The following table sets forth selected consolidated historical financial information derived from Sirius Group's (i) audited financial statements included elsewhere in this Annual Report on Form 10-K as of December 31, 2018 and 2017 and for each of the three years ended December 31, 2018, (ii) unaudited financial statements not included elsewhere in this Annual Report on Form 10-K as of December 31, 2016, 2015, and 2014 and for the years ended December 31, 2015 and 2014. You should read the following selected financial information in conjunction with the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data".
(2)As of December 31, 2018, Sirius Group had 6,088,535 warrants issued to former Easterly shareholders and 5,418,434 warrants issued to Series B preference shareholders outstanding. The Company also granted incentive compensation awards which provides for certain employees to purchase fully-vested common shares and be issued performance unit shares, which would give rise to potential additional Sirius Group shares outstanding. See Note 3 ("Significant transactions,") Note 14 ("Employee benefit plans and compensation plans") and Note 16 ("Earnings per share") to Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
(4)The acquisition expense ratio is calculated by dividing insurance and reinsurance acquisition expenses by net earned insurance and reinsurance premiums.
Sirius Group is a Bermuda exempted company whose principal businesses are conducted through its insurance and reinsurance subsidiaries and other affiliates. Sirius Group's subsidiaries, including Sirius Bermuda Insurance Company Ltd. ("Sirius Bermuda"), Sirius International Insurance Corporation ("Sirius International"), Sirius America Insurance Company ("Sirius America") and Lloyd's Syndicate 1945 ("Syndicate 1945"), provide insurance, reinsurance and insurance services on a worldwide basis. Sirius Group writes treaty and facultative reinsurance, as well as primary insurance. Sirius Group's primary insurance business has historically been predominantly accident and health insurance. In recent years, Sirius Group expanded its accident and health primary business capabilities in the U.S. via the acquisitions of International Medical Group Acquisition, Inc. ("IMG") and ArmadaCorp Capital, LLC ("Armada") in 2017. In addition to growing in accident and health insurance, Sirius Group further expanded its primary insurance platform launching its primary Surety and Environmental insurance platforms in the U.S. in late 2017. In mid-2018, Sirius Group began writing primary Casualty insurance through Pie Insurance Holdings, Inc. ("Pie Insurance"), a start-up specializing in a data driven approach to workers compensation insurance, where Sirius Group also has a minority investment and carrier relationship. In addition to these primary insurance platforms, Sirius Group re-entered the U.S. Casualty reinsurance market in early 2017.
In connection with the closing of the Merger, the Company completed a private placement of Series B preference shares, common shares, and warrants (the "Sirius Group Private Placement") at a price per share equal to (i) 1.05 multiplied by (ii) the Sirius Group September 30 Adjusted DBVPS, or $17.22447. Investors in the Sirius Group Private Placement included affiliated funds of Gallatin Point Capital, The Carlyle Group, Centerbridge Partners, L.P. and Bain Capital Credit, together with certain employees, directors and "friends & family". The Sirius Group Private Placement raised proceeds of $226 million, resulting in the purchase of:
In connection with the Merger, Sirius Group implemented the Employee Share Purchase Plan ("ESPP"), which provided all employees of Sirius Group with a one-time opportunity to purchase between 100 and 1,000 Company common shares at a price equal to 85% of market value for the first 100 shares and 100% of market value for the next 900 shares. For this purpose, market value of the Company common shares was equal to 1.05 times the Sirius Group September 30 Adjusted DBVPS. Employees had the option of paying for the shares upfront or, in the case of employees who are not executive officers, through a loan that is repaid over a two-year period through payroll deductions. Through the ESPP, 405 employees purchased 149,236 Company common shares prior to the consummation of the Merger, with a cost basis of $3 million.
Sirius Group incurred certain contractual costs associated with the Merger of $9 million and $7 million of various legal, advisory, and other consulting costs for the Merger and the Private Placement that were charged to Additional paid-in surplus.
Sirius Group had a commitment to purchase approximately 46.24% of the shares of The Phoenix Holdings Ltd. ("The Phoenix") from Delek Group for a sum of New Israeli Shekel ("NIS") 2.3 billion in cash (or $663 million using the December 31, 2017 NIS to USD conversion rate), subject to certain adjustments for interest and earnings. The commitment terminated on July 2, 2018.
• Runoff & Other-The Runoff & Other segment consists of asbestos risks, environmental risks, and other long-tailed liability exposures, in addition to results from Sirius Global Solutions Holding Company ("Sirius Global Solutions"), which specializes in the acquisition and management of runoff liabilities for insurance and reinsurance companies, both in the U.S. and internationally.
The global insurance and reinsurance marketplace is highly competitive and cyclical, which is most evident in property catastrophe excess due to the recent influx of capital into the industry. This trend is in large part due to the persistently low global interest rate environment which has led to alternative sources of capital entering the industry through insurance-linked financial instruments, which have provided attractive yields and diversification relative to existing portfolios. In addition, there has been a trend towards increased ceding commissions on assumed proportional reinsurance. These trends have led to consistently decreasing underwriting margins for several years, with the impact varying by product and market.
Recent activity in London surrounding Lloyd's has indicated a potential shift in the market. Lloyd's has remained a household name in the insurance market for centuries, but many involved with Lloyd's today are now evaluating the costs and benefits of conducting business in the market. Lloyd's management has acknowledged that costs and an increased regulatory environment have impacted the Lloyd's market, and that changes will likely occur in both the short-term and long-term to address these recent developments.
Sirius Group's combined ratio was 103% for the year ended December 31, 2018 compared to 108% for the year ended December 31, 2017. The decrease in the combined ratio was driven by lower catastrophe losses, partially offset by higher current accident year losses in the Global Property and Specialty & Casualty segments. Sirius Group's 2018 combined ratio included 15 points of catastrophe losses, net of reinsurance and reinstatement premiums, compared to 25 points for 2017. The combined ratio in 2018 was impacted by 1 point of net favorable prior year loss development compared to no benefit in 2017.
Sirius Group's combined ratio was 108% for 2017 compared to 94% for 2016. The increase in the combined ratio was driven by higher catastrophe losses and lower net favorable prior year loss reserve development. Sirius Group's combined ratio included 25 points of catastrophe losses for 2017 compared to 12 points for 2016 and included no combined ratio benefit from net favorable prior year loss reserve development in 2017 compared to 7 points in 2016.
Sirius Group ended 2017 with Adjusted book value per share of $15.98 compared to Adjusted book value per common share of $16.57 as of December 31, 2016, a decrease of 3.6% due to the comprehensive (loss) recognized.
See "Non-GAAP Financial Measures" for a reconciliation of Adjusted book value and Adjusted book value per share to the comparable GAAP measures.
For the year ended December 31, 2017, Operating (loss) attributable to common shareholders was $(128) million compared to $(8) million for 2016, driven by higher catastrophe losses.
(1)The loss ratio is calculated by dividing loss and LAE expenses by net earned insurance and reinsurance premiums.
(2)The acquisition expense ratio is calculated by dividing insurance and reinsurance acquisition expenses by net earned insurance and reinsurance premiums.
(5)Return on equity is calculated by dividing Net (loss) income attributable to Sirius Group's common shareholders for the period by the beginning common shareholders' equity.
(6)Operating (loss) attributable to common shareholders is a non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation of Operating (loss) attributable to common shareholders to the comparable GAAP measure.
(1)Adjusted book value and Adjusted book value per share are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of Adjusted book value and Adjusted book value per share to the comparable GAAP measures.
Gross written premiums - Gross written premiums in 2018 was $1,821 million, an increase of $382 million or 27% compared to gross written premiums of $1,439 million in 2017, with Specialty & Casualty up 49% and Global Property up 31%. See "Results of reportable segments" below.
Net written premiums - Net written premiums in 2018 was $1,357 million, an increase of $267 million or 24% compared to net written premiums of $1,090 million in 2017, with Specialty & Casualty up 52%, Global Property up 18% and Global A&H up 11%. See "Results of reportable segments" below.
Net investment income, Net realized investment gains (losses), Net unrealized investment gains (losses) and Net foreign exchange gains (losses) - Net investment income increased 25% to $71 million in 2018 from $57 million in 2017 due to a higher interest rate environment and increased dividend income. Sirius Group reported net realized investment gains of $2 million in 2018, which included $17 million of net realized foreign currency gains, compared to net realized investment (losses) of $(27) million in 2017, which included $(19) million of net realized foreign currency (losses). Net unrealized investment (losses) were $(23) million in 2018, which included $36 million of net unrealized foreign currency gains, compared to net unrealized investment (losses) of $(11) million in 2017, which included $(52) million of net unrealized foreign currency (losses). See "Summary of investment results" below. Additionally, Sirius Group recorded $23 million of non-investment related foreign exchange gains in 2018 compared to $9 million of non-investment related foreign exchange gains in 2017. Included in the 2018 amount is $28 million of favorable currency movement compared to $11 million of favorable foreign currency movement in 2017 on the SEK Subordinated Notes, which were issued in September 2017. See "Foreign currency translation" below.
Gain on revaluation of contingent consideration - Gain on revaluation of contingent consideration decreased to $10 million in 2018 from $49 million in 2017. In 2018, the gain on the revaluation of contingent consideration related to the remeasurement of the IMG and Armada Earnouts, whereas in 2017, the gain was mainly due to the settlement and remeasurement of the Armada Earnout.
Other revenue - Other revenue increased to $113 million in 2018 from $22 million in 2017. The increase in other revenue was primarily attributable to management's estimate of a right of indemnification against a third party in connection with an uncertain tax position and an increase in service fee revenue in Global A&H recognized by IMG and Armada, which were both acquired in the second quarter of 2017.
Insurance and reinsurance acquisition expenses - Insurance and reinsurance acquisition expenses increased 29% to $255 million in 2018 from $197 million in 2017, primarily due to an increase in net earned insurance and reinsurance premiums and higher acquisition expenses for Global Property, Global A&H and Specialty & Casualty, primarily due to business mix. See "Results of Reportable Segments" below.
Other underwriting expenses - Other underwriting expenses increased 38% to $146 million in 2018 from $106 million in 2017 due to increases in Specialty & Casualty, Global A&H, Global Property, and Runoff & Other. The increase in Specialty & Casualty was due to the new initiatives in Casualty, Surety and Environmental. The increase in Global A&H was due to the $16 million of operating expense for the MGUs, which are included in other underwriting expenses following their integration into the Accident and Health insurance and reinsurance underwriting unit starting in 2018. See "Results of reportable segments" below.
Net written premiums - Net written premiums in 2017 was $1,090 million, an increase of $152 million or 16% compared to net written premiums of $938 million in 2016, with Specialty & Casualty up 41%, Global A&H up 23% and Global Property up 8%. See "Results of reportable segments" below.
Net earned insurance and reinsurance premiums - Net earned insurance and reinsurance premiums in 2017 was $1,035 million, an increase of $145 million or 16% compared to net earned insurance and reinsurance premiums of $890 million in 2016, with Specialty & Casualty up 21%, Global Property up 17%, and Global A&H up 13%. See "Results of reportable segments" below.
Gain on revaluation of contingent consideration - 2017 results include a $49 million gain on revaluation of contingent consideration related to the IMG and Armada Earnouts, mainly due to the settlement and remeasurement of the Armada Earnout. See Note 3 "Significant transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K.
Other revenue - Other revenue in 2017 of $22 million consisted primarily of service fee revenue from IMG and Armada. Other revenue in 2016 included a $5 million gain on the change in fair value of weather derivatives, a $2 million bargain gain on the acquisition of Mount Beacon Holdings, LLC ("Mount Beacon") and a $2 million gain on the sale of Ashmere Insurance Company ("Ashmere"). See Note 3 "Significant transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K.
Impairment of intangible assets - Sirius Group recognized an impairment of $5 million related to trade names acquired as part of the acquisition of IMG. See Note 3 "Significant transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K.
Sirius Group maintains an equity portfolio that consists of equity securities, and other long-term investments, including hedge funds, private equity funds and direct investments in privately held common equity securities investments. From time to time, Sirius may also invest in exchange-traded funds ("ETFs") and mutual funds. For return purposes, investments in fixed-income ETFs and mutual funds are included in the fixed income results and excluded from equity portfolio results. Returns exclude the impact of third-party currency forwards and/or swaps.
(1)Includes foreign exchange gains (losses) for the years ended December 31, 2018, 2017, and 2016 of $53.0 million, $(70.8) million and $42.3 million, respectively.
(2)Relates primarily to Sirius Group's equity method investment in OneBeacon Insurance Group, Ltd. Refer to Note 19 "Investments in unconsolidated entities" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K.
Net investment income was $15 million higher in 2018 versus 2017 due to the higher interest rate in environment in 2018 and increased dividend income.
As of December 31, 2018, the fixed income portfolio duration was approximately 1.7 years compared to 2.0 years as of December 31, 2017. The average credit quality of the fixed income portfolio, including short-term investments, was AA at December 31, 2018 and 2017. As of December 31, 2018 and 2017, Sirius Group held $361 million and $399 million, respectively, of non-U.S. denominated fixed income securities.
The fixed income portfolio return in 2018 was 0.4% on a U.S. dollar basis and 1.5% in original currencies. Our U.S. portfolio returned 1.5% versus the Barclays, 1-3 Year Aggregate ("BarcAg 1-3") of 1.6%. Our non-U.S. portfolio gained 1.3% in original currencies, which compares to the OMX Stockholm OMRX Total Return Bond Index ("OMRX") of 1.0%. This was driven by a strong performance of our Canadian dollar and SEK-denominated fixed income holdings.
As of December 31, 2017, the fixed income portfolio duration was approximately 2.0 years compared to 3.0 years as of December 31, 2016. The reduction of duration was made to better position the portfolio against market losses arising from a rising rate environment. The average credit quality of the fixed income portfolio was AA as of December 31, 2017 and AA- as of December 31, 2016. The one-notch credit reduction was a result of incidental shifts in the portfolio mix rather than a change in investment strategy.
The Company benefited in 2017 versus 2016 from its continued, albeit modest, deployment into equity and alternative investment strategies. For 2017, the equity portfolio returned 16.8% on a U.S. dollar basis and 13.8% in local currencies. The S&P 500 returned 21.8% for the same period. At December 31, 2017, the equity and other long-term investments portfolio included $290 million of U.S. dollar and $176 million of non-U.S. dollar denominated securities. For 2016, the Sirius Group equity portfolio returned 11.5% on a U.S. dollar basis and 11.7% in local currencies for the same period. The S&P 500 returned 12.0% for the same period.
The U.S. dollar is the functional currency for Sirius Group's businesses except for Sirius International, Syndicate 1945, several subsidiaries of IMG, and the Canadian reinsurance operations of Sirius America. Sirius Group also invests in securities denominated in foreign currencies. Assets and liabilities recorded in these foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are converted using the average exchange rates for the period. Net foreign exchange gains and losses arising from the translation of functional currencies into U.S. dollars are reported in shareholders' equity and in Accumulated other comprehensive (loss). As of December 31, 2018 and 2017, Sirius Group had net unrealized foreign currency translation (losses) of $(202) million and $(141) million, respectively, recorded in Accumulated other comprehensive (loss) on its Consolidated Balance Sheets.
Assets and liabilities relating to foreign operations are remeasured into the functional currency using current exchange rates; revenues and expenses are remeasured into the functional currency using the weighted average exchange rate for the period. The resulting exchange gains and losses are reported as a component of net income in the period in which they arise within Net realized investment gains (losses), Net unrealized investment (losses), and Net foreign exchange gains (losses).
The following rates of exchange for the U.S. dollar have been used for translation of assets and liabilities whose functional currency is not the U.S. dollar as of December 31, 2018 and 2017:
Sirius International holds a large portfolio of investments that are denominated in U.S. dollars, but its functional currency is the SEK. When Sirius International prepares its stand-alone GAAP financial statements, it remeasures its U.S. dollar-denominated investments to SEK and recognizes the related foreign currency remeasurement gains or losses through pre-tax income. When Sirius Group consolidates Sirius International, it translates Sirius International's stand-alone GAAP financial statements to U.S. dollars and recognizes the related foreign currency translation gains or losses through other comprehensive income (loss). Since Sirius Group reports its financial statements in U.S. dollars, there is no net effect to book value per common share or to investment returns from foreign currency translation on its U.S. dollar-denominated investments at Sirius International. However, net realized and unrealized investment gains (losses), other revenues, net income (loss), earnings per share and other comprehensive income (loss) can be significantly affected during periods of high volatility in the foreign exchange rate between the U.S. dollar and other currencies, especially the SEK.
(3)Component of Net foreign exchange gains (losses) on the Consolidated Statements of (Loss) Income
As of December 31, 2018 the following currencies represented the largest exposure to foreign currency risk as a percentage of Sirius Group's shareholders' equity: the SEK 13% (short) and the Israeli shekel 4% (long). As of December 31, 2017, the following currencies represented the largest exposure to foreign currency risk as a percentage of Sirius Group's shareholder's equity: the SEK 9% (short) and the Israeli shekel 4% (long).
Set forth below is the carrying value of our investment holdings in U.S. dollars and foreign currencies as of December 31, 2018 and 2017:
During 2018, the U.S. dollar strengthened 9% against the SEK, 6% against the GBP and 5% against the EUR. These foreign currency movements resulted in approximately $44 million of foreign currency investment losses, which are recorded as a component of net realized and unrealized investment gains or losses recognized in pre-tax income and change in foreign currency translation on investments recognized in other comprehensive income. During 2017, the U.S. dollar weakened 9% against the SEK, 8% against the GBP and 12% against the EUR. These foreign currency movements resulted in approximately $16 million of foreign currency investment gains, which are recorded as a component of net realized and unrealized investment gains or losses recognized in pre-tax income and change in foreign currency translation on investments recognized in other comprehensive income.
Global Property recorded an underwriting (loss) of ($82) million and $(124) million in 2018 and 2017, respectively. The 2018 results included catastrophe losses of $192 million (30 points), net of reinsurance and reinstatement premiums, from Typhoon Jebi ($91 million), Hurricane Michael ($36 million), California Wildfires ($12 million), Typhoon Trami ($9 million), and other catastrophe events. The 2017 results included catastrophe losses of $245 million (43 points), net of reinsurance and reinstatement premiums, from Hurricane Maria ($76 million), Hurricane Irma ($75 million), Hurricane Harvey ($42 million) and other catastrophe events. Net unfavorable prior year loss reserve development was $44 million (7 points) in 2018 compared to $2 million of net unfavorable prior year loss reserve development (less than 1 point) in 2017. In 2018, unfavorable prior year loss reserve development was recorded in Other Property ($35 million) and Property Catastrophe Excess ($13 million), resulting from higher than expected loss reporting from recent accident years, including $21 million from Hurricanes Harvey, Irma, and Maria. In 2017, unfavorable prior year loss reserve development in Other Property ($18 million) was partially offset by $14 million of favorable prior year loss reserve development for Property Catastrophe Excess.
Global Property produced a combined ratio of 122% for 2017 compared to 90% in 2016. The increase in the combined ratio was driven by higher catastrophe losses and a higher frequency of non-catastrophe property losses.
Global Property recorded an underwriting (loss) of $(124) million in 2017 compared to $48 million of underwriting income for 2016. The 2017 results included $245 million (43 points) of catastrophe losses, net of reinsurance and reinstatement premiums, from Hurricane Maria ($76 million), Hurricane Irma ($75 million), Hurricane Harvey ($42 million), California Wildfires ($21 million), Mexico Earthquakes ($13 million) and other catastrophe events. This was an increase of $139 million from 2016. Net unfavorable prior year loss reserve development was $2 million (less than 1 point) in 2017 compared to $27 million of net favorable prior year loss reserve development (6 points) in 2016. Unfavorable prior year loss reserve development in Other Property ($18 million) was partially offset by $14 million of favorable prior year loss reserve development for Property Catastrophe Excess in 2017.
Global Property's gross written premiums increased 15% to $732 million in 2017 from $635 million in 2016, due to increased treaty participations.
Net earned insurance and reinsurance premiums increased 13% to $636 million in 2018 from $564 million in 2017 for Other Property and Property Catastrophe Excess due to favorable rate changes and new opportunities. The Other Property fronting arrangement did not significantly impact Global Property's net earned insurance and reinsurance premiums for either the 2018 or 2017 periods.
Gross written premiums increased 1% to $501 million in 2018 from $495 million in 2017 while net written premiums increased 11% to $380 million in 2018 from $342 million in 2017 due to retaining A&H business previously ceded to a subsidiary of IMG, which was acquired by Sirius Group in May 2017.
Gross written premiums increased 13% to $495 million in 2017 from $436 million in 2016, while net written premiums increased 23% to $342 million in 2017 from $278 million in 2016, due to increased primary insurance writings. Increased net earned insurance and reinsurance premiums (13%) and an improved combined ratio (driven by lower incurred losses) resulted in an underwriting income of $14 million in 2017 compared to $6 million in 2016.
Global A&H produced a combined ratio of 95% for 2017 compared to 98% in 2016. The decrease in the combined ratio was driven by lower current accident year loss ratios due to the non-renewal of certain underperforming accounts.
Underwriting income, which includes net service fee income, for Global A&H was $35 million in 2017, an increase of $29 million over 2016, driven by increased net earned insurance and reinsurance premiums, improved underwriting results, and the acquisition of IMG and Armada, which contributed additional net service fee income. IMG and Armada produced $21 million of net service fee income, which included service fee revenue of $66 million, net of $45 million of general and administrative expenses.
Specialty & Casualty consists of Sirius Group's insurance and reinsurance underwriting units which, offer Specialty & Casualty product lines on a worldwide basis.
Gross written premiums increased 49% to $325 million in 2018 from $218 million in 2017, due mainly to new initiatives in Casualty ($98 million), Environmental ($10 million) and Surety ($7 million), offset by a decrease in Marine ($21 million). Net written premiums increased 52% to $293 million in 2018 from $193 million in 2017, due to the same lines of business as the gross written premiums increase. The decrease in Marine was due to the decision not to renew the book written in Sirius International's London office due to underwriting performance.
Specialty & Casualty produced a net combined ratio of 101% in 2018 compared to 100% in 2017. The lower net combined ratio was due to a lower Loss ratio driven by lower catastrophe losses and increased favorable prior year loss reserve development, partially offset by higher current year losses in Aviation & Space and a higher Other underwriting expense ratio caused by the primary Surety and Environmental specialty lines, which were newly launched in late 2017.
Specialty & Casualty recorded underwriting income of $1 million in 2017 compared to underwriting income of $7 million in 2016. 2017 results included $14 million (9 points) of catastrophe losses, net of reinsurance and reinstatement premiums, mainly due to Hurricanes Irma, Maria, and Harvey (primarily in Marine) as compared to $3 million (2 points) of catastrophe losses in 2016, net of reinsurance and reinstatement premiums. Specialty & Casualty recorded $12 million (7 points) of favorable prior year loss reserve development in 2017, primarily in Marine ($5 million) and Trade Credit ($4 million) compared to $25 million (18 points) of favorable prior year loss reserve development in 2016, primarily from Aviation & Space ($12 million) and Marine ($7 million).
Specialty & Casualty gross written premiums increased 27% to $218 million in 2017 from $171 million in 2016, primarily a result of re-entering the U.S. casualty reinsurance market in 2017.
Net earned insurance and reinsurance premiums increased 47% to $240 million in 2018 from $163 million in 2017. Casualty ($66 million) and Trade Credit ($10 million) were the main drivers of the increase from the prior year.
Runoff & Other recorded $33 million of gross written premiums in 2018 compared to $(6) million of gross written premiums in 2017. Gross written premiums in 2018 related primarily to premiums from two loss portfolio transfers and a quota share. The negative gross written premiums in 2017 related to the cancellation of Mount Beacon Insurance Company's ("Mount Beacon Insurance") inforce business per a consent order approved by the Florida Office of Insurance Regulation. This cancellation did not impact net earned insurance and reinsurance premiums.
Runoff & Other recorded underwriting income (loss), net of service fee income, of $2 million and $(17) million for 2018 and 2017, respectively. In 2018, Runoff & Other recorded $18 million of net favorable prior year loss reserve development compared to $13 million of net unfavorable prior year loss reserve development in 2017. The net favorable prior year loss reserve development for Runoff & Other in 2018 included reductions in World Trade Center claims in response to revised information received by the Company and runoff Casualty reserves. In 2017, the Company increased its asbestos reserves by $59 million, which was offset by reductions of other runoff claims reserves of $46 million. The 2017 asbestos incurred losses were primarily a result of an in-depth analysis of Sirius Group's loss reserves in 2017. The asbestos study was initiated in response to increased estimates of industry asbestos losses promulgated by leading financial analysts. External asbestos experts were engaged by Sirius Group to assist with the actuarial and claims review of asbestos exposures within Sirius Group. Management booked the highest central estimate of the internal and external indications resulting from the in-depth study. See "Summary of Critical Accounting Estimates" below.
Runoff & Other recorded $13 million of net unfavorable prior year loss reserve development in 2017. During 2017, Sirius Group strengthened its asbestos loss reserves by $59 million, which was offset by reductions of other runoff loss reserves of $46 million, as discussed above.
In presenting Sirius Group's results, management has included and discussed the following non-GAAP financial measures: Adjusted book value, Adjusted book value per share and Operating (loss) attributable to common shareholders. The Company believes that these non-GAAP financial measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of the Company's results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission.
Total shares outstanding is derived by summing common shares and Series B preference shares outstanding. Adjusted book value is derived by summing common shareholders' equity and the Series B preference share amount reflected in mezzanine equity. Outstanding warrants are excluded as they are anti-dilutive. Adjusted book value per share is derived by dividing the Adjusted book value by the total shares outstanding. The reconciliation to total common shareholders' equity and book value per common share, the most directly comparable GAAP measures, are presented in the table below.
Sirius Group's top tier regulated insurance and reinsurance operating subsidiary is Sirius Bermuda. Sirius Bermuda's ability to pay dividends is limited under Bermuda law and regulations. Under the Insurance Act, Sirius Bermuda is restricted with respect to the payment of dividends. Sirius Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet) unless it files, at least seven days before payment of such dividends, with the BMA an affidavit stating that it will continue to meet the required margins following the declaration of those dividends. Accordingly, Sirius Bermuda can pay approximately $539 million to its parent company, Sirius International Group, Ltd., during 2019 without providing an affidavit to the BMA. Sirius Bermuda indirectly owns Sirius International Insurance Corporation, Sirius America Insurance Company and Sirius Group's other insurance and reinsurance operating companies, each of which are limited in their ability to pay dividends by the insurance laws of their relevant jurisdictions.
Under the normal course of business, Sirius America has the ability to pay dividends to its immediate parent during any twelve-month period without the prior approval of regulatory authorities in an amount set by a formula based on the lesser of net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus and subject to dividends paid in prior periods. Based on this formula, Sirius America does not have any dividend capacity as of December 31, 2018, without prior regulatory approval. As of December 31, 2018, Sirius America had $522 million of statutory surplus and $108 million of earned surplus. During 2018, Sirius America did not pay any dividends to its immediate parent.
There is a capital maintenance agreement between Sirius International and Sirius America, which obligates Sirius International to make contributions to Sirius America's surplus in order for Sirius America to maintain surplus equal to at least 125% of the company action level risk-based capital as defined in the NAIC's Property/Casualty Risk-Based Capital Report. The agreement provides for a maximum contribution to Sirius America of $200 million. During 2018, Sirius International did not make any contributions to the surplus of Sirius America. In 2017, Sirius International provided Sirius America with an accident year stop-loss cover, with an attachment point in excess of 83% and a limit of $27.0 million. This accident year stop-loss reinsurance was not renewed in 2018. In addition, at November 1, 2016, Sirius America and Sirius International entered into a quota share agreement whereby Sirius America ceded Sirius International 75% of its reinsurance business on an accident year basis. This quota share agreement was in force through March 31, 2018. In the third quarter of 2018, Sirius America entered into a commutation agreement with Sirius International and commuted all outstanding balances related to the accident year stop-loss and the 75% quota share. For 2018 and 2017, Sirius America ceded $9 million and $115 million, respectively, of premiums earned to Sirius International under this quota share agreement.
Pursuant to tax legislation enacted in Sweden in June 2018, the tax rate applicable to Swedish corporations will be reduced from 22.0% to 21.4% starting in 2019, and then to 20.6% starting in 2021. The enacted legislation also included a new provision treating an amount equal to 6% of the Safety Reserve balance as of January 1, 2021, as taxable income subject to tax at the applicable 20.6% rate. Based on this new provision, Sirius International's positive effect of the decreased tax rate on the deferred tax liability is offset by an additional deferred tax liability in the amount of $15 million as of December 31, 2018. Accordingly, for 2018, the deferred tax liability on Sirius International's Safety Reserve decreased to $261 million.
Certain operational leverage metrics can be measured with ratios that are calculated using insurance float. There are many activities that do not change the amount of insurance float at an insurance or reinsurance company but can have a significant impact on Sirius Group's operational leverage metrics. For example, investment gains and losses, foreign currency translation gains and losses, debt issuances and repurchases/repayments, common and preference share issuances and repurchases and dividends paid to shareholders are all activities that do not change insurance float but can meaningfully impact operational leverage metrics that are calculated using insurance float. During 2018, insurance float increased by $172 million due to higher premium volume and major catastrophe losses recorded in 2018, primarily from Typhoon Jebi and Hurricane Michael. These catastrophe losses increase Sirius Group's insurance float when they are first recorded but will decrease insurance float as the catastrophe losses are paid or reserves reduced.
Sirius Group incurred $5 million in expenses related to the issuance of the 2017 SEK Subordinated Notes (including SEK 27.5 million, or $4 million, in underwriting fees), which have been deferred and are being recognized into interest expense over the life of the 2017 SEK Subordinated Notes.
A portion of the proceeds were used to fully redeem the outstanding $250 million Sirius International Group, Ltd. ("SIG") Preference Shares ("SIG Preference Shares"), see Note 15 "Common shareholder's equity, mezzanine equity, and non-controlling interests" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for further details and discussion with respect to the SIG Preference Shares redemption. Taking into effect the amortization of all underwriting and issuance expenses, and applicable STIBOR, the 2017 SEK Subordinated Notes yield an effective rate of approximately 3.8% and 3.5% for the years ended December 31, 2018 and 2017, respectively. Sirius Group recorded $12 million and $3 million of interest expense, inclusive of amortization of issuance costs, on the 2017 SEK Subordinated Notes for 2018 and 2017, respectively.
In May 2017, Sirius Group issued Series A redeemable preference shares, with 150,000 shares authorized and 100,000 issued at the issuance date, with liquidation preference of $1,000 per preference share. The Series A redeemable preference shares participated in dividends on an as-converted basis with common shares. In connection with the Merger, the Company, IMGAH and Sirius Acquisitions Holding Company II completed the transactions contemplated by its previously announced Redemption Agreement and the Company redeemed all of the outstanding Series A redeemable preference shares, which were held by IMGAH, for $95 million in cash. In addition, the parties agreed that any remaining contingent consideration in respect of the IMG acquisition, will be paid in cash, not in Series A redeemable preference shares as previously contemplated in the agreement in respect of the IMG acquisition.
In February 2018, Sirius Group, through its indirectly wholly-owned subsidiary Sirius International Group, Ltd., entered into a three-year, $300 million senior unsecured revolving credit facility (the "Facility"). The Facility provides access to loans for working capital and general corporate purposes, and letters of credit to support obligations under insurance and reinsurance agreements and retrocessional agreements. The Facility is subject to various affirmative, negative and financial covenants that Sirius Group considers to be customary for such borrowings, including certain minimum net worth, maximum debt to capitalization and financial strength rating standards. As of December 31, 2018, there were no outstanding borrowings under the Facility.
As of December 31, 2018, Sirius Group was in compliance with all of the covenants under the 2017 SEK Subordinated Notes, the 2016 SIG Senior Notes, the Nordea Bank Finland Abp, London Branch facility, and the DNB Bank ASA, Sweden Branch facility. In addition, as of December 31, 2018, Sirius Group was in compliance with all of the covenants under the Facility.
Below is a schedule of Sirius Group's material contractual obligations and commitments as of December 31, 2018:
(2) We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts we write. Such loss payments represent our most significant future payment obligation. The total amount in the table above reflects our best estimate of our reserve for losses and loss expenses, refer to "Critical Accounting Estimates - Loss and LAE Reserves" for further details. The timing of claim payments is subject to significant uncertainty. Sirius Group maintains a portfolio of marketable investments with varying maturities and a substantial amount of short-term investments to provide adequate liquidity for the payment of claims. We have not taken into account corresponding reinsurance recoverable amounts that would be due to us.
(3) Sirius Group grants incentive awards to certain key employees of Sirius Group and its subsidiaries. This includes awards that primarily consist of performance units. Awards earned are subject to the attainment of pre-specified performance goals at the end of a three-year period or as otherwise determined. Refer to Note 14 "Employee benefit plans and compensation plans" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for further details and discussion on the incentive plan obligation.
(6) Letters of credit outstanding, the IMG Earnout, and the Armada Earnout are excluded from the table above.
(7) Sirius Group has future binding commitments to fund certain other long-term investments. These commitments totaled $82 million at December 31, 2018. These commitments do not have fixed funding dates. Therefore, these commitments are excluded from the table above.
(8) Starting in 2018, the Company has issued equity incentives for certain employees and other non-employee independent directors under the 2018 Omnibus Plan. Obligations arising from these incentives are excluded from the table above. Refer to Note 14 "Employee benefit plans and compensation plans" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for further details and discussion on the incentive plan obligation.
The following table summarizes our consolidated cash flows from operating, investing and financing activities for 2018, 2017, and 2016.
(1) Refer to the Consolidated Statements of Cash Flows in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for further details and discussion on the debt and financing arrangements of Sirius Group.
Net cash provided from (used for) operations was $108 million, $(36) million and $(47) million for the years ended 2018, 2017, and 2016, respectively. Cash flows from operations increased $144 million in 2018 compared to 2017 primarily due to higher amounts of net premiums collected, partially offset by higher net paid losses and acquisition costs. Cash flows from operations increased $11 million in 2017 compared to 2016 due to higher amounts of net premiums collected, partially offset by higher net paid losses. Sirius Group does not believe the trends in 2017 and 2016 will have a meaningful impact on its future liquidity or its ability to meet its future cash requirements.
During 2017, Sirius Group made retention related bonus payments totaling $31 million to management and employees as a result of the acquisition by CMIG International. During 2016, Sirius Group made transaction related bonus payments totaling $37 million primarily to management and employees as a result of the CMIG International acquisition. The transaction and retention related bonus payments were reimbursed by White Mountains to Sirius Group in 2017 and 2016, respectively, as stipulated in the stock purchase agreement between CMIG International and White Mountains.
Cash flows from investing and financing activities for the years ended December 31, 2018, 2017, and 2016
Cash flows (used for) provided from investing activities were $(190) million, $66 million and $19 million for the years ended December 31, 2018, 2017, and 2016, respectively. From 2017 to 2018, cash flows (used for) provided from investing decreased $256 million as result of Sirius Group's reduction in fixed maturity duration securities to better position the portfolio for a rising interest rate environment and the deployment of cash flow from operations into the overall investment strategy. From 2016 to 2017, cash flows from investing activities increased by $47 million, as a result of Sirius Group's reduction in fixed-maturity duration securities to better position the portfolio for a rising interest rate environment.
Cash flows (used for) provided from financing activities were $(7) million, $54 million and $31 million for 2018, 2017, and 2016, respectively. Cash flows (used for) provided from financing activities decreased by $60 million primarily as a result of the CM Bermuda common shares redemption and the Series A redeemable preference shares redemption which more than offset the gross proceeds of the Sirius Group Private Placement and the Easterly Trust Account assumed upon the closing of the Merger. Cash flows provided from financing activities increased by $23 million from 2016 to 2017 primarily as a result of the 2017 SEK Subordinated Notes issuance that occurred in September 2017.
On November 5, 2018, the Company completed the Merger and the Sirius Group Private Placement. Gross proceeds of the Sirius Group Private Placement, together with cash in the Easterly Trust Account assumed by Sirius Group upon the closing of the Merger, aggregated to $268 million. See Note 3 "Significant Transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for a more detailed discussion.
In connection with the Merger, Sirius Group implemented the Employee Share Purchase Plan ("ESPP"), which provided all employees of Sirius Group with a one-time opportunity to purchase between 100 and 1,000 Company common shares at a price equal to 85% of market value for the first 100 shares and 100% of market value for the next 900 shares. Gross proceeds of the ESSP amounted to $3 million. See Note 3 "Significant Transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for a more detailed discussion.
During 2018, Sirius Group paid $18 million of interest on the 2016 SIG Senior Notes and $12 million of interest on the 2017 SEK Subordinated Notes.
During 2018, as stipulated in the stock purchase agreement between CMIG International and White Mountains, White Mountains paid Sirius Group $1 million for certain long-term incentive payments that Sirius Group paid to its employees.
On August 16, 2018, Sirius Group purchased 100% of WRM America for $17 million. See Note 3 "Significant Transactions" in Sirius Group's audited financial statements included elsewhere in this Annual Report on Form 10-K for a more detailed discussion,
On April 25, 2017, Sirius Group made a payment of $4 million to retire the note that was issued as part of the acquisition of the runoff loss reserve portfolio of Old Lyme Insurance Company Ltd.
During 2017, Sirius Group paid $14 million of dividends on the SIG Preference Shares and $18 million of interest on the 2016 Senior Notes, $3 million of interest on the 2017 SEK Subordinated Notes, and $1 million of interest on the Old Lyme Note.
During 2017, as stipulated in the stock purchase agreement between CMIG International and White Mountains, White Mountains paid Sirius Group $3 million for certain long-term incentive payments that Sirius Group paid to its employees.
On May 26, 2017, Sirius Group purchased 100% ownership of IMG and its subsidiaries. Included in the total consideration was $251 million of cash.
Cash flows from investing and financing activities for the years ended December 31, 2016
During 2016, Sirius Group retired the $400.0 million face value of 2007 SIG Senior Notes using the funds received from the issuance of the 2016 SIG Senior Notes and paid a prepayment penalty of $6 million.
During 2016, Sirius Group paid $19 million of dividends on the SIG Preference Shares and $32 million of interest on the 2007 SIG Senior Notes.
During 2016, as stipulated in the stock purchase agreement between CMIG International and White Mountains, White Mountains paid Sirius Group $17 million, representing the after-tax cost of industry loss warrants that White Mountains required Sirius Group to purchase to mitigate the potential impact of major natural catastrophe events on Sirius Group's balance sheet pending the close of the sale to CMIG International.
On February 1, 2016, in conjunction with the sale of Symetra from White Mountains to Sumitomo Life Insurance Company, Sirius Group sold its investment in Symetra and received proceeds of $560 million.
During 2016, Sirius Global Solutions completed the sale of Ashmere in connection with the sale of Sirius Group to CMIG International and received proceeds of $19 million.
Sirius Group establishes loss and LAE reserves that are estimates of future amounts needed to pay claims and related expenses for events that have already occurred. Sirius Group also obtains reinsurance whereby another reinsurer contractually agrees to indemnify Sirius Group for all or a portion of the reinsurance risks underwritten by Sirius Group. Such arrangements, where one reinsurer provides reinsurance to another reinsurer, are usually referred to as "retrocessional reinsurance" arrangements. Sirius Group establishes estimates of amounts recoverable from retrocessional reinsurance in a manner consistent with the loss and LAE liability associated with reinsurance contracts offered to its customers (the "ceding companies"), net of an allowance for uncollectible amounts. Net reinsurance loss reserves represent loss and LAE reserves reduced by retrocessional reinsurance recoverable on unpaid losses. In addition to those risk factors which give rise to inherent uncertainties in establishing insurance loss and LAE reserves, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to: (1) the claim-tail for reinsurers and insurers working through MGUs being further extended because claims are first reported to either the original primary insurance company or the MGU and then through one or more intermediaries or reinsurers, (2) the diversity of loss development patterns among different types of reinsurance treaties, facultative contracts or primary insurance contracts, (3) the necessary reliance on the ceding companies, intermediaries and MGUs for information regarding reported claims and (4) the differing reserving practices among ceding companies and MGUs.
The following table summarizes the net loss and LAE reserves, separated between (i) case reserves for claims reported ("Case") and (ii) incurred but not reported ("IBNR") reserves for losses that have occurred but for which claims have not yet been reported and for expected future development on case reserves as of December 31, 2018 and 2017.
The following table details our prior year loss reserve development of liability for net unpaid claims and claim expenses for the years ended December 31, 2018, 2017, and 2016.
There are possible variations from current estimates of loss reserves due to changes in a few key assumptions. In order to quantify the potential volatility in the loss reserve estimates for Global A&H, Sirius Group employs a stochastic simulation approach to produce a range of results around the central estimate and estimated probabilities of possible outcomes. Both the probabilities and the related modeling are subject to inherent uncertainties. The simulation relies on a significant number of assumptions, such as variation in historical loss reserve development patterns, individual claims estimates and unanticipated inflation.
There are possible variations from current estimates of loss reserves due to changes in key assumptions. In order to quantify the potential volatility in the loss reserve estimates for Specialty & Casualty lines, Sirius Group employs a stochastic simulation approach to produce a range of results around the central estimate and estimated probabilities of possible outcomes. Both the probabilities and the related modeling are subject to inherent uncertainties. The simulation relies on a significant number of assumptions, such as variation in historical loss reserve development patterns, individual claims estimates, potential misestimating the initial expected losses during the pricing process, and unanticipated inflation.
Runoff & Other consists of results from Sirius Global Solutions, which specializes in the acquisition and management of runoff liabilities for insurance and reinsurance companies along with other lines of business that Sirius Group is currently not writing.
Sirius Group regularly reviews the adequacy of its recorded reserves by using a variety of generally accepted actuarial methods, including historical incurred and paid loss development methods, and market and exposure analyses. Estimates of the expected ultimate losses involve management judgment and are based on historical information for that class of business, which includes loss ratios, market conditions, changes in pricing and conditions, underwriting changes, changes in claims emergence, review of judicial and economic trends, and other factors that may influence expected ultimate losses. If actual loss activity differs substantially from expectations, an adjustment to recorded reserves may be warranted. As time passes, loss reserve estimates for a given year will rely more on actual loss activity and historical patterns than on initial assumptions.
There are possible variations from current estimates of loss reserves due to changes in key assumptions. In order to quantify the potential volatility in the loss reserve estimates for Runoff & Other, Sirius Group employs a stochastic simulation approach to produce a range of results around the central estimate and estimated probabilities of possible outcomes. Both the probabilities and the related modeling are subject to inherent uncertainties. The simulation relies on a significant number of assumptions, such as variation in historical loss reserve development patterns, individual claims estimates, litigation and judicial trends and unanticipated inflation.
Sirius Group recorded a decrease of $7 million, an increase of $59 million, and an increase of $14 million of asbestos-related incurred losses and LAE in 2018, 2017, and 2016, respectively. The decrease of $7 million for 2018 was driven by favorable loss reserve development, primarily due to benign claims activity on the Sirius Global Solutions portfolio. The 2017 incurred losses were primarily a result of an in-depth analysis of Sirius Group's loss reserves undertaken in 2017. The asbestos study was initiated in response to increased estimates of industry asbestos losses promulgated by leading financial analysts. External asbestos experts were engaged by Sirius Group to assist with the actuarial and claims review of asbestos exposures within Sirius Group. Management booked the highest central estimate of the internal and external indications resulting from the in-depth study. The 2016 incurred losses were primarily the result of management's monitoring of a variety of metrics including actual paid and reported claims activity.
Sirius Group's net reserves for A&E losses were $200 million and $221 million as of December 31, 2018 and 2017, respectively. Sirius Group's asbestos three-year net paid survival ratio was approximately 10.2 years as of December 31, 2018 and 2017. Sirius Group's environmental three-year net paid survival ratio was approximately 4.2 years and 4.3 years as of December 31, 2018 and 2017, respectively.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead the Company to change the selection of the valuation technique (for example, from market to cash flow approach) or to use multiple valuation techniques to estimate the fair value of a financial instrument. These circumstances could cause an instrument to be reclassified between levels within fair value hierarchy. Investments valued using Level 1 inputs include fixed maturity investments, primarily investments in U.S. Treasuries Bills and Notes, equity securities, and short-term investments. Investments valued using Level 2 inputs are primarily comprised of fixed maturity investments, which have been disaggregated into classes, including U.S. government and government agency, corporate debt securities, mortgage-backed and asset-backed securities, non-U.S. government and government agency, U.S. state and municipalities and political sub division and preferred stocks. Investments valued using Level 2 inputs also include certain ETFs that track U.S. stock indices such as the S&P 500 but are traded on foreign exchanges. Fair value estimates for investments that trade infrequently and have few or no observable market prices are classified as Level 3 measurements. Sirius Group determines when transfers between levels have occurred as of the beginning of the period.
Corporate debt securities consist primarily of investment-grade debt of a wide variety of U.S. and non-U.S. corporate issuers and industries. The corporate fixed maturity investments are primarily priced by pricing services. When evaluating these securities, the pricing services gather information from market sources regarding the issuer of the security and obtain credit data, as well as other observations, from markets and sector news. Evaluations are updated by obtaining broker dealer quotes and other market information including actual trade volumes, when available. The pricing services also consider the specific terms and conditions of the securities, including any specific features which may influence risk.
As of December 31, 2018, Sirius Group's other long-term investments accounted for at fair value include $118 million in hedge funds and $183 million in private equity funds versus $60 million in hedge funds and $145 million in private equity funds as of December 31, 2017. As of December 31, 2018, Sirius Group held investments in nine hedge funds and 27 private equity funds versus investments in seven hedge funds and 28 private equity funds as of December 31, 2017.
The largest investment in a single fund was $55 million and $31 million as of December 31, 2018 and 2017, respectively. The fair value of Sirius Group's investments in hedge funds and private equity funds is based upon Sirius Group's proportionate interest in the underlying fund's net asset value, which is deemed to approximate fair value. Sirius Group employs a number of procedures to assess the reasonableness of the fair value measurements for its other long-term investments, including obtaining and reviewing each fund's audited financial statements and discussing each fund's pricing with the fund's manager. However, since the fund managers do not provide sufficient information to independently evaluate the pricing inputs and methods for each underlying investment, the inputs are considered to be unobservable.
Sirius Group's investment portfolio includes investments in hedge funds and private equity funds. As of December 31, 2018, the value of investments in hedge funds and in private equity funds was $118 million and $183 million, respectively. The underlying investments are typically publicly traded and private equity securities and, as such, are subject to market risks that are similar to Sirius Group's equity securities. The following illustrates the estimated effect on December 31, 2018 fair value resulting from a 10% change and a 30% change in market value:
Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. Such events or circumstances may include an economic downturn in a geographic market or change in the assessment of future operations.
In the absence of any indications of potential impairment, the evaluation of goodwill is performed during the fourth quarter of each year and when events or changes in circumstances indicate that it is more likely than not that the asset is impaired. Sirius Group primarily uses two approaches to value goodwill and intangibles: the income approach, which converts future estimates of cash flows by reporting unit to a single (discounted) current value and the market approach, which uses prices and other information from transactions for identical or similar assets or liabilities. If goodwill or intangible assets are impaired, they are written down to their fair value with a corresponding expense reflected in the Consolidated Statements of Income and Comprehensive Income in the period in which the determination is made.
In the fourth quarter of 2018, Sirius Group performed goodwill impairment testing for Global A&H. Management calculated a range of fair values using the income approach and market approach and compared the concluded fair values to the carrying values of Global A&H. Management determined that no point in the fair value range was the best estimate of fair value for each reporting unit, so the midpoint was used to assess goodwill. Next, management compared the fair values to the carrying values of Global A&H. The fair value midpoint exceeded the carrying value by 6.2%. Expected future cash flows and/or earnings may be materially and negatively impacted as a result of, among other things, a decrease in renewals and new business, loss of key personnel, lower-than-expected yields or higher-than-expected claims activity and incurred losses as well as other general economic factors.
There was no evidence of potential impairment for goodwill as of December 31, 2018.
In 2018, Sirius Group recognized $3 million of indefinite lived intangible assets related to insurance licenses from the acquisition of WRM America. In total, Sirius Group held $22 million and $27 million of indefinite lived intangible assets as of December 31, 2018 and 2017, respectively.
For the year ended December 31, 2016, Sirius Group did not recognize any impairments on intangible assets with an indefinite life.
The following table summarizes Sirius Group's gross premiums written for primary and assumed business for the years ended December 31, 2018, 2017, and 2016:
Sirius Group and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law such that taxes are imposed, Sirius Group and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. Sirius Group has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which Sirius Group's subsidiaries and branches are subject to tax are Australia, Belgium, Canada, Denmark, Germany, Gibraltar, Hong Kong (China), Luxembourg, Malaysia, the Netherlands, Shanghai (China), Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
The Swedish Tax Authority ("STA") has denied deductions claimed by two of our Swedish subsidiaries in certain tax years for interest they paid on intra-group debt instruments. We have challenged the STA's denial in court based on the technical merits. Our reserve for uncertain tax positions has taken into account relevant developments in these tax disputes and in applicable Swedish tax law including recent case law. We also have taken into account the Stock Purchase Agreement by which Sirius Group was sold to CMIG International in 2016. Pursuant to such Agreement, the seller agreed to indemnify the buyer and us for, among other things, (1) any additional tax liability in excess of our accounting for uncertain tax positions for tax periods prior to the sale of Sirius Group to CMIG International, and (2) an impairment in our net deferred tax assets resulting from a final determination by a tax authority.
In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (Accounting Standards Codification ("ASC") 310-20), which changes the amortization period for certain purchased callable debt securities. Under the new guidance, for investments in callable debt securities held at a premium, the premium will be amortized over the period to the earliest call date. The new guidance does not change the amortization period for callable debt securities held at a discount. The new guidance is effective for annual and interim periods beginning after December 15, 2018. We plan to adopt the standard on its effective date of January 1, 2019. We do not expect the standard to have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). The new guidance requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. Under existing guidance, recognition of lease assets and liabilities is not required for operating leases. The new guidance requires that lease assets and liabilities to be recognized and measured initially based on the present value of the lease payments. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Sirius Group will adopt this guidance as of January 1, 2019. We estimate adoption of this standard will result in recognition of additional net lease assets and lease liabilities of approximately $38 million. We do not believe this standard will materially affect our consolidated net earnings.
We have audited the accompanying consolidated balance sheets of Sirius International Insurance Group, Ltd. and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of (loss) income, comprehensive (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Other long-term investments also includes certain investments that are eligible for the equity method where Sirius Group has elected the fair value option under which the changes in fair value are reported in pre-tax revenues in Net unrealized investment (losses). (See Note 19.)
Other underwriting expenses consist primarily of personnel related expenses (including salaries, benefits, and variable compensation expense) and other general operating expenses related to the underwriting operations.
Losses and LAE are charged against income as incurred. Unpaid insurance loss and LAE reserves are based on estimates (generally determined by claims adjusters, legal counsel, and actuarial staff) of the ultimate costs of settling claims, including the effects of inflation and other societal and economic factors. Unpaid reinsurance loss and LAE reserves are based primarily on reports received from ceding companies and actuarial projections. Unpaid loss and LAE reserves represent management's best estimate of ultimate losses and LAE, net of estimated salvage and subrogation recoveries, if applicable. Such estimates are regularly reviewed and updated and any resulting adjustments are reflected in current operations. The process of estimating loss and LAE reserves involves a considerable degree of judgment by management and the ultimate amount of expense to be incurred could be greater or less than the amounts currently reflected in the financial statements.
Sirius Group holds derivative financial instruments for both risk management and investment purposes. Sirius Group recognizes all derivatives as either assets or liabilities, measured at fair value, in the Consolidated Balance Sheets. Changes in the fair value of derivative instruments are recognized in current period pre-tax income.
Sirius Group capitalizes costs related to computer software developed for internal use during the application development stage of software development projects. These costs generally consist of certain external, payroll, and payroll-related costs. Sirius Group begins amortization of these costs once the project is completed and ready for its intended use. Amortization is on a straight-line basis and over a useful life of three to five years. As of December 31, 2018 and 2017, Sirius Group had unamortized deferred software costs of $9.3 million and $10.5 million, respectively. For the years ended December 31, 2018, 2017, and 2016, Sirius Group had amortization expenses of $4.8 million, $4.6 million, and $3.2 million, respectively, related to software developed for internal use.
Sirius Group recognizes agent commissions and other revenues when it has fulfilled all of its obligations necessary to earn the revenue and when it can both reliably estimate the amount of revenue, net of any amounts expected to be uncollectible, and any amounts associated with expected cancellations.
Some of Sirius Group's subsidiaries file consolidated tax returns in the United States. Sirius Group has subsidiaries in various jurisdictions, including but not limited to Sweden, the United Kingdom, and Luxembourg, which are subject to applicable taxes in those jurisdictions.
The U.S. dollar is the functional currency for Sirius Group's businesses except for Sirius International Insurance Corporation ("Sirius International"), Lloyd's Syndicate 1945 ("Syndicate 1945"), several subsidiaries of International Medical Group Acquisition, Inc. ("IMG"), and the Canadian reinsurance operations of Sirius America Insurance Company ("Sirius America"). Sirius Group also invests in securities denominated in foreign currencies. Assets and liabilities recorded in these foreign currencies are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are converted using the average exchange rates for the period. Net foreign exchange gains and losses arising from the translation of functional currencies are reported in shareholder's equity, in Accumulated other comprehensive (loss). As of December 31, 2018 and 2017, Sirius Group had Net unrealized foreign currency translation losses of $202.4 million and $140.5 million, respectively, recorded in Accumulated other comprehensive (loss) on its Consolidated Balance Sheets.
The following rates of exchange for the U.S. dollar have been used for translation of assets and liabilities for subsidiaries whose functional currency is not the U.S. dollar at December 31, 2018 and 2017:
An entity in which Sirius Group holds a variable interest is a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) as a group, the holders of equity investment at risk lack either the direct or indirect ability through voting rights or similar rights to make decisions about an entity's activities that most significantly impact the entity's economic performance or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both, and substantially all of the entity's activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (a) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (b) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE, as well as following an event that requires reassessment, Sirius Group determines whether it is the primary beneficiary based on the facts and circumstances surrounding each entity. (See Note 20.)
Effective January 1, 2018, Sirius Group adopted Accounting Standards Update ("ASU") 2017-01, Business Combinations: Clarifying the Definition of a Business (ASC 805), which clarifies the definition of a business and affects the determination of whether acquisitions or disposals are accounted for as assets or as a business. Under the new guidance, when substantially all of the fair value of the assets is concentrated in a single identifiable asset or a group of similar identifiable assets, it is not a business. Sirius Group has applied the guidance in the update when determining the accounting treatment for transactions that have occurred during the year ended December 31, 2018. (See Note 3).
Effective January 1, 2018, Sirius Group adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which modifies the guidance for revenue recognition. The scope of the new guidance excludes insurance contracts but is applicable to certain fee arrangements as well as commissions and other non-insurance revenues. This guidance impacts the timing of service fee recognition by IMG and ArmadaCorp Capital, LLC ("Armada"). Sirius Group used the modified retrospective transition approach to adopt this guidance, which resulted in the recognition of a cumulative effect of adoption as an adjustment to the beginning balance of retained earnings at the date of initial application of $1.6 million, net of tax.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). The new guidance requires lessees to recognize lease assets and liabilities on the balance sheet for both operating and financing leases, with the exception of leases with an original term of 12 months or less. Under existing guidance, recognition of lease assets and liabilities is not required for operating leases. The new guidance requires that lease assets and liabilities to be recognized and measured initially based on the present value of the lease payments. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Sirius Group will adopt this guidance as of January 1, 2019. We estimate adoption of this standard will result in recognition of additional net lease assets and lease liabilities of approximately $37.7 million. We do not believe this standard will materially affect our consolidated net earnings.
On November 5, 2018, the Company completed the transactions contemplated by the definitive Agreement and Plan of Merger ("Merger Agreement"). Under the terms of the Merger Agreement, Easterly Acquisition Corp. ("Easterly") merged with Sirius Acquisitions Holding Company III and became a wholly-owned subsidiary of the Company (the "Merger"). Upon the closing of the Merger, Easterly's common stock was exchanged for the Company's common shares at an exchange ratio (the "Exchange Ratio") calculated as (i) the amount of cash per public share of Easterly common stock in Easterly's trust account (the "Trust Account") immediately prior to the closing of the Merger divided by (ii) (x) 1.05 multiplied by (y) Sirius Group's adjusted diluted book value per common share as of September 30, 2018 ("Sirius Group September 30 Adjusted DBVPS"). Based on the Sirius Group September 30 Adjusted DBVPS, estimated as of September 30, 2018, and funds in the Trust Account on November 5, 2018, the Exchange Ratio was equal to 0.609. Following the Merger, the Company's common shares are traded on the Nasdaq Global Select Market under the symbol "SG."
In connection with the Merger, the Company and CM Bermuda Ltd. ("CM Bermuda"), the sole holder of the Company's common shares prior to the Merger, entered into a redemption agreement, dated November 2, 2018 (the "CM Bermuda Redemption Agreement"), pursuant to which, effective as of the closing of the Merger, the Company redeemed 9,519,280 of the Company's common shares at a price per share equal to $17.22447 for $164.0 million, which were paid on November 16, 2018.
Also in connection with the Merger, on November 16, 2018 the Company completed a post-closing adjustment of $1.6 million that was settled in cash with CM Bermuda based on the reported book value per share of $16.44 as of September 30, 2018, pursuant to the Merger Agreement.
Sirius Group incurred certain contractual costs associated with the Merger of $9.0 million and $7.1 million of various legal, advisory, and other consulting costs for the Merger and the Private Placement that were charged to Additional paid-in surplus.
In connection with the Merger, the Company, IMG Acquisition Holdings, LLC ("IMGAH") and Sirius Acquisitions Holding Company II completed the transactions contemplated by its previously announced redemption agreement and the Company redeemed all of the outstanding Series A redeemable preference shares, which were held by IMGAH, for $95.0 million in cash. Effective as of the completion of the redemption, the parties terminated the registration rights agreement and the shareholder's agreement between the Company and IMGAH. In addition, the parties agreed that any remaining contingent consideration in respect of the IMG acquisition, will be paid in cash, not in Series A redeemable preference shares as previously contemplated in the agreement in respect of the IMG acquisition. (See "IMG") below.
On May 26, 2017, Sirius Group acquired 100% ownership of IMG and its subsidiaries, a leading provider of global travel medical insurance products and assistance services. The purchase of IMG was undertaken to expand on Sirius Group's existing Global Accident and Health ("Global A&H") platform and to accelerate the growth strategy of the Global A&H international insurance business, to add service fee revenues to Sirius Group's existing risk-transfer based insurance revenues, and to gain access to IMG's distribution networks and client base. Total consideration consisted of $250.8 million of cash, $100.0 million of Series A redeemable preference shares that are convertible into common shares (as explained further below), and up to $50.0 million of contingent consideration ("IMG Earnout"), payable in Series A redeemable preference shares, which was stated as $43.1 million at fair value at acquisition date, resulting in a total enterprise value of $393.9 million. Sirius Group assumed certain IMG debt of $129.5 million ("Debt Assumption"), reducing its cash consideration by that amount and resulting in a total equity consideration of $264.4 million. Concurrently with the transaction, IMG's subsidiary International Medical Group - Stop-Loss, Inc. ("IMG - Stop Loss") was sold to Certus Management Group, Inc. ("Certus"). As part of the sale of IMG - Stop Loss, Sirius Group issued a secured promissory note of $9.0 million to Certus.
The IMG Earnout is payable, if earnings before interest expense, taxes, depreciation and amortization ("EBITDA") of IMG exceed amounts defined in the purchase agreement for each year during the three year period ending December 31, 2019. As part of the Series A preference shares redemption agreement, the parties agreed that any remaining contingent consideration in respect of the IMG acquisition, will be paid in cash, not in Series A redeemable preference shares, following the redemption, as previously contemplated in the agreement in respect of the IMG acquisition. On November 8, 2018, the Company paid $3.5 million to IMGAH for the contingent payment for the 2017 calendar year. At December 31, 2018 the IMG Earnout liability was remeasured at a fair value of $19.9 million and is reflected within Other liabilities. As a result of the remeasurement of the IMG Earnout, Sirius Group recorded $6.1 and $13.6 million in Gain on revaluation of contingent consideration in 2018 and 2017, respectively.
During 2017, IMG's revenues and net income after acquisition, inclusive of intangible asset amortization expenses, were $79.6 million and $13.3 million, respectively.
The goodwill balance is primarily attributed to Armada's assembled workforce and access to the supplemental healthcare insurance market, and additional synergies to be realized in the future. The goodwill recognized is expected to be deductible for income tax purposes in the future. The contingent consideration is payable if EBITDA of Armada exceeds amounts defined in the redemption agreement. The Armada Earnout can be settled in the Company's common shares, subject to certain criteria. The Armada Earnout is subject to fair value measurement, which is a component of net income and reflected in Gain on revaluation of contingent consideration. In December 2017, Sirius Group settled approximately 82% of the Armada Earnout with the Seller for $30.6 million. At December 31, 2017, the remaining Armada Earnout liability was remeasured at a fair value of $13.3 million and is reflected in Other liabilities. As a result of the settlement and remeasurement of the Armada Earnout, Sirius Group recorded a $35.2 million gain in Gain on revaluation of contingent consideration in 2017. During 2018, Sirius Group settled $0.9 million of the Armada Earnout. At December 31, 2018 the Armada Earnout was remeasured at a fair value of $8.9 million and is reflected within Other liabilities. As a result of the remeasurement of the Armada Earnout, Sirius Group recorded a $3.5 million Gain on revaluation of contingent consideration in 2018.
On May 17, 2016, Sirius Global Solutions Holding Company ("Sirius Global Solutions") and Florida Specialty Insurance Company partnered to form Florida Specialty Acquisition LLC ("FSA"). Sirius Global Solutions provided $15.8 million to acquire 100% of FSA's common shares. FSA acquired Mount Beacon Holdings, LLC and its subsidiaries including Mount Beacon Insurance Company ("Mount Beacon"). FSA was dissolved on September 21, 2017.
Property Catastrophe Excess-Property catastrophe excess of loss reinsurance treaties cover losses from catastrophic events. Sirius Group writes a worldwide book with the largest concentration of exposure in Europe and the United States. The U.S. book written in Bermuda has a national account focus supporting principally the lower and/or middle layers of large capacity programs. Additionally, Stockholm writes a U.S. book mainly consisting of select small regional and standard lines carriers. The exposures written in the international book are diversified across many countries, regions, perils and layers.
Agriculture-Sirius Group provides stop-loss reinsurance coverage to companies writing U.S. government-sponsored multi-peril crop insurance ("MPCI"). Sirius Group's participation is net of the government's stop-loss reinsurance protection. Sirius Group also provides coverage for crop-hail and certain named perils when bundled with MPCI business. Sirius Group also writes agriculture business outside of the United States.
Trade Credit writes credit and bond reinsurance worldwide. The bulk of the business is traditional short-term commercial credit insurance, covering pre-agreed domestic and export sales of goods and services with typical coverage periods of 60 to 120 days. Losses under these policies are correlated to adverse changes in a respective country's gross national product.
Contingency underwrites contingency insurance for event cancellation and non-appearance, primarily on a primary policy and facultative reinsurance basis. Additionally, coverage for liabilities arising from contractual bonus, prize redemption and over-redemption is also offered. The contingency portfolio is diversified across many countries and regions.
Casualty underwrites a cross section of all casualty lines, including general liability, umbrella, auto, workers compensation, professional liability, and other specialty classes, written on a proportional, excess of loss, and primary basis.
Surety underwrites commercial surety bonds, including non-construction contract bonds, in a broad range of business segments in the United States.
Environmental underwrites a pure environmental insurance book in the United States consisting of four core products that revolve around pollution coverage, which are premises pollution liability, contractor's pollution liability, contractor's pollution and professional liability.
The following tables summarize the segment results for the years ended December 31, 2018, 2017, and 2016:
(10)Sirius Group does not allocate its assets by segment, with the exception of goodwill and intangible assets.
(6)General and administrative expenses, MGU + Runoff & Other is part of General and administrative expenses on the Consolidated Statements of (Loss) Income (the sum of General and administrative expenses, MGU + Runoff & Other and General and administrative expenses is equal to General and administrative expenses on the Consolidated Statements of (Loss) Income).
(2)Unallocated LAE are part of Loss and loss adjustment expenses on the Consolidated Statements of (Loss) Income (the sum of Loss and allocated LAE and Unallocated LAE is equal to Loss and loss adjustment expenses on the Consolidated Statements of (Loss) Income).
The following table summarizes the loss and LAE reserve activities of Sirius Group for the years ended December 31, 2018, 2017, and 2016:
(1) Loss and LAE reserves acquired in 2018 relate to Sirius Group's purchase of WRM America; 2017 relate to Sirius Group's purchase of IMG; 2016 relates to Sirius Group's purchase of Mount Beacon.
The following table summarizes reported A&E loss and LAE reserve activities (gross and net of reinsurance) for the years ended December 31, 2018, 2017, and 2016:
The following table summarizes the ending liabilities for unpaid loss and LAE, net of reinsurance for each of Sirius Group's segments as of December 31, 2018:
The first table (top section of grouping) presents, for each of the previous 10 accident years (1) cumulative total undiscounted incurred loss and allocated LAE, net of reinsurance, as of each of the previous 10 year-end evaluations, (2) total IBNR plus expected development on reported claims as of December 31, 2018, and (3) the cumulative number of reported claims as of December 31, 2018. The net loss reserves for losses and loss expenses related to the acquisitions described in Note 3 have been incorporated within the ten year short duration tables on a prospective basis. Sirius Group provides treaty reinsurance for a significant portion and across all lines of its business. Sirius Group does not receive, and as such does not maintain claims count information associated with many of its reinsurance contracts, especially proportional covers. As such, Sirius Group has determined that it is impracticable to provide this information.
In the normal course of business, Sirius Group seeks to protect its businesses from losses due to concentration of risk and losses arising from catastrophic events by reinsuring with third-party reinsurers. Sirius Group remains liable for risks reinsured in the event that the reinsurer does not honor its obligations under reinsurance contracts. The effects of reinsurance on Sirius Group's written and earned premiums and on losses and LAE were as follows:
Sirius Group's core proportional property reinsurance programs provide protection for parts of the non proportional treaty accounts written in Europe, the Americas, Caribbean, Asia, the Middle East and Australia. These reinsurance protections are designed to increase underwriting capacity where appropriate, and to reduce exposure both to large catastrophe losses and to a frequency of smaller loss events.
Sirius Group has in place excess of loss retrocessional coverage for its worldwide earthquake related exposures. This coverage was renewed for one year at May 1, 2018, providing $40.0 million of reinsurance protection in excess of Sirius Group's retention of $35.0 million and a further $35.0 million of coverage in excess of $75.0 million.
Almost all of Sirius Group's excess of loss reinsurance protections, excluding ILWs which tend to only cover one loss event, include provisions that reinstate coverage at a cost of 100% or more of the original reinsurance premium.
(1)Standard & Poor's ratings as detailed above are: "AA" (Very strong), "A" (Strong), and "BBB+" and "BBB" (Adequate).
The following table presents a rollforward of Deferred acquisition costs for the years ended December 31, 2018, 2017, and 2016:
Net realized and unrealized investment gains (losses) for the years ended December 31, 2018, 2017, and 2016 consisted of the following:
(1)Includes 17.3, $(19.1), and $50.0 of realized gains (losses) due to foreign currency during 2018, 2017, and 2016, respectively.
Net realized investment gains (losses) for the years ended December 31, 2018, 2017, and 2016 consisted of the following:
The following table summarizes the amount of total gains (losses) included in earnings attributable to unrealized investment gains (losses) for Level 3 investments for the years ended December 31, 2018, 2017, and 2016:
The cost or amortized cost, gross unrealized investment gains (losses), net foreign currency gains (losses), and fair value of Sirius Group's fixed maturity investments as of December 31, 2018 and 2017, were as follows:
(1)2017 figures have been revised to correct for a misclassification in prior disclosure of subcategories within residential mortgage-backed securities. Cost or amortized cost and fair value balances increased by $41.4 for residential mortgage-backed securities and decreased by the same amounts for commercial mortgage-backed securities. Gross unrealized losses and net foriegn currency gains (losses) increased by $0.3 for residential mortgage-backed securities and decreased by the same amounts for commercial mortgage-backed securities.
The weighted average duration of Sirius Group's fixed income portfolio as of December 31, 2018 was approximately 1.7 years, including short-term investments, and approximately 2.2 years excluding short-term investments.
At December 31, 2018, the above totals included $42.6 million of sub-prime securities. Of this total, $17.1 million was rated AAA, $9.8 million rated AA, $6.0 million rated A, $4.7 million rated BBB and $5.0 million classified as other. At December 31, 2017, the above included $93.0 million of sub-prime securities. Of this total, $53.0 million was rated AAA, $25.7 million rated AA, $1.3 million rated A, $8.4 million rated BBB and $4.6 million classified as other.
The following table summarizes the total mortgage and asset-backed securities held at fair value in Sirius Group's investment portfolio as of December 31, 2018 and 2017:
(3)At December 31, 2018 and 2017, all mortgage- and asset-backed securities held by Sirius Group were classified as Level 2 investments.
The following summarizes the December 31, 2018 fair value of hedge funds subject to restrictions on redemption frequency and advance notice period requirements for investments in active hedge funds:
As of December 31, 2018, investments in private equity funds were subject to lock-up periods as follows:
As of December 31, 2018 and 2017, investments of $792.4 million and $548.2 million, respectively, were held in trusts required to be maintained in relation to various reinsurance agreements. Sirius Group's consolidated reinsurance operations are required to maintain deposits with certain insurance regulatory agencies in order to maintain their insurance licenses. The fair value of such deposits which are included within total investments totaled $801.2 million and $548.4 million as of December 31, 2018 and 2017, respectively.
The valuation process above is generally applicable to all of Sirius Group's fixed maturity investments. The techniques and inputs specific to asset classes within Sirius Group's fixed maturity investments for Level 2 securities that use observable inputs are as follows:
Non-U.S. government and government agency securities consist of debt securities issued by non-U.S. governments and their agencies along with supranational organizations (also known as sovereign debt securities). Securities held in these sectors are primarily priced by pricing services who employ proprietary discounted cash flow models to value the securities. Key quantitative inputs for these models are daily observed benchmark curves for treasury, swap, and high issuance credits. The pricing services then apply a credit spread for each security which is developed by in-depth and real time market analysis. For securities in which trade volume is low, the pricing services utilize data from more frequently traded securities with similar attributes. These models may also be supplemented by daily market and credit research for international markets.
The following tables summarize Sirius Group's financial assets and liabilities measured at fair value as of December 31, 2018 and 2017 by level:
(1) Excludes fair value of $301.4 associated with hedge funds and private equity funds which fair value is measured at net asset value using the practical expedient.
(1) 2017 figures have been revised to correct for a misclassification in prior disclosure of subcategories within residential mortgage-backed securities and commercial mortgage-backed securities. Fair value and Level 2 input balances increased by $41.4 for residential mortgage-backed securities and decreased by the same amount for commercial mortgage-backed securities.
(2) Excludes fair value of $205.3 associated with hedge funds and private equity funds which fair value is measured at net asset value using the practical expedient.
The following tables present changes in Level 3 for financial instruments measured at fair value for the years ended December 31, 2018 and 2017:
(1) Excludes fair value of $301.5 associated with hedge funds and private equity funds which fair value is measured at net asset value using the practical expedient.
(1) Excludes fair value of $205.3 associated with hedge funds and private equity funds which fair value is measured at net asset value using the practical expedient.
There were no transfers between Level 3 and Level 2 measurements for the year ended December 31, 2018.
Goodwill and Indefinite-Lived Intangible Assets: The preliminary fair value of the goodwill and indefinite-lived intangible asset acquired as part of the acquisitions of both IMG and Armada (see Note 3) was determined using the income valuation and market valuation methodologies. The income approach determines value for an asset based on the present value of cash flows projected to be generated over the remaining economic life of the asset being measured. The net cash flows are discounted to present value using a discount rate that reflects the relative risk of achieving the cash flow and the time value of money. The market approach is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable assets or group of assets.
Sirius Group tests goodwill and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. When Sirius Group determines goodwill and indefinite-lived intangible assets may be impaired, Sirius Group uses techniques, including discounted expected future cash flows, to measure fair value. Sirius Group used Level 3 inputs to measure and record an $8.0 million and $5.0 million impairment of Trade Names indefinite-lived intangible asset during 2018 and 2017, respectively, that were recorded in Impairment of Intangible Assets in the Consolidated Statements of (Loss) Income. (See Note 10).
Goodwill is not amortized, but rather is evaluated for impairment on an annual basis, or whenever indications of potential impairment exist. In the absence of any indications of potential impairment, the evaluation of goodwill is performed during the fourth quarter of each year. Sirius Group uses widely accepted valuation techniques to determine the fair value of its reporting units used in its annual goodwill impairment analysis. Sirius Group's valuation is primarily based on qualitative and quantitative assessments regarding the fair value of the reporting unit relative to its carrying value. Sirius Group models the fair value of the reporting unit based on projected earnings and cash flows of the reporting unit.
The following table shows the change in goodwill, intangible assets with an indefinite life, and intangible assets with a finite life during the years ended December 31, 2018 and 2017:
(1)Net balance at December 31, 2016 for Intangible assets with an indefinite life relate to insurance licenses allocated to the Runoff & Other segment.
(2)Foreign currency translation, impairments, and amortization in 2017 and 2018 relate to Armada and IMG and are allocated to the Global A&H segment.
(3)Additions in 2018 relate to insurance licenses allocated to the Runoff & Other segment.
The following tables presents the components of goodwill and intangible assets as of December 31, 2018 and 2017:
The estimated remaining useful lives of these intangible assets range from 3.3 to 20.9 years.
Sirius Group's debt outstanding as of December 31, 2018 and 2017 consisted of the following:
A schedule of contractual repayments of Sirius Group's debt as of December 31, 2018 follows:
Sirius Group incurred $4.6 million in expenses related to the issuance of the 2017 SEK Subordinated Notes (including SEK 27.5 million, or $3.5 million, in underwriting fees), which have been deferred and are being recognized into interest expense over the life of the 2017 SEK Subordinated Notes.
A portion of the proceeds were used to fully redeem the outstanding $250.0 million Sirius International Group, Ltd. Preference Shares. (See Note 15).
Taking into effect the amortization of all underwriting and issuance expenses, and applicable STIBOR, the 2017 SEK Subordinated Notes yielded an effective rate of approximately 3.8% and 3.5% for the years ended December 31, 2018 and 2017, respectively. Sirius Group recorded $11.7 million and $3.3 million of interest expense, inclusive of amortization of issuance costs, on the 2017 SEK Subordinated Notes for the years ended December 31, 2018 and 2017, respectively.
Sirius Group incurred $5.1 million in expenses related to the issuance of the 2016 SIG Senior Notes (including $3.4 million in underwriting fees), which have been deferred and are being recognized into interest expense over the life of the 2016 SIG Senior Notes.
Sirius Group's net income (loss) before income taxes for the years ended December 31, 2018, 2017, and 2016 was generated in the following domestic and foreign jurisdictions:
The total income tax (expense) benefit for the years ended December 31, 2018, 2017, and 2016 consisted of the following:
The non-Sweden component of pre-tax (loss) income was $97.9 million, $(83.8) million, and $67.3 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The Company previously applied Staff Accounting Bulletin 118 ("SAB 118"), which provided guidance on accounting for the tax effects of the TCJA which was enacted into law in the U.S. in December 2017. SAB 118 addresses situations where accounting for certain income tax effects of the TCJA under ASC 740, Income Taxes ("ASC 740"), may be incomplete upon issuance of an entity's financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. The Company has completed its accounting for all material tax effects of the TCJA and has recognized adjustments as of December 31, 2018 as described below.
The TCJA includes a new 21% corporate tax rate, the impacts of which (including on Sirius Group's deferred tax assets) were already taken into account in Sirius Group's financial results for the year ended December 31, 2017. The TCJA also includes a new BEAT provision, which is essentially a minimum tax that is potentially applicable to certain otherwise deductible payments made by U.S. entities to non-U.S. affiliates, including cross-border interest payments and reinsurance premiums. The statutory BEAT rate is 5% in 2018 and will rise to 10% in 2019-2025 and then 12.5% in 2026 and thereafter. The TCJA also includes provisions for GILTI under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries. Consistent with accounting guidance, Sirius Group will treat BEAT as an in period tax charge when incurred in future periods for which no deferred taxes need to be provided and has made an accounting policy election to treat GILTI taxes in a similar manner. No provision for income taxes related to BEAT or GILTI was recorded as of December 31, 2018. Sirius Group has completed its accounting for loss reserves based on the new discounting methodology prescribed by the TCJA and recognized an adjustment of $3.5 million without a net impact on total taxes since an offsetting deferred tax asset would also be recorded.
Sirius Group has capital and liquidity in many of its subsidiaries, some of which may reflect undistributed earnings. If such capital or liquidity were to be paid or distributed to the Company or Sirius Group's subsidiaries, as dividends or otherwise, they may be subject to income or withholding taxes. Sirius Group generally intends to operate, and manage its capital and liquidity, in a tax-efficient manner. However, the applicable tax laws in relevant countries are still evolving, including in response to guidance from the Organisation for Economic Cooperation and Development. Accordingly, such payments or earnings may be subject to income or withholding tax in jurisdictions where they are not currently taxed or at higher rates of tax than currently taxed, and the applicable tax authorities could attempt to apply income or withholding tax to past earnings or payments.
Of the $34.9 million net deferred tax liability as of December 31, 2018, $32.8 million relates to net deferred tax assets in U.S. subsidiaries, $155.8 million relates to net deferred tax assets in Luxembourg subsidiaries, $12.6 million relates to net deferred tax assets in United Kingdom subsidiaries and $236.1 million relates to net deferred tax liabilities in Sweden subsidiaries.
Sirius Group expects to utilize net operating loss carryforwards in Luxembourg of $668.9 million but does not expect to utilize the remainder as they belong to companies that are not expected to have sufficient taxable income in the future. Included in the U.S. net operating loss carryforwards are losses of $102.2 million subject to an annual limitation on utilization under Internal Revenue Code Section 382 and $11.0 million are subject to separately return limitation year ("SRLY") provisions of the consolidated return regulations. Of the Section 382 limited loss carryforwards, $9.6 million will expire between 2022 and 2025 and $92.6 million will expire between 2030 and 2032. The SRLY limited losses will expire between 2036 and 2037. Sirius Group expects to utilize all of the U.S. net operating loss carryforwards.
If Sirius Group determines in the future that its reserves for unrecognized tax benefits on permanent differences and interest and penalties are not needed, the reversal of $64.9 million of such reserves as of December 31, 2018 would be recorded as an income tax benefit and would impact the effective tax rate. If Sirius Group determines in the future that its reserves for unrecognized tax benefits on temporary differences are not needed, the reversal of $0.1 million of such reserves as of December 31, 2018 would not impact the effective tax rate due to deferred tax accounting but would accelerate the payment of cash to the taxing authority. Most of Sirius Group's reserves for unrecognized tax benefits on permanent differences relate to interest deductions denied by the Swedish Tax Authority ("STA"), as described further below.
Sirius Group classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31, 2018, 2017, and 2016, Sirius Group recognized $0.1 million, $(0.1) million, and $0.2 million in interest income (expense), respectively, net of any tax benefit. The balance of accrued interest as of December 31, 2018 and 2017 is $0.2 million and $0.1 million, respectively, net of any tax benefit.
The STA has denied deductions claimed by two of the Company's Swedish subsidiaries in certain tax years for interest paid on intra-group debt instruments. Sirius Group has challenged the STA's denial in court based on the technical merits. In October 2018, one of the Swedish subsidiaries received an adverse decision from Sweden's Administrative Court, which Sirius Group has appealed. Sirius Group has taken into account this and other relevant developments in applicable Swedish tax law and has established a reserve for this uncertain tax position. As of December 31, 2018, the total amount of such reserve was $62.2 million.
In connection with this matter, Sirius Group has also taken into account the SPA by which Sirius Group was sold to CMIG International in 2016 and has recorded an indemnification asset. Pursuant to the SPA, the seller agreed to indemnify the buyer and Sirius Group for, among other things, (1) any additional tax liability in excess of Sirius Group's accounting for uncertain tax positions for tax periods prior to the sale of Sirius Group to CMIG International, and (2) an impairment in Sirius Group's net deferred tax assets resulting from a final determination by a tax authority. While Sirius Group is continuing to challenge the STA's denial based on the technical merits by appealing the adverse court decision received in October 2018, the ultimate resolution of these tax disputes is uncertain and no assurance can be given that there will be no material changes to Sirius Group's operating results or balance sheet in connection with these uncertain tax positions or the related indemnification.
Sirius Group entered into an interest rate swap ("Interest Rate Cap") with two financial institutions where it paid an upfront premium and in return receives a series of quarterly payments based on the 3-month London Interbank Offered Rate ("LIBOR") at the time of payment. The Interest Rate Cap does not qualify for hedge accounting. Changes in fair value are recognized as unrealized gains or losses and are presented within Other revenue. The fair value of the interest rate cap has been estimated using a non-binding single broker quote and, accordingly, has been classified as a Level 3 measurement as of December 31, 2018 and 2017. Collateral held is recorded within short-term investments with an equal amount recognized as a liability to return collateral. Sirius Group's liability to return that collateral is based on the amounts provided by the counterparties and investment earnings thereon. The following table summarizes the Interest Rate Cap collateral balances held by Sirius Group and ratings by counterparty:
During 2018, Sirius Group sold equity put options to hedge against a long position in Common equities. The equity put options were not designated or accounted for under hedge accounting. Changes in fair value are presented within Net unrealized investment (losses) gains. The fair value of the equity put options is widely available and have quoted prices in active markets and accordingly, were classified as a Level 1 measurement.
The following tables summarize information on the classification and amount of the fair value of derivatives not designated as hedging instruments within the Company's Consolidated Balance Sheets as at December 31, 2018 and 2017:
(1)Asset derivatives are classified within Other assets within the Company's Consolidated Balance Sheets at December 31, 2018 and 2017.
(2)Liability derivatives are classified within Other liabilities within the Company's Consolidated Balance Sheets at December 31, 2018 and 2017.
Swedish and German employees of Sirius International can participate in defined benefit plans which are based on the employees' pension entitlements and length of employment. In Sweden, where a defined benefit pension plan is mandated by the government, Sirius International's employees participate in collective agreements funded by Sirius International. These collective agreements are managed by third party trustees who calculate the pension obligation, invoice Sirius International for additional funding, and invest the funds. All employees in Germany are covered by defined benefit pension plans sponsored by Sirius International called Sirius Rückversicherungs Service GmbH Pension Plan. Paid pension premiums are invested with Skandia Liv for employees in Sweden and with Allianz for employees in Germany. Skanda Liv held 94% and 94% of total plan assets in 2018 and 2017, respectively. Allianz held 6% and 6% of total plan assets in 2018 and 2017, respectively. Skandia manages the portfolio to be able to pay a guaranteed amount and a favorable return over time with the goal of getting the highest possible return along with well-balanced risk. The average return for the period 2016 through 2018 was 6.4%. The investment directive is decided by the Skandia Liv board of directors. To achieve the goals the portfolio is diversified with the asset allocation shown below.
The assumptions used to determine Swedish benefit obligations for the years ended December 31, 2018 and 2017 are as follows:
The assumptions used to determine German benefit obligations for the years ended December 31, 2018 and 2017 are as follows:
The accumulated benefit obligation for the years ended December 31, 2018 and 2017 was $17.5 million and $17.4 million, respectively.
The components of net periodic pension expense for the years ended December 31, 2018, 2017, and 2016 are as follows:
Starting in 2018, the Company has issued equity incentives for certain employees under the Employee Share Purchase Plan and the 2018 Omnibus Plan and for other non-employee independent directors. For the year ended December 31, 2018, the Company recorded $2.5 million of share-based compensation expense under these plans.
Effective August 22, 2018, the Company established an Employee Share Purchase Plan ("ESPP") which allowed all employees of the Company and its subsidiaries to purchase up to 1,000, but no less than 100 shares of Sirius Group in connection with the transaction with Easterly. The purchase price of each common share purchased by a participant is equal to 85% of market value for the first 100 shares and 100% of market value for any additional shares purchased. Participants can either purchase the shares in cash or be issued a full-recourse promissory note by the Company, secured by the shares, payable via payroll deductions. A maximum of 1,000,000 shares have been made available for purchase under the Plan.
As of December 31, 2018, 149,236 shares have been purchased under the Plan and net promissory notes total $0.9 million.
In connection with the Company's 2018 Omnibus Incentive Plan, the Company granted incentive compensation awards ("IPO Incentive Awards") on August 6, 2018 which provides for certain employees to purchase fully-vested common shares and be issued performance share units. Participants can purchase shares on or before December 31, 2018 at a pre-determined strike price or choose to purchase the total shares over three years at pre-determined strike prices. While the shares are fully vested upon purchase, participants are required to hold the shares for three years.
Performance Share Units vest over three years, 25% based on ROE performance during each of the 2019, 2020, and 2021 fiscal years and 25% based on the average ROE performance during the 2019 through 2021 period subject to participants purchasing and holding 1/3 of pledged shares in 2019, 2/3 in 2020, and 100% in 2021. Payouts begin at 0% of awarded shares for a 4.5% ROE, 100% at a 9.0% ROE and 150% at a 13.5% ROE with linear interpolation in between. The employee must remain employed through the end of the applicable performance period to vest in the shares earned in that performance period.
Under the SPA, bonus arrangements for certain employees of Sirius Group were granted. Certain of these bonus arrangements were paid to bonus recipients as compensation for services performed before the sale date ("transaction bonuses"). In addition, certain employees received additional bonus payments under the bonus arrangements after the 12th month and 20th month anniversary of the sale date ("retention bonuses"). Under the SPA, White Mountains agreed to pay the Company an amount equal to the transaction bonuses plus the employer-paid portion of employment or similar taxes less tax benefits attributable to the payment. In addition, White Mountains also agreed to pay the Company for the retention bonuses under the same terms as the transaction bonuses shortly after Sirius Group paid those amounts to the employees. During 2016, Sirius Group recorded $36.9 million in General and administrative expenses in connection with the transaction bonuses. The Company was paid $25.3 million and $30.5 million in 2017, and 2016, respectively, from its former parent for the transaction and retention bonuses after employment costs and taxes, which was recorded as Additional paid-in surplus. During 2018, the Company was not paid any amount from its former parent for the transaction and retention bonuses. During 2017 and 2016, Sirius Group recorded $13.3 million and $17.6 million, respectively, in General and administrative expenses in connection with the retention bonuses. During 2018, Sirius Group did not record any General and administrative expenses in connection with the retention bonuses.
The Company did not pay any dividends during the years ended December 31, 2018 and 2017, respectively. The Company paid common dividends of $27.0 million in cash and investments during the year ended December 31, 2016.
On November 5, 2018, in connection with the closing of the Merger, Sirius Group issued 11,901,670 of the 15,000,000 authorized Series B preference shares, with a par value of $0.01 per share, as part of the Sirius Group Private Placement. (See Note 3.)
The Company adjusts the carrying value of the Series B preference shares to equal the redemption value at the end of each reporting period. At December 31, 2018, the balance of the Series B preference shares was $232.2 million.
In connection with the acquisition of IMG, the Company issued mandatorily convertible stock in the form of Series A redeemable preference shares as a portion of the consideration paid. (See Note 3.) The Company issued 100,000 of the 150,000 authorized Series A redeemable preference shares to the seller of IMG. Each Series A redeemable preference share has a liquidation preference per share of $1,000.
At December 31, 2017, the balance of the Series A redeemable preference shares with accrued dividends was $106.1 million.
The following table shows the change in non-controlling interest for the years ended December 31, 2018, 2017, and 2016:
Basic earnings (loss) per share is computed by dividing net income (loss) available to Sirius Group common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to Sirius Group common shareholders by the weighted-average number of common shares outstanding adjusted to give effect to potentially dilutive securities.
The changes in accumulated other comprehensive (loss), by component, for the years ended December 31, 2018, 2017, and 2016 are as follows:
(1)Other, net consists of accumulated other comprehensive income related to balances arising from Sirius Group's share in OneBeacon's Pension Liability (See Note 19) and from amortization of hedge related to the 2007 SIG Senior Notes.
The Insurance Act 1978 of Bermuda and related regulations, as amended ("Insurance Act"), regulates the insurance business of Bermuda-domiciled insurers and reinsurers. The Insurance Act imposes solvency and liquidity standards on Bermuda insurance companies, as well as auditing and reporting requirements. The Bermuda Monetary Authority ("BMA"), a Solvency II-equivalent regulatory regime, has confirmed that it will act as the primary group supervisor effective July 1, 2016 and has designated Sirius Bermuda as the designated insurer. Therefore, Sirius Group is subject to the BMA's group supervision and solvency rules. Under the Insurance Act, insurers and reinsurers are required to maintain minimum statutory capital and surplus at a level equal to the greater of a minimum solvency margin ("MSM") and the Enhanced Capital Requirement ("ECR") which is established by reference to either a Bermuda Solvency Capital Requirement ("BSCR") model or an approved internal capital model. The BSCR model is a risk-based capital model that provides a method for determining an insurer's minimum required capital taking into account the risk characteristics of different aspects of the company's business. As of December 31, 2018, the eligible capital for Sirius Group exceeded the required capital as measured by the BSCR model.
Sirius Group participates in the Lloyd's market through the 100% ownership of Sirius International Corporate Member Ltd., a Lloyd's corporate member, which in turn provides underwriting capacity to Syndicate 1945. Sirius Group has its own Lloyd's managing agent, Sirius International Managing Agency, which manages Syndicate 1945. Lloyd's approved net capacity for 2019 is £80.8 million, or approximately $103.0 million (based on the December 31, 2018 GBP to USD exchange rate). Stamp capacity is a measure of the amount of net premium (premiums written less acquisition costs) that a syndicate is authorized by Lloyd's to write.
Sirius America's policyholders' surplus, as reported to regulatory authorities as of December 31, 2018 and 2017, was $522.2 million and $521.8 million. Sirius America's statutory net (loss) income for the years ended December 31, 2018, 2017, and 2016 was $(9.9) million, $(6.4) million, and $82.7 million, respectively. The principal differences between Sirius America's statutory amounts and the amounts reported in accordance with GAAP include deferred acquisition costs, deferred taxes, gains recognized under retroactive reinsurance contracts, and market value adjustments for debt securities. The minimum policyholders' surplus necessary to satisfy Sirius America's regulatory requirements was $93.4 million as of December 31, 2018, which equals the authorized control level of the NAIC risk-based capital based on Sirius America's policyholders' surplus.
Oakwood Insurance Company ("Oakwood") policyholders' surplus, as reported to regulatory authorities as of December 31, 2018 and 2017 was $40.5 million and $41.4 million, respectively. Oakwood's statutory net (loss) income for the years ended December 31, 2018, 2017, and 2016 was $(1.1) million, $0.5 million and $(12.0) million, respectively. The minimum policyholders' surplus necessary to satisfy Oakwood's regulatory requirements was $5.0 million as of December 31, 2018, which equals the authorized control level of the NAIC risk-based capital based on Oakwood's policyholders' surplus. During 2017, Mount Beacon was merged into Oakwood.
WRM America policyholders' surplus, as reported to regulatory authorities as of December 31, 2018 was $13.9 million. WRM America's statutory net (loss) for the year ended December 31, 2018 was $(0.6) million. The minimum policyholders' surplus necessary to satisfy WRM America's regulatory requirements was $9.8 million as of December 31, 2018, and the NAIC risk-based capital authorized control level was $0.1 million.
Under the normal course of business, Sirius America has the ability to pay dividends to its immediate parent during any twelve-month period without the prior approval of regulatory authorities in an amount set by a formula based on the lesser of net investment income, as defined by statute, or 10% of statutory surplus, in both cases as most recently reported to regulatory authorities, subject to the availability of earned surplus and subject to dividends paid in prior periods. Based on this formula, Sirius America does not have any dividend capacity as of December 31, 2018, without prior regulatory approval. As of December 31, 2018, Sirius America had $522.2 million of statutory surplus and $108.4 million of earned surplus. During 2018, Sirius America did not pay any dividends to its immediate parent.
During 2018 and 2017, the Company did not pay any dividends to its shareholders. The Company paid $27.0 million in dividends to its former parent on April 18, 2016. As of December 31, 2018, Sirius Group had $52.1 million of net unrestricted cash, short-term investments, and fixed maturity investments outside of its regulated and unregulated insurance and reinsurance operating subsidiaries.
There is a capital maintenance agreement between Sirius International and Sirius America, which obligates Sirius International to make contributions to Sirius America's surplus in order for Sirius America to maintain surplus equal to at least 125% of the company action level risk-based capital as defined in the National Association of Insurance Commissioners' Property/Casualty Risk-Based Capital Report. The agreement provides for a maximum contribution to Sirius America of $200 million. During 2018, Sirius International did not make any contributions to the surplus of Sirius America. In 2017, Sirius International provided Sirius America with an accident year stop-loss cover, with an attachment point in excess of 83% and a limit of $27 million. This accident year stop-loss reinsurance was not renewed in 2018. In addition, at November 1, 2016, Sirius America and Sirius International entered into a quota share agreement whereby Sirius America ceded Sirius International 75% of its reinsurance business on an accident year basis. This quota share agreement was in force through March 31, 2018. For the year ended December 31, 2018 and 2017, Sirius America ceded $9 million and $115 million, respectively, of premiums earned to Sirius International under this quota share agreement. In the third quarter of 2018, Sirius America entered into a commutation agreement with Sirius International and commuted all outstanding balances related to the accident year stop-loss and the 75% quota share.
Subject to certain limitations under Swedish law, Sirius International is permitted to transfer pre-tax income amounts into an untaxed reserve referred to as a Safety Reserve. As of December 31, 2018, Sirius International's Safety Reserve amounted to SEK 10.7 billion, or $1.2 billion (based on the December 31, 2018 SEK to USD exchange rate). Under GAAP, an amount equal to the Safety Reserve, net of a related deferred tax liability established at the Swedish tax rate of 22%, is classified as shareholder's equity. Generally, this deferred tax liability is only required to be paid by Sirius International if it fails to maintain prescribed levels of premium writings and loss reserves in future years. As a result of the indefinite deferral of these taxes, Swedish regulatory authorities apply no taxes to the Safety Reserve when calculating solvency capital under Swedish insurance regulations. Accordingly, under local statutory requirements, an amount equal to the deferred tax liability on Sirius International's Safety Reserve ($261.1 million as of December 31, 2018) is included in solvency capital. Access to the Safety Reserve is restricted to coverage of insurance and reinsurance losses. Access for any other purpose requires the approval of Swedish regulatory authorities. Similar to the approach taken by Swedish regulatory authorities, most major rating agencies generally include the $1.2 billion balance of the Safety Reserve, without any provision for deferred taxes, in Sirius International's regulatory capital when assessing Sirius International and Sirius Group's financial strength. Subject to certain limitations under Swedish law, Sirius International is permitted to transfer certain portions of its pre-tax income to its Swedish parent companies to minimize taxes (referred to as a group contribution). During 2018, Sirius International did not transfer any of its 2017 pre-tax income via group contributions to its Swedish parent companies.
Sirius Group's investments in unconsolidated entities are included within Other long-term investments and consist of investments in common equity securities or similar instruments, which give Sirius Group the ability to exert significant influence over the investee's operating and financial policies ("equity method eligible unconsolidated entities"). Such investments may be accounted for under either the equity method or, alternatively, Sirius Group may elect to account for them under the fair value option.
The following table presents the components of Other long-term investments as of December 31, 2018 and 2017:
(2)There were no investments accounted for using the equity method as of December 31, 2018 and 2017.
The following tables present aggregated summarized financial information for Sirius Group's investments in equity method eligible unconsolidated entities:
The following table summarizes amounts recorded by Sirius Group under the equity method relating to its investment in OneBeacon for the period January 1, 2016 until April 18, 2016:
The following table presents financial information for OneBeacon for the three months ended March 31, 2016:
Sirius Group is a passive investor in certain third-party-managed hedge and private equity funds, some of which are VIEs. Sirius Group is not involved in the design or establishment of these VIEs, nor does it actively participate in the management of the VIEs. The exposure to loss from these investments is limited to the carrying value of the investments at the balance sheet date.
In the normal course of business, Sirius Group enters into insurance and reinsurance contracts with certain of its insurance and MGU affiliates, or their subsidiaries. During the year ended December 31, 2018 and 2017, these contracts with related parties resulted in gross written premiums of $67.9 million and $3.5 million, respectively. During the year ended December 31, 2016, Sirius Group did not have any contracts with related parties that resulted in any gross written premiums. As at December 31, 2018 and 2017, Sirius Group had total receivables due from related parties of $14.3 million and $10.4 million, respectively. At December 31, 2018, Sirius Group did not have any payables due to related parties. At December 31, 2017, Sirius Group had total payables due to related parties of $0.5 million.
White Mountains Advisors ("WMA"), an indirect wholly-owned subsidiary of Sirius Group's former parent, provided investment advisory and management services to Sirius Group and its subsidiaries under an Investment Advisory Services Agreement. During 2016, Sirius Group terminated this agreement. Sirius Group incurred $3.1 million of investment fees during 2016.
On August 16, 2016, the Company announced that Meyer "Sandy" Frucher was added as an independent director to its board of directors. Mr. Frucher is Vice Chairman of Nasdaq, Inc. The Company is traded on the Nasdaq Global Select Market and has business transactions that are related to its listing on the exchange under the normal course of business. (See Note 3.)
During the years ended December 31, 2018, 2017, and 2016, Sirius Group received its gross reinsurance premiums written from three major, third-party reinsurance intermediaries as detailed in the following table:
The Lloyd's Central Fund is available to satisfy claims if a member of Lloyd's is unable to meet its obligations to policyholders. Sirius Group has an obligation to pay contributions to the Lloyd's Central Fund each year based on gross written premium. For 2019, Sirius Group estimates the Lloyd's Central Fund contributions to be $0.6 million (based on the December 31, 2018 GBP to USD exchange rate) which is 0.35% of gross written premium. The Council of Lloyd's have the power to levy an additional contribution on members if it considered necessary, and the maximum additional contribution is currently 3% of capacity.
Sirius Group, and the insurance and reinsurance industry in general, are routinely subject to claims related litigation and arbitration in the normal course of business, as well as litigation and arbitration that do not arise from, or are directly related to, claims activity. Sirius Group estimates of the costs of settling matters routinely encountered in claims activity are reflected in the reserves for unpaid loss and LAE. (See Note 5.)