The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, were derived from the audited consolidated financial statements of the Company. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.
Based on 40.7 million, 40.8 million, 40.9 million, 42.7 million and 44.7 million common shares outstanding for December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
Commencing in 2015, we initiated a strategic build out of our insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving our insurance program strategic goals of increased premium volume and improved underwriting results. Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business. We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise. As part of this initiative, we launched a new syndicate through Lloyd’s of London and formed Ireland Insurance, providing us access to additional international business and new product opportunities to further diversify and broaden our insurance portfolio.
Net Investment Income. Net investment income increased by 7.1% to $581.2 million in 2018 compared with investment income of $542.9 million in 2017. Net pre-tax investment income, as a percentage of average invested assets, was 3.2% in 2018 compared to 3.1% in 2017. The increases in both income and yield were primarily the result of higher income from our growing fixed maturity portfolio and higher income from our limited partnerships, partially offset by lower dividend income from our equity portfolio.
Net investment income increased by 14.8% to $542.9 million in 2017 compared with investment income of $473.1 million in 2016. Net pre-tax investment income, as a percentage of average invested assets, was 3.1% in 2017 compared to 2.8% in 2016. The increases in income and yield were primarily the result of higher income from our limited partnerships and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.
Net Realized Capital Gains (Losses). Net realized capital losses were $127.1 million in 2018, net realized capital gains were $153.2 million in 2017 and net realized capital losses were $7.2 million in 2016. The net realized capital losses of $127.1 million in 2018 were comprised of $67.3 million of net losses from fair value re-measurements, $51.7 million of net realized capital losses from sales of investments and $8.1 million of other-than-temporary impairments. The net realized capital gains of $153.2 million in 2017 were comprised of $139.0 million of net gains from fair value re-measurements and $21.3 million of net realized capital gains from sales of investments, partially offset by $7.1 million of other-than-temporary impairments. The net realized capital losses of $7.2 million in 2016 were comprised of $31.6 million of other-than-temporary impairments, realized capital loss of $28.0 million from the sale of our Heartland subsidiary and $6.7 million of net realized capital losses from sales of investments, partially offset by $59.1 million of net gains from fair value re-measurements.
Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, six of which remain outstanding. These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss). As a result of these adjustments in value, we recognized net derivative gains of $0.5 million, $9.6 million and 18.6 million in 2018, 2017 and 2016, respectively. The change in the fair value of these equity index put option contracts is generally indicative of the change in the equity markets and interest rates over the same periods.
Incurred losses and LAE increased by 25.0% to $5,651.4 million in 2018, compared to $4,522.6 million in 2017, primarily due to an increase in current year attritional losses of $711.9 million, mainly due to the impact of the increase in premiums earned and changes in the mix of business, and unfavorable development of $561.2 million on prior years catastrophe losses, mainly related to Hurricanes Harvey, Irma and Maria and the California wildfires. The increase in loss estimates for Hurricanes Harvey, Irma and Maria was mostly driven by re-opened claims reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers. These increases were partially offset by a decrease of $263.6 million in current year catastrophe losses. The current year catastrophe losses of $1,239.0 million in 2018 related to Hurricane Michael ($462.0 million), Camp wildfire ($322.0 million), Woolsey wildfire ($154.0 million), Typhoon Jebi ($80.0 million), Hurricane Florence ($73.8 million), Cyclone Mekunu ($43.7 million), Typhoon Trami ($25.0 million), Australia Hailstorm ($25.0 million), other 2018 California wildfires ($24.6 million), Japan floods ($20.5 million) and the U.S. winter storms ($8.4 million). The $1,502.5 million of current year catastrophe losses in 2017 related to Hurricane Irma ($558.1 million), Hurricane Maria ($361.7 million), Hurricane Harvey ($316.7 million), the 2017 Northern California wildfires ($149.9 million), the Mexico City earthquake ($31.0 million), the South Africa Knysna fires ($23.7 million), Cyclone Debbie in Australia ($22.1 million), the Peru storms ($14.9 million), the 2017 US Midwest storms ($12.9 million) and the Southern California wildfires ($11.6 million).
development on prior years attritional losses in 2017 was mainly comprised of $207.1 million of favorable development on reinsurance business, primarily related to property and short tail business in the United States and Bermuda, and $56.4 million of favorable development on insurance business, mainly related to workers compensation business. The $1,502.5 million of current year catastrophe losses in 2017 is outlined above. The $387.9 million of current year catastrophe losses in 2016 related to Hurricane Matthew ($135.0 million), the Fort McMurray Canada wildfire ($115.8 million), 2016 U.S. storms ($51.6 million), the Ecuador earthquake ($23.2 million), the 2016 New Zealand earthquake ($18.9 million), the 2016 Taiwan earthquake ($15.1 million), the Tennessee wildfire ($14.7 million) and Hurricane Hermine ($13.5 million).
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 16.5% to $1,519.0 million for the year ended December 31, 2018 compared to $1,304.0 million for the year ended December 31, 2017. The changes were primarily due to the impact of the increases in premiums earned and changes in the mix of business towards additional pro rata business.
Commission, brokerage, taxes and fees increased by 9.7% to $1,304.0 million for the year ended December 31, 2017 compared to $1,188.7 million for the year ended December 31, 2016. The change was primarily due to the impact of the increases in premiums earned and changes in the mix of business.
The TCJA caused the Company to record income tax expense of $8.2 million in 2017. This income tax expense reflects the lower 21% tax benefit to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax benefit that had been expected before the TCJA. In 2018, the Company recorded adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts were finalized.
Shareholders’ equity increased by $293.8 million to $8,369.2 million at December 31, 2017 from $8,075.4 million at December 31, 2016, principally as a result of $469.0 million of net income, $121.9 million of net foreign currency translation adjustments, $25.0 million of share-based compensation transactions and $6.5 million of net benefit plan obligation adjustments, partially offset by $207.2 million of shareholder dividends, $71.3 million of unrealized depreciation on investments, net of tax and repurchases of 0.2 million common shares for $50.0 million.
Net investment income increased by 14.8% to $542.9 million in 2017 compared with investment income of $473.1 million in 2016. The increase was primarily due to an increase in limited partnership income and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.
Net realized capital losses were $127.1 million in 2018, net realized capital gains were $153.2 million in 2017 and net realized capital losses were $7.2 million in 2016. In 2018, we recorded $67.3 million of net losses from fair value re-measurements, $51.7 million of net realized capital losses from sales of investments and $8.1 million of other-than-temporary impairments. In 2017, we recorded $139.0 million of net gains from fair value re-measurements and $21.3 million of net realized capital gains from sales of investments, partially offset by $7.1 million of other-than-temporary impairments. In 2016, we recorded $31.6 million of other-than-temporary impairments, $28.0 million of realized capital loss from the sale of our Heartland subsidiary and $6.7 million of net realized capital losses from sales of investments, partially offset by $59.1 million of net gains from fair value re-measurements. The fixed maturity and equity sales during these years related primarily to adjusting the portfolios for overall market changes and individual credit shifts.
Premiums. Gross written premiums increased by 16.3% to $3,014.3 million in 2018 from $2,593.0 million in 2017, primarily due to increases in treaty property and treaty casualty writings and growth in the mortgage business. Net written premiums increased by 17.7% to $2,642.2 million in 2018 compared to $2,245.4 million in 2017, which is consistent with the change in gross written premiums. Premiums
earned increased by 15.9% to $2,529.0 million in 2018, compared to $2,181.2 million in 2017. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
2018, compared to $1,632.8 million in 2017. The increase was primarily due to $519.6 million of unfavorable development on prior years catastrophe losses in 2018, primarily related to Hurricanes Harvey, Irma and Maria and the 2017 California wildfires, an increase of $279.4 million in current year attritional losses, mainly due to the impact of the increase in premiums earned and changes in the mix of business, and an increase of $236.5 million in current year catastrophe losses. The increase in loss estimates for Hurricanes Harvey, Irma and Maria was mostly driven by re-opened claims reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers. The current year catastrophe losses of $952.2 million in 2018 related primarily to Hurricane Michael ($416.5 million), Camp wildfire ($297.0 million), Woolsey wildfire ($151.0 million), Hurricane Florence ($49.3 million), other 2018 California wildfires ($23.1 million), Typhoon Jebi ($6.5 million), Japan floods ($5.5 million), Typhoon Trami ($2.0 million) and the U.S. winter storms ($1.3 million). The $715.7 million of current year catastrophe losses in 2017 related to Hurricane Irma ($331.8 million), Hurricane Harvey ($204.3 million), the Northern California wildfires ($132.9 million), Hurricane Maria ($31.2 million), the Southern California wildfires ($9.6 million), and the 2017 US Midwest storms ($6.9 million).
Segment Expenses. Commission and brokerage expense increased by 22.9% to $568.4 million in 2018 compared to $462.5 million in 2017. The increases are mainly due to the impact of the increases in premiums earned and changes in the mix of business towards additional pro rata business. Segment other underwriting expenses increased to $60.3 million in 2018 from $55.9 million in 2017. The increases were mainly due to the impact of the increase in premiums earned.
Gross written premiums increased by 7.0% to $1,316.7 million in 2017 compared to $1,230.7 million in 2016, primarily due to the increases in Middle East and Asian business and a positive impact of $22.0 million from the movement of foreign exchange rates, partially offset by a decline in Latin American business. Net written premiums increased by 13.6% to $1,229.6 million in 2017 compared to $1,082.7 million in 2016. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance related to the quota share contracts. Premiums earned increased 7.4% to $1,202.0 million in 2017 compared to $1,119.1 million in 2016. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses and LAE increased by 117.8% to $1,059.6 million in 2017 compared to $486.6 million in 2016, primarily due to an increase of $277.5 million in current year catastrophe losses, favorable development of $224.8 million on prior years attritional losses in 2016 mainly related to property business which did not recur in 2017 and favorable development of $43.7 million on prior years catastrophe losses in 2016 which did not recur in 2017. The $456.3 million of current year catastrophe losses in 2017 are outlined above. The $178.8 million of current year catastrophe losses in 2016 were due to the Fort McMurray Canada wildfire ($97.5 million), Hurricane Matthew ($27.4 million), the Ecuador earthquake ($23.6 million), the 2016 Taiwan earthquake ($15.2 million) and the New Zealand earthquake ($14.0 million).
Commission and brokerage increased by 1.5% to $287.7 million in 2017 compared to $283.4 million in 2016. Segment other underwriting expenses increased to $38.8 million in 2017 compared to $35.5 million in 2016. The increases were mainly due to the impact of the increase in premiums earned.
Premiums. Gross written premiums increased by 38.3% to $1,666.3 million in 2018 compared to $1,205.0 million in 2017, primarily due to increased casualty and motor business written through the U.K. Branch and Ireland office, an increase in Bermuda property business and a positive impact of $15.8 million from the movement of foreign exchange rates. Net written premiums increased by 40.9% to $1,605.5 million in 2018 compared to $1,139.1 million in 2017, which is consistent with the change in gross written premiums. Premiums earned increased 21.1% to $1,324.2 million in 2018 compared to $1,093.3 million in 2017. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses and LAE increased by 10.0% to $808.7 million in 2018 compared to $735.3 million in 2017, primarily due to an increase of $172.2 million of current year attritional losses, related primarily to the impact of the increase in premiums earned, partially offset by a decrease of $81.5 million in current year catastrophe losses and $43.3 million of favorable development on prior years catastrophe losses mainly related to Hurricanes Irma and Maria. The current year catastrophe losses of $78.4 million in 2018 related primarily to Camp wildfire ($25.0 million), Hurricane Michael ($18.5 million), Typhoon Jebi ($13.4 million), Hurricane Florence ($13.0 million), Japan floods ($5.4 million) and Woolsey wildfire ($3.0 million). The $159.9 million of current year catastrophe losses in 2017 primarily related to Hurricane Maria ($53.4 million), Hurricane Irma ($43.6 million), Hurricane Harvey ($40.7 million), the Northern California wildfires ($14.0 million), the Mexico City earthquake ($4.9 million) and Cyclone Debbie in Australia ($3.3 million).
Incurred losses and LAE increased by 59.2% to $735.3 million in 2017 compared to $461.9 million in 2016, primarily due to an increase of $150.0 million in current year attritional losses related primarily to the impact of the increase in premiums earned and an increase of $134.4 million in current year catastrophe losses. The $159.9 million of current year catastrophe losses in 2017 are outlined above. The $25.5 million of current year catastrophe losses in 2016 were due to Hurricane Matthew ($10.3 million), the Fort McMurray Canada wildfire ($10.0 million) and the 2016 New Zealand earthquake ($5.0 million).
Segment Expenses. Commission and brokerage increased by 5.1% to $319.2 million in 2018 compared to $303.7 million in 2017 mainly due to the impact of the increase in premiums earned, partially offset by lower contingent commissions. Segment other underwriting expenses increased to $43.6 million in 2018 compared to $38.0 million in 2017. The increases are mainly due to the impact of the increases in premiums earned.
Commission and brokerage increased by 29.8% to $303.7 million in 2017 compared to $234.0 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and higher contingent commissions. Segment other underwriting expenses increased slightly to $38.0 million in 2017 compared to $36.3 million in 2016.
Premiums. Gross written premiums increased by 9.3% to $2,250.6 million in 2018 compared to $2,059.2 million in 2017.
This increase was related to most lines of business including casualty, energy, accident and health and premiums written through the Lloyd’s Syndicate. Net written premiums increased by 4.7% to $1,708.0 million in 2018 compared to $1,630.6 million in 2017. The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased 12.1% to $1,638.6 million in 2018 compared to $1,461.4 million in 2017. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.
Incurred losses and LAE decreased by 2.7% to $1,065.8 million in 2018 compared to $1,094.9 million in 2017, mainly due to a decrease of $127.5 million in current year catastrophe losses, partially offset by an increase in current year attritional losses of $105.5 million, due mainly to the impact of the increase in premiums earned. The current year catastrophe losses of $43.1 million in 2018 related primarily to Hurricane Michael ($24.0 million), Hurricane Florence ($9.5 million), the U.S. winter storms ($7.1 million), other 2018 California wildfires ($1.5 million) and Australia hailstorm ($1.0 million). The $170.6 million of current year catastrophe losses in 2017 were due to Hurricane Irma ($75.1 million), Hurricane Harvey ($68.0 million), Hurricane Maria ($14.0 million), the 2017 US Midwest storms ($6.0 million), the Northern California wildfires ($3.0 million), the Southern California wildfires ($2.0 million), the Mexico City earthquake ($1.4 million) and Cyclone Debbie in Australia ($1.1 million).
Incurred losses and LAE decreased by 2.5% to $1,094.9 million in 2017 compared to $1,122.7 million in 2016, mainly due to $230.0 million of more favorable development on prior years attritional losses in 2017 compared to 2016, partially offset by an increase of $121.2 million in current year catastrophe losses and an increase of $79.4 million in current year attritional losses, primarily related to the increase in premiums earned. The $56.4 million of favorable development on prior years attritional losses in 2017 mainly related to workers compensation business. The $170.6 million of current year catastrophe losses in 2017 are outlined above. The $49.4 million of current year catastrophe losses in 2016 were due to the 2016 U.S. storms ($30.0 million), Hurricane Matthew ($11.0 million) and the Fort McMurray Canada wildfire ($8.4 million).
Loss and LAE Reserves. Our most critical accounting policy is the determination of our loss and LAE reserves. We maintain reserves equal to our estimated ultimate liability for losses and LAE for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, we use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves whenever an adjustment appears warranted. We consider many factors when setting reserves including: (1) our exposure base and projected ultimate premiums earned; (2) our expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze our loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) uncertainties discussed below regarding our liability for A&E claims. Our insurance and reinsurance loss and LAE reserves represent management’s best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Our net income (loss) will be impacted in a period in which the change in estimated ultimate losses and LAE is recorded. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
process. Business in which claims are reported and settled relatively quickly are commonly referred to as short tail lines, principally property lines. On the other hand, casualty claims tend to take longer to be reported and settled and casualty lines are generally referred to as long tail lines. Our estimates of ultimate losses for shorter tail lines, with the exception of loss estimates for large catastrophic events, generally exhibit less volatility than those for the longer tail lines.
We use similar actuarial methodologies, such as expected loss ratio, chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, to estimate our ultimate losses and LAE for each exposure group. Although we use similar actuarial methodologies for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows us to have greater confidence in our estimates of ultimate losses for short tail lines at an earlier stage than for long tail lines. As a result, we utilize, as well, exposure-based methods to estimate our ultimate losses for longer tail lines, especially for immature accident years. For both short and long tail lines, we supplement these general approaches with analytically based judgments. We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using traditional actuarial methods. We estimate losses for these types of events based on information derived from catastrophe models, quantitative and qualitative exposure analyses, reports and communications from ceding companies and development patterns for historically similar events. Due to the inherent uncertainty in estimating such losses, these estimates are subject to variability, which increases with the severity and complexity of the underlying event.
At December 31, 2018, we had net unrealized losses, net of tax, of $179.4 million compared to unrealized gains, net of tax, of $50.0 million at December 31, 2017. Gains and losses from market fluctuations for investments held at market value are reflected as comprehensive income (loss) in the consolidated balance sheets. Gains and losses from market fluctuations for investments held at fair value are reflected as net realized capital gains and losses in the consolidated statements of operations and comprehensive income (loss). Market value declines for the fixed income portfolio, which are considered credit other-than-temporary impairments, are reflected in our consolidated statements of operations and comprehensive income (loss), as realized capital losses. We consider many factors when determining whether a market value decline is other-than-temporary, including: (1) we have no intent to sell and, more likely than not, will not be required to sell prior to recovery, (2) the length of time the market value has been below book value, (3) the credit strength of the issuer, (4) the issuer’s market sector, (5) the length of time to maturity and (6) for asset-backed securities, changes in prepayments, credit enhancements and underlying default rates. If management’s assessments change in the future, we may ultimately record a realized loss after management originally concluded that the decline in value was temporary. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by independent, professional investment managers using portfolio guidelines approved by internal management.
The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $13,119.1 million and $11,884.3 million at December 31, 2018 and 2017, respectively.
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 12.2% to minus 16.0% for the low range and from plus 12.2% to plus 16.0% for the high range. Both the higher and lower ranges are associated with the U.S. Reinsurance segment. The size of the range is dependent upon the level of confidence associated with the outcome. Within each range, management’s best estimate of loss reserves is based upon the point estimate derived by our actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. For the above presentation, we have assumed what we believe is a reasonable confidence level but note that there can be no assurance that our claim obligations will not vary outside of these ranges.
Additional losses, including those relating to latent injuries, and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by us or the reinsurance and insurance industry generally, may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional contracts, could have material adverse effects on our future financial condition, results of operations and cash flows.
With respect to asbestos only, at December 31, 2018, we had net asbestos loss reserves of $252.5 million, or 96.6%, of total net A&E reserves, all of which was for assumed business.
(2) Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.
We maintain our own economic capital models to monitor and project our overall capital, as well as, the capital at our operating subsidiaries. A key input to the economic models is projected income and this input is continually compared to actual results, which may require a change in the capital strategy.
As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At December 31, 2018 and December 31, 2017, we held cash and short-term investments of $897.1 million and $1,144.7 million, respectively. Our short-term investments are generally readily marketable and can be converted to cash. In addition to these cash and short-term investments, at December 31, 2018, we had $1,330.5 million of available for sale fixed maturity securities maturing within one year or less, $8,016.5 million maturing within one to five years and $3,205.0 million maturing after five years. Our $716.6 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in
conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling a significant amount of securities or using available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in realized capital gains or losses. At December 31, 2018 we had $181.3 million of net pre-tax unrealized depreciation related to fixed maturity securities, comprised of $367.9 million of pre-tax unrealized depreciation and $186.6 million of pre-tax unrealized appreciation.
In addition to our cash flows from operations and liquid investments, we also have multiple credit facilities that provide up to $200.0 million of unsecured revolving credit for liquidity but more importantly provide for up to $600.0 million and £30.0 million of collateralized standby letters of credit to support business written by our Bermuda operating subsidiaries.
The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,371.0 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after March 31, 2016 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2018, was $5,994.9 million. As of December 31, 2018, the Company was in compliance with all Group Credit Facility covenants.
At December 31, 2018 and 2017, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. At December 31, 2018, the Group Credit Facility had no outstanding letters of credit under tranche one and $558.8 million outstanding letters of credit under tranche two. At December 31, 2017, the Group Credit Facility had no outstanding letters of credit under tranche one and $538.2 million outstanding letters of credit under tranche two.
Effective November 9, 2018, Everest International renewed its credit facility with Lloyds Bank plc (“Everest International Credit Facility”). The current renewal of the Everest International Credit Facility provides up to £30.0 million for the issuance of standby letters of credit on a collateralized basis. The Company pays a commitment fee of 0.1% per annum on the average daily amount of the remainder of (1) the aggregate amount available under the facility and (2) the aggregate amount of drawings outstanding under the facility. The Company pays a credit commission fee of 0.35% per annum on drawings outstanding under the facility.
Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.4 million for December 31, 2018 and 2017.
Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 10% of its December 31, 2018 shareholders’ equity. Economic loss is the PML exposure, net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods. This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $759.2 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.
Our business operations depend on the proper functioning and availability of our information technology platform, which includes data processing and related electronic communications. We communicate electronically internally and with our brokers, program managers, clients and third party vendors. Some of these electronic communications involve personal, confidential and proprietary information. We seek to ensure that all of our systems, data and electronic transmissions are appropriately protected from cybersecurity attacks with the latest technology safeguards. These include, but are not limited to, requiring an independent assessment of outside vendor’s computing environment relative to the services they are providing us.
Interest expense on long term notes is calculated at the variable floating rate of 5.0% as of December 31, 2018.
Loss and LAE reserves represent management’s best estimate of losses from claim and related settlement costs. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash flows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from our estimates.
During 2018, 2017 and 2016, we declared and paid common shareholder dividends of $216.2 million, $207.2 million and $195.4 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland and Everest Dublin Holdings is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re, Everest International or Mt. Logan Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re’s ability to declare and pay dividends sufficient to support Holdings’ general corporate needs and that Holdings Ireland, Everest Dublin Holdings, Bermuda Re and Everest International will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2018, 2017 and 2016, Everest Re paid no dividends to Holdings and EGS paid dividends to Holdings of $90.0 million, $0.0 million and $0.0 million. For the years ended December 31, 2018, 2017 and 2016, Bermuda Re paid dividends to Group of $750.0 million, $400.0 million and $650.0 million, respectively; Everest International paid dividends to Group of $200.0 million, $0.0 million and $40.0 million, respectively; and Mt. Logan Re paid dividends to Group of $0.0 million, $25.0 million and $0.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 14 of Notes to Consolidated Financial Statements.
Accounting for Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, authoritative guidance regarding the accounting for share-based compensation. This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the consolidated statements of operations and comprehensive income/(loss). Previously, excess tax benefits have been recorded as part of the additional paid in capital within the consolidated balance sheets. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period. The Company has implemented this guidance prospectively as of January 1, 2017. The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows. The Company has implemented this guidance retrospectively as of January 1, 2017.
The following table presents certain financial statement line items as previously reported in 2016, the effect of those line items due to treating the cost of shares withheld upon settlement of share-based compensation awards as a financing activity with the Statements of Cash Flows and the line items as currently reported within the financial statements.
Leases. In February 2016, FASB issued ASU 2016-02 (and subsequently issued ASU 2018-11 in July, 2018) which outline new guidance on the accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company will adopt ASU 2016-02 effective January 1, 2019 and estimates that its increase in lease liability will be $75.0 million with no impact on shareholders’ equity upon adoption and no material impact on future consolidated statements of operation and comprehensive income (loss).
Debt Issuance Costs. In April 2015, The FASB issued ASU 2015-03, authoritative guidance on the presentation of debt issuance costs. This guidance requires that debt issuance costs be presented within the balance sheet as a reduction of the carrying value of the debt liability, rather than as a separate asset. This guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim reporting periods. The Company implemented this guidance effective in the second quarter of 2016. The adoption did not have a material impact on the Company’s financial statements.
Revenue Recognition. In May 2014, the FASB issued ASU 2014-09 and in August 2015, FASB issued ASU 2015-14 which outline revised guidance on the recognition of revenue arising from contracts with customers. The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2014-09 and ASU 2015-14 did not have a material impact on the Company’s financial statements.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $2,133.2 million of mortgage-backed securities in the $15,227.6 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $241.0 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
We had $13,119.1 million and $11,884.3 million of gross reserves for losses and LAE as of December 31, 2018 and 2017, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.0 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $1.3 billion resulting in a discounted reserve balance of approximately $10.2 billion, representing approximately 66.2% of the value of the fixed maturity investment portfolio funds.