for the year ended December 31, 2017, which has been included in earnings from continuing operations before income 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. Excluding the loss on sale, the net earnings (losses) relating to Laguna for the years ended December 31, 2017, 2016 and 2015 were $(1.2) million, $1.0 million and $1.8 million, respectively. These amounts were not significant to our consolidated operations and therefore Laguna was not classified as a discontinued operation in current or prior periods.
The contractual maturities of our fixed maturity and short-term investments classified as trading 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 tables summarize our fixed maturity and short-term investments classified as available-for-sale in a gross unrealized loss position:
The valuation of our other investments is described in Note 8 - "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:
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. The funds have liquidity terms that vary from daily up to 45 days' notice.
CLO equities comprise investments in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. CLO equities denote direct investments by us in these securities.
CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $1.1 million, part of a self-liquidating structure which is expected to pay out over one to five years. The other fund has a fair value of $11.7 million and is eligible for redemption in 2018.
Other primarily comprises a fund that provides loans to educational institutions throughout the United States and its territories.
As at December 31, 2017, we had unfunded commitments to private equity funds of $164.7 million.
Our other investments carried at cost of $125.6 million as of December 31, 2017 consist of life settlement contracts. During the years ended December 31, 2017 and 2016, net investment income included $13.8 million and $18.0 million, respectively, related to investments in life settlements. During the years ended December 31, 2017 and 2016, there were impairment charges of $7.2 million and $5.3 million, respectively, recognized in net realized and unrealized gains/losses. The following table presents further information regarding our investments in life settlements as of December 31, 2017 and 2016.
At December 31, 2017, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending December 31, 2018 and the four succeeding years ending December 31, 2022 is $17.8 million, $17.7 million, $16.6 million, $15.7 million, and $15.2 million, respectively.
The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $40.8 million, $41.3 million and $95.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The following table sets forth the credit ratings of our fixed maturity investments underlying the funds held - directly managed account as of December 31, 2017:
The independent pricing services used by the investment accounting service providers, investment managers and investment custodians obtain actual transaction prices for securities that have quoted prices in active markets. Where we utilize single unadjusted broker-dealer quotes, they are generally provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. For determining the fair value of securities that are not actively traded, in general, pricing services use "matrix pricing" in which the independent pricing service uses observable market inputs including, but not limited to, reported trades, benchmark yields, broker-dealer quotes, interest rates, prepayment speeds, default rates and other such inputs as are available from market sources to determine a reasonable fair value. In addition, pricing services use valuation models, using observable data, such as an Option Adjusted Spread model, to develop prepayment and interest rate scenarios. The Option Adjusted Spread model is commonly used to estimate fair value for securities such as mortgage-backed and asset-backed securities.
Municipal securities consist primarily of bonds issued by U.S.-domiciled state and municipal entities. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes and benchmark yields. These are considered observable market inputs and, therefore, the fair values of these securities are classified as Level 2.
market observable. Where significant inputs are unable to be corroborated with market observable information, we classify the securities as Level 3.
We have categorized all of our investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on unadjusted quoted prices in active markets for identical assets. The fair value estimates of our investments in preferred stock are based on observable market data and, as a result, have been categorized as Level 2.
For our investments in 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 values of these investments were 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 assets 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.
Changes in fair value related to Level 3 assets and liabilities in the table above are included in net incurred losses and LAE in our consolidated statements of earnings.
The fair value of the liability for losses and LAE and reinsurance balances recoverable may increase or decrease due to changes in the corporate bond rate, the credit spread for non-performance risk, the risk cost of capital, the weighted average cost of capital and the estimated payment pattern as described below:
An increase in the weighted average cost of capital would result in an increase in the fair value of the liability for losses and LAE and reinsurance balances recoverable. Conversely, a decrease in the weighted average cost of capital would result in a decrease in the fair value of the liability for losses and LAE and reinsurance balances recoverable.
As of December 31, 2017 and 2016, investments in life settlement contracts were carried at cost of $125.6 million and $131.7 million, respectively, and their fair values were $131.9 million and $129.5 million, respectively.
Disclosure of fair value of amounts relating to insurance contracts is not required, except those for which we elected the fair value option, as described above. Our remaining assets and liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value as of December 31, 2017 and 2016.
We use foreign currency forward exchange rate contracts in qualifying hedging relationships to hedge the foreign currency exchange rate risk associated with certain of our net investments in foreign operations. At December 31, 2017 and 2016, we had forward currency contracts in place which we had designated as hedges of our net investments in foreign operations.
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 at December 31, 2017 and 2016:
From time to time, we may also utilize foreign currency forward contracts as part of our overall foreign currency risk management strategy or to obtain exposure to a particular financial market, as well as for yield enhancement in non-qualifying hedging relationships. We may also utilize equity call option instruments either to obtain exposure to a particular equity instrument or for yield enhancement in non-qualifying hedging relationships.
The following table provides the total reinsurance balances recoverable as at December 31, 2017 and 2016:
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 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 8 - "Fair Value Measurements".
As of December 31, 2017 and 2016, we had reinsurance balances recoverable of approximately $2.0 billion and $1.5 billion, respectively. The increase of $560.3 million in reinsurance balances recoverable was primarily a result of the QBE and RSA reinsurance transactions, which closed in the first quarter of 2017, and the impact of the recent hurricane losses on Atrium and StarStone, partially offset by reserve reductions, commutations and cash collections made during the year ended December 31, 2017 in our Non-life Run-off segment.
The following table summarizes the liability for losses and LAE by segment as at December 31, 2017 and 2016:
The tables below provide the components of net incurred losses and LAE by segment for the years ended December 31, 2017, 2016 and 2015:
The loss development tables disclosed below, sets forth our historic incurred and paid loss development by accident year through December 31, 2017, net of reinsurance, as well as the cumulative number of reported claims, IBNR balances, and other supplementary information.
Non-Life Run-off - The lines of business included within the loss development disclosures below include General Casualty, Workers’ Compensation and Professional Indemnity/Directors & Officers; and
The exposures included within the other category includes losses with several different development patterns that are not individually significant for separate disclosure.
For each line of business for which loss development tables have been provided below, the disclosure approach and format adopted reflects the following:
Fair value adjustments arising from the business acquisitions that we have completed as well as the retroactive reinsurance agreements for which we have elected the fair value option are excluded from the incurred loss triangles;
All data presented within the loss triangles is net of reinsurance recoveries, excluding provisions for uncollectible reinsurance recoverables; and
The IBNR reserves included within each incurred loss development table by accident year, reflect the net IBNR recorded as of December 31, 2017, including expected development on reported losses.
The historical dollar 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 triangles, 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 at December 31, 2017.
Acquisitions - The information included within the incurred and paid loss development tables for all the lines of business related to the StarStone segment below have been presented on a prospective basis from the date of our acquisition of StarStone, which was effective on April 1, 2014. Providing pre-acquisition incurred and paid losses by accident year for years prior to 2014 was determined to be impracticable due to significant data limitations. This prospective treatment was also adopted for the disclosures included within our Non-Life Run-off segment with respect to StarStone’s run-off business whose exposures are included within the general casualty and professional indemnity/Directors & Officers lines of business disclosed within our Non-Life Run-off loss development tables below; and
Retroactive reinsurance agreements - For those loss portfolio transfers that we assume through retroactive reinsurance agreements for which we don’t have access to historical loss development information from the ceding entities or where the data is not sufficiently reliable, these have been presented prospectively within the loss development tables disclosed below, from the date that the reinsurance agreements became effective.
This prospective treatment, therefore, results in loss development trends within the calendar year that either the business acquisition or retroactive reinsurance agreement is completed, that is not entirely reflective of the actual performance of the acquired business or the retroactive reinsurance agreement.
Claim counts are presented only on a reported and not on an ultimate basis. Therefore, reported claim counts include open claims which have outstanding reserves but exclude IBNR claims. As such the reported claims are consistent with reported losses, which can be calculated by subtracting IBNR losses from incurred losses. However, the reported claim counts are inconsistent with the losses in the incurred losses triangles, which include IBNR losses, and to losses in the paid loss triangles, which exclude outstanding reserves;
For lines of business that have a mix of primary and excess layer exposures, such as our general casualty and workers’ compensation lines of business, the reported claim counts may fluctuate from period to period between exposure layers, thereby distorting any measure of frequency and severity; and
Net incurred losses and LAE in the Non-life Run-off segment for the years ended December 31, 2017, 2016 and 2015 were as follows:
The net reduction in incurred losses and LAE for the year ended December 31, 2017 of $190.7 million included net incurred losses and LAE of $5.9 million related to current period net earned premium, primarily for the portion of the run-off business acquired with Sussex. Excluding current period net incurred losses and LAE of $5.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $196.5 million, which was attributable to a reduction in estimates of net ultimate losses of $181.3 million, a reduction in provisions for bad debt of $1.5 million and a reduction in provisions for unallocated LAE of $54.1 million, relating to 2017 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $10.1 million and a change in fair value of $30.3 million related to our assumed retroactive reinsurance agreements with RSA and QBE completed during the period and for which we have elected the fair value option. The reduction of estimates in net ultimate losses for the year ended December 31, 2017 was reduced by amortization of the deferred charge of $14.4 million.
The reduction in net IBNR reserves of $393.1 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 59 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2017, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $381.5 million for net paid losses of $578.9 million related to the settlement of non-commuted losses in the year and 59 commutations and
policy buy-backs of assumed and ceded exposures. Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2017 amounted to $7.4 million (comprising $23.2 million of assumed case reserves and LAE reserves, partially offset by $15.8 million of ceded incurred reinsurance recoverable case reserves).
The net reduction in incurred losses and LAE for the year ended December 31, 2015 of $270.8 million included current period incurred losses and LAE of $39.9 million related to current period net earned premium of $43.3 million (primarily for the portion of the run-off business acquired with StarStone). Excluding current period net incurred losses and LAE of $39.9 million, net incurred losses and LAE relating to prior periods were reduced by $310.8 million, which was attributable to a reduction in estimates of net ultimate losses of $227.5 million, reduction in provisions for bad debts of $25.3 million and a reduction in provisions for unallocated LAE of $62.7 million, relating to 2015 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.6 million.
The reduction in estimates of net ultimate losses relating to prior periods of $227.5 million comprised reductions in IBNR reserves of $377.7 million partially offset by net incurred loss development of $150.2 million, which includes amortization of deferred charges of $15.3 million. The decrease in the estimate of net IBNR reserves of $377.7 million (compared to $262.4 million during the year ended December 31, 2014) was comprised of $32.0 million relating to asbestos liabilities (compared to $59.4 million in 2014), $1.6 million relating to environmental liabilities (compared to $6.2 million in 2014), $3.0 million relating to general casualty liabilities (compared to $62.5 million in 2014), $243.4 million relating to workers' compensation liabilities (compared to $63.6 million in 2014) and $97.7 million relating to all other remaining liabilities (compared to $70.7 million in 2014).
The increase in provisions for bad debt of $25.3 million was a result of the collection of certain reinsurance recoverables against which bad debts had been provided in earlier periods, and the reduction in bad debt provisions for insolvent reinsurers as a result of distributions received, partially offset by additional provisions for contractual disputes with reinsurers.
In establishing the reserves for losses and LAE related to asbestos and environmental claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, reserves have been established to cover additional exposures on both known and unreported claims. Estimates of the reserves are reviewed and updated continually. Developed case law and claim histories are still evolving for such claims, especially because significant uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. In view of the changes in the legal and tort environment that affect the development of such claims, the uncertainties inherent in valuing asbestos and environmental claims are not likely to be resolved in the near future. Ultimate values for such claims cannot be estimated using traditional reserving techniques and there are significant uncertainties in estimating the amount of our potential losses for these claims. There can be no assurance that the reserves established by us will be adequate or will not be adversely affected by the development of other latent exposures. The net liability for unpaid losses and LAE as of December 31, 2017 and 2016 included $1,863.2 million and $979.8 million, respectively, which represented an estimate of the net ultimate liability for asbestos and environmental claims. The gross liability for such claims as at December 31, 2017 and 2016 was $1,992.1 million and $1,021.8 million, respectively. For the years ended December 31, 2017 and 2016, our reserves for asbestos and environmental liabilities increased by $970.4 million and $545.2 million on a gross basis, respectively, and by $883.4 million and $545.1 million on a net basis, respectively, due to acquisition activity in 2017 primarily related to the RSA and QBE transactions.
The following tables set forth information about incurred and paid loss development, total IBNR reserves and cumulative loss frequency related to our general casualty, workers' compensation and professional indemnity/Directors & Officers lines of business within the Non-Life Run-off segment as at December 31, 2017. The information related to incurred and paid loss development for the years ended December 31, 2008 through 2016 is presented as supplementary information and is therefore unaudited.
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended December 31, 2017, 2016 and 2015:
The following tables set forth information about incurred and paid loss development information for the Atrium segment as at December 31, 2017. The information related to incurred and paid loss development for the years ended December 31, 2008 through 2016 is presented as supplementary information and is therefore unaudited. Information about total IBNR reserves and cumulative loss frequency as at December 31, 2017, 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, 2017 is set forth below:
The following table provides a breakdown of the liability for losses and LAE reserves by line of business as at December 31, 2017 and 2016:
Intangible assets with a definite life - Other includes the distribution channel, Lloyd’s capacity, 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. Intangible asset amortization for the years ended December 31, 2017, 2016 and 2015 was $4.3 million, $6.4 million and $9.8 million, respectively. Amortization for the year ended December 31, 2015 included an impairment charge of $4.0 million for the Torus brand in relation to the StarStone rebranding exercise.
The table above excludes fair value adjustments of $2.7 million and $46.5 million as at December 31, 2017 and 2016, respectively, relating to policy benefits for life and annuity contracts relating to our Pavonia operations which are classified as held-for-sale. Amortization of fair value adjustments relating to Pavonia were $6.1 million and $7.0 million during the years ended December 31, 2017 and 2016, respectively.
We utilize debt facilities primarily for acquisitions and, from time to time, for general corporate purposes. Under these facilities, debt obligations as of December 31, 2017 and 2016 were as follows:
During the year ended December 31, 2017, we utilized $874.1 million and repaid $912.1 million under our facilities. The facilities were primarily utilized for funding significant new business as described in Note 4 - "Significant New Business".
For the years ended December 31, 2017, 2016 and 2015, interest expense was $26.0 million, $20.3 million and $19.3 million, respectively, on our loan facilities.
This 5-year revolving credit facility, originated on September 16, 2014, and most recently amended on March 20, 2017 is among the Parent Company and certain of its subsidiaries, as borrowers and as guarantors, and various financial institutions. We are permitted to borrow up to an aggregate of $831.3 million. The individual outstanding loans under this facility are short-term loans, and the fair values of these loans approximate their book values. As of December 31, 2017, there was $607.2 million of available unutilized capacity under this facility. Subsequent to December 31, 2017, we utilized $307.4 million and repaid $132.0 million bringing the available unutilized capacity under this facility to $431.8 million.
On December 24, 2014, we entered into a four-year term loan (the "Sussex Facility", formerly called the Companion Facility) with two financial institutions. This facility was fully utilized to borrow $109.0 million to fund 50% of the consideration payable for the acquisition of Sussex, which was completed on January 27, 2015. We repaid the outstanding principal in June 2017 and terminated the facility.
On November 18, 2016, we entered into and fully utilized a three-year $75.0 million unsecured term loan (the "EGL Term Loan Facility"). During the year ended December 31, 2017, we repaid $0.9 million of the outstanding principal under this facility.
We carried the RNCI at its estimated redemption value, which is fair value, as of December 31, 2017. The increase was primarily attributable to an increase in comparable company market valuations, an increase in the net assets due to net earnings, partially offset by a reduction in net assets due to the distribution of dividends during the year ended December 31, 2017.
As of December 31, 2017, we had $9.3 million of noncontrolling interest ("NCI") primarily related to an external interest in one of our non-life run-off subsidiaries. A reconciliation of the beginning and ending carrying amount of the equity attributable to NCI is included in the Consolidated Statement of Changes in Shareholders Equity.
As at December 31, 2017 and 2016, the authorized share capital was 111,000,000 ordinary shares ("Voting Ordinary Shares") and non-voting convertible ordinary shares ("Non-Voting Ordinary Shares"), each of par value $1.00 per share, and 45,000,000 preference shares of par value $1.00 per share.
the Series A shares were issued and held in treasury, but were not outstanding. These shares were canceled in June 2016 in an internal reorganization as described below.
There is no economic difference in Series B, C or D shares, but there are slight differences in the conversion rights and the limited voting rights of each series.
there were 404,771 Series E shares issued and outstanding as of December 31, 2017. There were 714,015 Series E shares originally issued and outstanding in connection with the acquisition of StarStone. During 2015, 309,244 of the previously issued and outstanding Series E shares were converted into Voting Ordinary Shares upon market sales constituting a widely dispersed offering. The Series E shares have substantially the same rights as the Series C shares, except that (i) they are convertible only into Voting Ordinary Shares and (ii) they may only vote as required under Bermuda law. The Series E shares include all other Non-Voting Ordinary Shares authorized under our bye-laws but not classified as Series A, B, C or D Non-Voting Ordinary Shares.
As of December 31, 2017, 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. During December 2016, 164,919 Warrants were exercised on a cashless basis, resulting in the issuance of 66,520 Series C Non-Voting Ordinary Shares.
As of December 31, 2017, there were 388,571 Series C Participating Non-Voting Perpetual Preferred Stock ("Series C Preferred Shares") issued and held by one of our wholly-owned subsidiaries. The Series C Preferred Shares were issued in June 2016 in an internal reorganization transaction that resulted in the cancellation of all of the Series A Shares, which had an equivalent value and were also previously held by our wholly-owned subsidiary. The Series C Preferred Shares (i) upon liquidation, dissolution or winding up of the Company, entitle their holders to a preference over holders of our ordinary voting and non-voting shares of an amount equal to $0.001 per share with respect to surplus assets and (ii) are non-voting except in certain limited circumstances. The Series C Preferred shares have dividend rights equal to those of the ordinary voting shares, subject to certain limitations and in an amount determined by a "participation rate" that is generally reflective of the reduction in the number of Series C Preferred Shares issued in exchange for the previously outstanding Series A Shares. The Series C Preferred Shares otherwise rank on parity with the ordinary voting and non-voting shares, and they rank senior to each other class or series of share capital, unless the terms of any such class or series shall expressly provide otherwise.
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2017, 2016 and 2015:
Restricted shares and restricted share units are service awards that typically vest over three to four years. These awards are share-settled and are recorded in additional paid-in capital on the consolidated balance sheets. The fair value of these awards is measured at the grant date and expensed over the service period. The following table summarizes the activity related to restricted shares and restricted share awards during 2017:
Compensation costs of $7.3 million, $3.0 million and $6.1 million relating to these share awards were recognized in our statement of earnings for the years ended December 31, 2017, 2016 and 2015, respectively. The unrecognized compensation cost related to our non-vested share awards as at December 31, 2017 was $11.7 million. This cost is expected to be recognized over the next 1.75 years, which is the weighted average contractual life of the awards.
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. Straight-line interpolation applies within these ranges and no settlement occurs if the increase in FDBVPS is less than the Threshold.
The following table summarizes the activity related to SARs during 2017:
For the years ended December 31, 2017, 2016 and 2015, 3,852, 4,298 and 5,174 restricted share units, respectively, were credited to the accounts of non-employee directors under the Enstar Group Limited Deferred Compensation and Ordinary Share Plan for Non-Employee Directors (the "Deferred Compensation Plan"). Expense related to the restricted share units for the years ended December 31, 2017, 2016 and 2015, was $0.8 million, $0.7 million and $1.0 million, respectively.
For the years ended December 31, 2017, 2016 and 2015, compensation costs relating to the shares issued under the Amended and Restated Enstar Group Limited Employee Share Purchase Plan ("Share Plan") of $0.4 million, $0.3 million and $0.3 million, respectively, were recorded in our consolidated statement of earnings. For the years ended December 31, 2017, 2016 and 2015, 12,401, 12,234 and 11,998 shares, respectively, were issued to employees under the Share Plan.
Pension expense relating to defined contribution plans for the years ended December 31, 2017, 2016 and 2015 was $12.2 million, $10.8 million and $10.3 million, respectively. Pension expense can be affected by changes in our employee headcount as a result of our acquisitions described in Note 3 - "Acquisitions".
Our effective tax rate is generally driven by the geographical distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions. We have recorded the effects of U.S. Tax Reform in 2017, primarily related to our deferred tax asset and valuation allowance thereon, as described below.
The change in the deferred tax liability during the year ended December 31, 2017 differs from deferred tax expense for 2017 primarily due to reclassification of our deferred tax asset to other assets in relation to Alternative Minimum Tax ("AMT") recoverable as described below in relation to U.S. Tax Reform, partially offset by the adoption of ASU 2016-09 which resulted in a reduction of our deferred tax liability and an increase in retaining earnings on the consolidated statement of changes in shareholders' equity.
Net Deferred Tax Liability balance for continuing operations by major jurisdiction:
As of December 31, 2017, we had net operating loss carryforwards that could be available to offset future taxable income, as follows:
On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act resulted in a reduction of the U.S. Federal Tax rate to 21% from 35%, effective for tax years beginning after December 31, 2017. Consequently, we have recorded a $63.8 million write down of our U.S. deferred tax asset in 2017. The Tax Act also repealed the corporate AMT. Taxpayers with AMT credit carryovers in excess of their tax liability may have the credits refunded over multiple years between 2018 and 2022. As a result, we have recorded a reduction to our valuation allowance of $7.4 million and reclassified our AMT credit carryforward to other assets on our consolidated balance sheet.
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, 2017:
Through several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of our Voting Ordinary Shares (which now constitutes approximately 8.2% of our outstanding Voting Ordinary Shares). On November 6, 2013, we appointed James D. Carey to our Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC ("Stone Point"), the manager of the Trident funds.
We also have separate accounts, with a balance of $183.4 million and $215.0 million as at December 31, 2017 and 2016, respectively, managed by Eagle Point Credit Management and PRIMA Capital Advisors, which are affiliates of entities owned by Trident, with respect to which we incurred approximately $0.5 million in management fees for each of the years ended December 31, 2017 and 2016.
In addition, we are invested in two 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 director. The fair value of our investments in Sound Point Capital funds was $27.4 million and $25.4 million as of December 31, 2017 and December 31, 2016, respectively. For the years ended December 31, 2017 and 2016, we have recognized net
unrealized gains of $2.0 million and $1.9 million, respectively, in respect of investments managed by Sound Point Capital.
In connection with our investment in KaylaRe, we entered into a shareholders agreement with the other shareholders in KaylaRe, including the Trident funds and HH KaylaRe Holdings, Ltd., an affiliate of Hillhouse Capital Management (“Hillhouse”). The Shareholders Agreement (i) provides us with the right to appoint one member to the KaylaRe Board of Directors until the date that we own less than 1,250,000 common shares, (ii) includes a five year lock-up period on common shares of KaylaRe (unless KaylaRe completes an initial public offering before the expiry of this five year lock-up period) and (iii) provides customary tag-along rights and rights of first refusal in the case of certain proposed transfers by any other shareholder and customary preemptive rights in the event of a proposed new issuance of equity securities by KaylaRe. In the event that KaylaRe has not consummated an initial public offering by March 31, 2021, the Trident funds have the right to require us and Hillhouse to purchase on a pro rata basis all of their common shares in KaylaRe at the then-current fair market value.
In addition, Fitzwilliam Insurance Limited ("Fitzwilliam"), one of our non-life run-off subsidiaries, ceded $nil (2016: $177.2 million) of loss reserves to KaylaRe Ltd. during the year ended December 31, 2017, on a funds held basis. Under the terms of this reinsurance agreement, Fitzwilliam is entitled to receive a profit commission calculated with reference to reserve savings made during the currency of this agreement. During the year ended December 31, 2017, Fitzwilliam recognized $18.8 million of profit commission (2016: $7.1 million), recorded as fees and commission income.
As of December 31, 2017 and December 31, 2016, our equity method investee, KaylaRe, had investments in a fund managed by Hillhouse with a fair value of $456.7 million and $350.0 million, respectively.
As of December 31, 2017, our wholly-owned subsidiary, Cavello Bay, had transferred funds to Hillhouse of $200.0 million, which were invested on January 2, 2018. A further $50.0 million will be invested by Cavello Bay in funds managed by Hillhouse during the first quarter of 2018.
We have recorded the investment in Clear Spring using the equity method basis of accounting, pursuant to the conclusion that we are not required to consolidate following an analysis based on the guidance in ASC 810 - Consolidation. Our investment in the common shares of Clear Spring was carried at $10.6 million on the balance sheet as at December 31, 2017.
Effective January 1, 2017, StarStone National Insurance Company (“StarStone National”) entered into a Quota Share Treaty with Clear Spring pursuant to which Clear Spring reinsures 33.3% of core Workers Compensation business written by StarStone National. During the year ended December 31, 2017, StarStone National ceded $14.3 million of premium earned, $9.5 million of net incurred losses and LAE and $6.7 million of acquisition costs to Clear Spring under this quota share agreement.
As at December 31, 2017, the total amount of net assets of our consolidated subsidiaries that were restricted was $2.5 billion.
Each of our regulated Bermuda insurance and reinsurance subsidiaries would be prohibited from declaring or paying any dividends if it were in breach of its minimum solvency margin (which is a function of outstanding losses) or liquidity ratio (which is a function of relevant assets) 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 insurance and reinsurance subsidiaries is prohibited, without the prior approval of the BMA, from reducing by 15% or more its total statutory capital as set out in its previous year’s statutory financial statements. Our Bermuda insurance companies that are in run-off are required to seek regulatory approval for any dividends or distributions.
As of December 31, 2017 and 2016, 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 $1.2 billion as of December 31, 2017 (2016: $1.3 billion) and were in compliance with their liquidity requirements.
Our U.K.-based insurance subsidiaries are required to maintain adequate financial resources in accordance with the requirements of 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 at December 31, 2017 and 2016, 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 $246.6 million and $273.0 million as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, 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 StarStone resources into one agency. For the 2017 underwriting year, participation in all three syndicates has been through a common corporate member.
For all of our U.S. insurance and reinsurance subsidiaries, with the exception of one subsidiary which has a permitted accounting practice to treat an adverse development cover reinsurance agreement as prospective reinsurance, there are no prescribed or permitted statutory accounting practices that differ significantly from the statutory accounting principles established by the National Association of Insurance Commissioners ("NAIC"). The U.S. insurance and reinsurance subsidiaries are also required to maintain minimum levels of solvency and liquidity as determined by law, and to comply with risk-based capital requirements and licensing rules.
As of December 31, 2017, all of our U.S. non-life insurance and reinsurance subsidiaries exceeded their required levels of risk-based capital. On an aggregate basis, our U.S. non-life insurance and reinsurance subsidiaries exceeded their minimum levels of risk-based capital as of December 31, 2017 by $385.4 million (December 31, 2016: $402.0 million).
Our remaining regulated life subsidiary files financial statements with state insurance regulatory authorities and the NAIC in the United States. Our life company is subject to certain Risk-Based Capital ("RBC") requirements as specified by the NAIC. RBC is used to evaluate the adequacy of capital and surplus maintained by our life company in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate risk and (iv) business risk. As of December 31, 2017 and 2016, our life subsidiary exceeded their minimum RBC requirements by $7.8 million (2016: $51.6 million). This subsidiary is restricted by state laws and regulations as to the amount of dividends they may pay. Any dividends in excess of limits are deemed "extraordinary" and require approval. As of December 31, 2017 and 2016, the maximum dividend payout which may be made without prior approval is $nil (2016: $nil).
Our Swiss insurance subsidiary, Harper Insurance Limited, is regulated by the Swiss Financial Market Supervisory Authority ("FINMA") pursuant to the Insurance Supervisory Act 2004. This subsidiary is obligated to maintain a minimum solvency margin based on the Swiss Solvency Test regulations ("SST") as stipulated by the Insurance Supervisory Act. From January 1, 2016, Switzerland has been granted full Solvency II equivalence by the European Commission. As of December 31, 2017 and 2016, this subsidiary exceeded the SST requirements by $44.0 million (2016: $6.1 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 FINMA’s approval. The solvency and capital requirements must continue to be met following any distribution.
Credit risk exists in relation to our insurance and reinsurance balances recoverable. We remain liable to the extent that counterparties do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our insurers and reinsurers. Amounts recoverable from reinsurers are described Note 10 - "Reinsurance Balances Recoverable".
We are also subject to credit risk in relation to funds held by reinsured companies. Under funds held arrangements, the reinsured company has retained funds that would otherwise have been remitted to our reinsurance subsidiaries. The funds may be placed into trust or subject to other security arrangements. The funds balance is credited with investment income and losses payable are deducted. We are subject to credit risk if the reinsured company is unable to honor the value of the funds held balances, such as in the event of insolvency. However, we generally have the contractual ability to offset any shortfall in the payment of the funds held balances with amounts owed by us to the reinsured for losses payable and other amounts contractually due. We routinely monitor the creditworthiness of reinsured companies with whom we have funds held arrangements. We have a significant concentration of $1.0 billion to one reinsured company which has financial strength credit ratings of A+ from A.M. Best and AA from Standard & Poor's, as well as to KaylaRe as described in Note 21 - "Related Party Transactions".
We limit the amount of credit exposure to any one counterparty and none of our counterparty credit exposures, excluding U.S. Government instruments and the counterparties noted above, exceeded 10% of shareholders’ equity as of December 31, 2017. Our credit exposure to the U.S. government was $810.9 million as at December 31, 2017.
Rent expense for the years ended December 31, 2017, 2016 and 2015 was $9.5 million, $9.7 million and $11.1 million, respectively.
including the anticipated outcome of any pending arbitration or litigation are included in the liability for losses and LAE in our consolidated balance sheets. In addition to claims litigation, we may be subject to other lawsuits and regulatory actions in the normal course of business, which may involve, among other things, allegations of underwriting errors or omissions, employment claims or regulatory activity. We do not believe that the resolution of any currently pending legal proceedings, either individually or taken as a whole, will have a material effect on our business, results of operations or financial condition. We anticipate that, similar to the rest of the insurance and reinsurance industry, we will continue to be subject to litigation and arbitration proceedings in the ordinary course of business, including litigation generally related to the scope of coverage with respect to asbestos and environmental and other claims.
As at December 31, 2017, we had unfunded commitments to investment funds of $164.7 million.
In the second half of 2017, following the completion of the sale of our Laguna and Pavonia businesses, which significantly reduced the size of our life and annuities business, we undertook a review of our reportable segments. Following this review we determined that 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. 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, our remaining life business and other miscellaneous items. The change in reportable segments had no impact on our previously reported historical consolidated financial positions, results of operations or cash flows. These segments are described in Note 1 - "Description of Business".
Atrium and StarStone, our active underwriting operations, are reported as separate segments because they are managed and operated in separate and distinct manners. Atrium’s senior management runs its day-to-day operations with limited involvement of our senior management, whereas our senior management and employees are involved in StarStone’s day-to-day operations. 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.
The difference in the amount of equities shown at fair value and the equities shown in our consolidated balance sheet relates to the fair value of $22.1 million as of December 31, 2017 for our investment in a registered investment company affiliated with entities owned by Trident. Refer to Note 21 - "Related Party Transactions" of the notes to the consolidated financial statements.
As at December 31, 2017 and 2016, parental guarantees supporting subsidiaries' insurance obligations were $795.7 million and $625.7 million, respectively.
As of and for the years ended December 31, 2017, 2016 and 2015