The gain on bargain purchase, net of expenses, arose from the acquisition of Flagstone on November 30, 2012 and is net of transaction related expenses.
Transaction expenses incurred during 2014 relate to the acquisition of Western World. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
Return on average equity is calculated by dividing the net income available to Validus common shareholders for the period by the average of the beginning, ending and intervening quarter end shareholders’ equity available to Validus common shareholders balances.
Book value per common share is defined as total shareholders’ equity available to Validus common shareholders divided by the number of common shares outstanding as at the end of the period, giving no effect to dilutive securities.
In addition, the Company has a corporate and investment function (“Corporate and Investments”), which includes the activities of the parent company, and which carries out certain functions for the group, including investment management. Corporate and Investments includes investment income on a managed basis and other non-segment expenses, predominantly general and administrative, stock compensation and finance expenses. Corporate and Investments also denotes the activities of certain key executives such as the Chief Executive Officer and Chief Financial Officer. For internal reporting purposes, Corporate and Investments is reflected separately; however, it is not considered an operating segment. The Company’s corporate expenses, capital servicing and debt costs and investment results are presented separately within the corporate and investments discussion.
We underwrite global property insurance and reinsurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit reinsurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Property and other reinsurance premiums have historically risen in the aftermath of significant catastrophic losses. As loss reserves are established, industry surplus is depleted and the industry’s capacity to write new business diminishes. The global property and casualty insurance and reinsurance industry has historically been highly cyclical. Since 2007, increased capital provided by new entrants or by the commitment of capital by existing insurers and reinsurers increased the supply of insurance and reinsurance which resulted in a softening of rates on most lines. From 2010 to 2012, there was an increased level of catastrophe activity, principally the Chilean earthquake, Deepwater Horizon, the Tohoku earthquake, the New Zealand earthquakes and Superstorm Sandy, but the Company continues to see increased competition and decreased premium rates in most classes of business. In the absence of significant catastrophes in recent years, the market supply of capital is greater than the demand and therefore we expect to see continued pressure on rates in the near term.
The following tables present the Validus Re and AlphaCat segments’ January 2017 and 2016 reinsurance renewals by line of business:
Business written by the Talbot and Western World segments is distributed evenly throughout the year. Through December 31, 2016, the Talbot segment experienced a whole account rate decrease of approximately 5.8% driven primarily by decreases in the downstream energy and power and political lines. The Western World segment experienced a whole account rate increase of approximately 0.5% through December 31, 2016.
Book value per diluted common share plus accumulated dividends, together with other key book value financial indicators, are shown in the table below:
These are non-GAAP financial measures which are described in the section entitled “Non-GAAP Financial Measures.”
dividends per common share are an integral part of the value created for shareholders. During the year ended December 31, 2016 the Company paid cash dividends of $1.40 (2015: $1.28) per common share.
Book value per diluted common share is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid increased by $2.64, or 6.2%, from $42.33 at December 31, 2015 to $44.97 at December 31, 2016. Growth in book value per diluted common share inclusive of dividends was 9.5% and 10.0% for the year ended December 31, 2016 and 2015, respectively. All outstanding warrants expired on December 12, 2015 and no further warrants are anticipated to be issued.
Tangible book value per diluted common share is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus excluding the $150.0 million liquidation value of the preferred shares, less goodwill and other intangible assets, plus the assumed proceeds from the exercise of outstanding options; divided by the sum of common shares, unvested restricted shares, options outstanding (assuming their exercise). Tangible book value per diluted common share increased by $2.53, or 6.5%, from $38.63 at December 31, 2015 to $41.16 at December 31, 2016.
The Company believes that the following other financial indicators are beneficial in evaluating our performance and measuring the overall growth in value generated for shareholders:
Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income, finance expenses, dividends on preferred shares, tax (expense) benefit, income (loss) from operating affiliate, (income) attributable to AlphaCat investors, net realized and change in unrealized gains (losses) on investments, income (loss) from investment affiliates, foreign exchange gains (losses), other income (loss), non-recurring items and net (income) attributable to noncontrolling interests. The Company believes the reporting of underwriting income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the years ended December 31, 2016, 2015 and 2014 was $358.3 million, $463.1 million and $529.6 million, respectively.
Return on average equity represents the return generated on common shareholders’ equity during the year. Return on average equity is calculated by dividing the net income available to Validus common shareholders for the year by the average shareholders’ equity available to Validus during the year. Average shareholders’ equity is the average of the beginning, ending and intervening quarter end shareholders’ equity balances, excluding the $150.0 million liquidation value of the preferred shares. The Company’s objective is to generate superior returns on capital that appropriately reward shareholders for the risks assumed. The return on average equity for the years ended December 31, 2016, 2015 and 2014 was 9.7%, 10.3% and 13.0%, respectively.
There were no non-notable loss events occurring during the three months ended December 31, 2016. There were no notable or non-notable loss events occurring during the three months ended December 31, 2015. Losses and loss expenses incurred from notable loss events during the three months ended December 31, 2016 included losses and loss expenses from the fourth quarter 2016 notable loss events, Hurricane Matthew and the 2016 New Zealand earthquake, and were partially offset by a reduction on the second quarter 2016 notable loss event, the Canadian Wildfires, as follows:
The loss ratio for the three months ended December 31, 2016 was 50.9%, which included $46.8 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 8.7 percentage points compared to a loss ratio for the three months ended December 31, 2015 of 39.5%, which included $58.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.7 percentage points. The favorable loss reserve development on prior accident years of $46.8 million was primarily due to favorable development on attritional losses of $41.5 million and favorable development on events of $5.3 million. The favorable loss reserve development on prior accident years of $58.1 million was primarily due to favorable development of attritional losses of $48.1 million and favorable development on events of $10.0 million. The term “events” refers to aggregate notable and non-notable losses incurred.
Policy acquisition costs for the three months ended December 31, 2016 were $120.9 million compared to $102.3 million for the three months ended December 31, 2015, an increase of $18.6 million or 18.2%. The increase was primarily driven by an increase in the Validus Re segment as a result of profit commissions on agriculture business.
General and administrative expenses for the three months ended December 31, 2016 were $78.0 million compared to $98.6 million for the three months ended December 31, 2015, a decrease of $20.6 million or 20.9%. The decrease was primarily driven by a decrease in the performance bonus accrual.
Summarized Results of Operations - Fourth Quarter 2016 - Validus Re Segment
The loss ratio for the three months ended December 31, 2016 was 43.7%, which included $28.9 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 12.9 percentage points compared to a loss ratio for the three months ended December 31, 2015 of 43.3%, which included $22.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.7 percentage points. The loss ratio for the three months ended December 31, 2016 included losses on fourth quarter 2016 notable loss events of $32.5 million, or 14.4 percentage points of the loss ratio. Partially offsetting these losses was a reduction on the second quarter 2016 notable loss event, the Canadian Wildfires, of $12.0 million, benefiting the loss ratio by 5.3 percentage points, for total notable losses of $20.5 million or 9.1 percentage points of the loss ratio. The favorable development of $28.9 million on prior accident years for the three months ended December 31, 2016 was primarily due to favorable development on attritional losses of $24.3 million and favorable development on events of $4.6 million.
Policy acquisition costs for the three months ended December 31, 2016 were $53.4 million compared to $37.5 million for the three months ended December 31, 2015, an increase of $15.9 million or 42.4%. The increase was primarily driven by an increase in the specialty lines as a result of profit commissions on agriculture business.
The combined ratio for the three months ended December 31, 2016 was 77.6% compared to 69.3% for the three months ended December 31, 2015, an increase of 8.3 percentage points.
Underwriting income for the three months ended December 31, 2016 was $50.3 million compared to $71.3 million for the three months ended December 31, 2015, a decrease of $21.1 million, or 29.5%.
The following table presents underwriting income for the three months ended December 31, 2016 and 2015:
Gross premiums written for the three months ended December 31, 2016 were $218.6 million compared to $229.7 million for the three months ended December 31, 2015, a decrease of $11.0 million, or 4.8%. Gross premiums written for the three months ended December 31, 2016 included $71.4 million of property premiums, $39.6 million of marine premiums and $107.6 million of specialty premiums compared to $73.9 million of property premiums, $60.6 million of marine premiums and $95.1 million of specialty premiums for the three months ended December 31, 2015. The decrease in the marine lines of $21.0 million was primarily driven by decreases in the upstream energy and cargo classes as a result of reductions in our participation and non-renewals on various programs due to the current rate environment and premium adjustments on prior year policies. This decrease was partially offset by an increase in gross premiums written in the specialty lines of $12.5 million, primarily due to increases in the contingency, political lines and financial lines classes of $10.0 million, $7.6 million and $4.1 million, respectively.
The loss ratio for the three months ended December 31, 2016 was 60.6%, which included $16.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 9.2 percentage points compared to a loss ratio for the three months ended December 31, 2015 of 38.6%, which included $23.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.3 percentage points. The loss ratio for the three months ended December 31, 2016 included losses on fourth quarter 2016 notable loss events of $14.6 million, or 8.4 percentage points of the loss ratio. Partially offsetting these losses was a reduction on the second quarter 2016 notable loss event, the Canadian Wildfires, of $2.2 million, benefiting the loss ratio by 1.3 percentage points, for total notable losses of $12.4 million or 7.1 percentage points of the loss ratio. The favorable development of $16.1 million on prior accident years for the three months ended December 31, 2016 is primarily due to favorable development on attritional losses.
Gross premiums written for the three months ended December 31, 2016 were $87.0 million compared to $71.1 million for the three months ended December 31, 2015, an increase of $15.9 million, or 22.3%. Gross premiums written for the three months ended December 31, 2016 included $29.0 million of property premiums and $58.0 million of liability premiums, compared to $13.9 million of property premiums and $57.2 million of liability premiums for the three months ended December 31, 2015. The increase in gross premiums written in the property lines of $15.2 million was primarily due to additional business written in the programs property, commercial package property, and brokerage property classes of $5.6 million, $3.9 million, and $3.1 million, respectively, as a result of the continued build out of the underwriting platform in short-tail lines.
The loss ratio for the three months ended December 31, 2016 was 72.0%, which included $0.6 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 0.9 percentage points compared to a loss ratio for the three months ended December 31, 2015 of 54.7%, which included $7.3 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 11.9 percentage points. The loss ratio for the three months ended December 31, 2016 included losses on fourth quarter 2016 notable loss events of $3.4 million, or 4.5 percentage points of the loss ratio and other U.S.-based weather losses of $2.8 million, or 3.7 percentage points of the loss ratio. The favorable development of $7.3 million on prior accident years for the three months ended December 31, 2015 is primarily due to favorable development on attritional losses and the amortization of the risk premium adjustment accounted for at the time of the acquisition of Western World.
Underwriting loss for the three months ended December 31, 2016 was $6.7 million compared to income of $3.8 million for the three months ended December 31, 2015, a decrease of $10.5 million.
In presenting the Company’s results, management has included and discussed the results of AlphaCat, which are presented on an asset manager basis. Validus’ share of AlphaCat income is a non-GAAP measure and is not calculated under standards or rules that comprise U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
Summarized Results of Operations - Fourth Quarter 2016 - AlphaCat Segment
Revenues earned for the three months ended December 31, 2016 were $4.7 million, of which $3.9 million were earned from third parties, compared to $6.3 million for the three months ended December 31, 2015, of which $5.0 million were earned from third parties. The decrease in revenues earned from third parties of $1.1 million was driven by a decrease in performance fees earned as a result of the notable loss events incurred during the three months ended December 31, 2016.
Total expenses for the three months ended December 31, 2016 were $2.9 million, compared to $3.4 million for the three months ended December 31, 2015, a decrease of $0.5 million, or 15.7%.
Income before investment income from AlphaCat Funds and Sidecars for the three months ended December 31, 2016 was $1.8 million, compared to $2.9 million for the three months ended December 31, 2015, a decrease of $1.1 million, or 38.0%.
Investment income from AlphaCat Funds and Sidecars, excluding PaCRe which was off-risk effective January 1, 2016, for the three months ended December 31, 2016 was $4.5 million, compared to $5.9 million for the three months ended December 31, 2015, a decrease of $1.4 million or 23.9%. The decrease was driven by the notable loss events incurred during the three months ended December 31, 2016.
Validus’ share of AlphaCat income, excluding PaCRe, for the three months ended December 31, 2016 was $6.3 million, compared to $8.8 million for the three months ended December 31, 2015, a decrease of $2.5 million, or 28.5%.
Tax benefit for the three months ended December 31, 2016 was $21.2 million compared to $0.8 million for the three months ended December 31, 2015, a favorable movement of $20.5 million. The favorable movement was primarily due to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Flagstone acquisition. The Company believes it is now more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over the next three years and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million in the quarter.
The Company acquired Western World on October 2, 2014, therefore the results of Western World have been included in the Company’s consolidated results from the date of acquisition. The following table presents the results of operations for the years ended December 31, 2016, 2015 and 2014:
Non-GAAP Financial Measures. In presenting the Company’s results, management has included and discussed underwriting income and operating income that are not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
Highlights for the year ended December 31, 2016, 2015 and 2014 were as follows:
Gross premiums written for the year ended December 31, 2016 were $2,648.7 million compared to $2,557.5 million for the year ended December 31, 2015, an increase of $91.2 million, or 3.6%. The increase in gross premiums written was primarily driven by an increase in the AlphaCat and Western World segments and was partially offset by a decrease in the Validus Re and Talbot segments.
Losses and loss expenses arising from notable and non-notable loss events occurring during the years ended December 31, 2016, 2015 and 2014 are set out in the tables below:
Policy acquisition costs for the years ended December 31, 2016, 2015 and 2014 were $449.5 million, $410.1 million and $339.5 million, respectively.
Underwriting income for the years ended December 31, 2016, 2015 and 2014 was $358.3 million, $463.1 million and $529.6 million, respectively.
The following table presents underwriting income by line of business for the years ended December 31, 2016 and 2015:
An increase in gross premiums written in the specialty lines of $105.7 million, primarily due to new casualty lines written during the period of $79.0 million and business historically written in marine lines being renewed in specialty lines.
Net premiums earned for the year ended December 31, 2016 were $943.9 million compared to $990.2 million for the year ended December 31, 2015, a decrease of $46.3 million, or 4.7%. The decrease was driven by decreases in the property and marine lines of $32.3 million and $36.4 million, respectively, as a result of lower gross premiums written during the year ended December 31, 2016, offset by the earned impact of the reduction in reinsurance premiums ceded and was partially offset by an increase in net premiums earned in the specialty lines of $22.4 million, primarily due to the increase in gross premiums written as noted above, the impact of reinstatement premiums and adjustments to existing business.
Losses and loss expenses for the year ended December 31, 2016 were $411.5 million compared to $458.0 million for the year ended December 31, 2015, a decrease of $46.5 million or 10.2%. The decrease was primarily as a result of lower losses and loss expenses from attritional losses and notable loss events during the year ended December 31, 2016 and was partially offset by higher losses and loss expenses from non-notable loss events.
During the year ended December 31, 2016, there were three notable loss events and four non-notable loss events that impacted Validus Re as set out in the table below:
▪Hurricane Matthew - property and marine lines of $12.2 million and $1.4 million, respectively.
▪Tianjin - property and marine lines of $23.3 million and $12.5 million, respectively; and
For the year ended December 31, 2016, losses and loss expenses incurred from the 2016 non-notable loss events, the Texas Hailstorms, Kumamoto Earthquake, Jubilee Oil and SpaceX, were $42.8 million, or 4.5 percentage points of the loss ratio. Net of reinstatement premiums of $12.4 million, these events resulted in an aggregate reduction of underwriting income of $30.4 million. The losses and loss expenses of the 2016 non-notable loss events by line of business were as follows:
For the year ended December 31, 2015, losses and loss expenses from the 2015 Chilean Earthquake non-notable loss event were $17.6 million, or 1.8 percentage points of the loss ratio, and related primarily to Validus Re’s property lines. Net of reinstatement premiums of $2.2 million, this event resulted in an aggregate reduction of underwriting income of $15.4 million.
Loss reserve development by line of business for the years ended December 31, 2016 and 2015 was as follows:
The favorable development on events in 2016 in the property lines was primarily related to the 2015 Chilean Earthquake non-notable loss event and the Tianjin notable loss event. The adverse development in 2016 in the marine lines primarily related to reserves established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015.
The favorable development on events in 2015 in the property lines was primarily related to Superstorm Sandy.
Policy acquisition costs for the year ended December 31, 2016 were $181.0 million compared to $166.4 million for the year ended December 31, 2015, an increase of $14.7 million, or 2.4 percentage points of the policy acquisition costs ratio. The increase was driven by an increase in the specialty lines due to profit commissions on agriculture business, as well as an increase in financial, trade credit and mortgage lines, along with new casualty business which carries higher costs and was partially offset by a decrease in the marine lines as a result of a reduction in proportional business along with adjustments to existing business.
A decrease in gross premiums written in the property lines of $69.1 million, primarily due to a reduction in business written in the catastrophe excess of loss lines of $76.8 million, driven by reductions in participation on various programs due to market conditions; and
Net premiums earned for the year ended December 31, 2015 were $990.2 million compared to $917.3 million for the year ended December 31, 2014, an increase of $72.9 million, or 8.0%. The increase was primarily due to an increase in the specialty lines of $131.8 million as a result of the increase in gross premiums written as described above and was partially offset by decreases in the property and marine lines of $39.2 million and $19.7 million, respectively, as a result of lower gross premiums written during the year ended December 31, 2015 compared to the year ended December 31, 2014.
For the year ended December 31, 2014, losses and loss expenses from a single notable loss event, Tripoli Airport, were $22.5 million, or 2.4 percentage points of the loss ratio and primarily related to the specialty lines. Net of reinstatement premiums of $3.0 million, this event resulted in an aggregate reduction of underwriting income of $19.5 million.
For the year ended December 31, 2014, losses and loss expenses incurred from two non-notable loss events, the Japanese Snowstorm and the 2014 Chilean Earthquake, were $29.9 million, or 3.3 percentage points of the loss ratio and related solely to the property lines. Net of reinstatement premiums of $2.5 million, these events resulted in an aggregate reduction of underwriting income of $27.4 million.
The favorable development on events in the property lines was primarily related to the European Floods and Superstorm Sandy notable loss events. The adverse development on events in the marine lines was primarily related to the Costa Concordia notable loss event, and was partially offset by favorable development on the Gryphon Alpha mooring failure notable loss event.
Policy acquisition costs for the year ended December 31, 2015 were $166.4 million compared to $141.7 million for the year ended December 31, 2014, an increase of $24.7 million, or 1.3 percentage points of the policy acquisition costs ratio. The increase was primarily due to an increase in the policy acquisition costs ratio in the marine and specialty lines of 4.3 and 1.4 percentage points, respectively, as a result of the impact of premium adjustments and profit commissions, respectively.
A decrease in gross premiums written in the property lines of $10.0 million. The decrease includes an increase in premium estimates of $5.2 million, which had no impact on earned premium. After the impact of these changes in estimates, the decrease was primarily driven by decreases in the downstream energy and power and property treaty classes as a result of the timing of renewals, the non-renewal of various programs due to the current rate environment and reduced premium adjustments in the current year; and
A decrease in gross premiums written in the marine lines of $65.6 million, which includes an increase in premium estimates of $4.2 million, which had no impact on earned premium. After the impact of these changes in estimates, the decrease was primarily driven by decreases in the upstream energy and cargo classes as a result of reductions in our participation and non-renewals on various programs due to continued pressure on rates from the lack of activity and lower prices in the oil and gas sector; partially offset by,
An increase in gross premiums written in the specialty lines of $27.5 million. The increase includes an increase in premium estimates of $17.0 million, which had no impact on earned premium. After the impact of these changes in estimates, the increase was primarily driven by increases in the contingency and political violence classes as a result of premium adjustments on prior period policies and an increase in the financial lines as a result of new business written during the year. The increases were partially offset by a decrease in the aviation direct class as a result of non-renewals on various programs due to continued pressure on rates.
Reinsurance premiums ceded for the year ended December 31, 2016 were $175.7 million compared to $198.9 million for the year ended December 31, 2015, a decrease of $23.2 million, or 11.6%. The decrease was primarily due to a decrease in the property lines of $17.4 million as a result of lower quota share ceded premiums during the year ended December 31, 2016 compared to the year ended December 31, 2015 and a decrease in the marine lines of $4.6 million as a result of higher reinstatement premiums during the year ended December 31, 2015, which was primarily attributable to $11.1 million of reinstatement premiums from Pemex, a 2015 notable loss event.
Net premiums earned for the year ended December 31, 2016 were $781.9 million compared to $838.1 million for the year ended December 31, 2015, a decrease of $56.2 million, or 6.7%. Excluding the impact of the changes in estimates noted above on gross premiums written, which had no impact on earned premium, the decrease was primarily driven by the overall reduction in net premiums written in the marine lines and slower earnings patterns on longer-term contracts in the specialty lines during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Losses and loss expenses for the year ended December 31, 2016 were $424.9 million compared to $347.3 million for the year ended December 31, 2015, an increase of $77.6 million or 22.3%, primarily as a result of lower favorable development on prior accident years and higher losses from non-notable loss events during the year ended December 31, 2016.
During the year ended December 31, 2016, there were three notable loss events and four non-notable loss events that impacted Talbot as set out in the table below:
During the year ended December 31, 2015, there were two notable loss events and one non-notable loss event that impacted Talbot as set out in the table below:
For the year ended December 31, 2016, losses and loss expenses from three notable loss events, the Canadian Wildfires, Hurricane Matthew and the 2016 New Zealand Earthquake were $24.1 million, or 3.1 percentage points of the loss ratio. Net of reinstatement premiums of $0.4 million, these events resulted in an aggregate reduction of underwriting income of $23.7 million. The losses and loss expenses of the 2016 notable loss events by line of business were as follows:
▪Canadian Wildfires - property and specialty lines of $9.3 million and $0.2 million, respectively;
▪Pemex - property and marine lines of $0.4 million and $12.5 million, respectively.
For the year ended December 31, 2016, losses and loss expenses incurred from the 2016 non-notable loss events, the Texas Hailstorms, Kumamoto Earthquake, Jubilee Oil and SpaceX, were $20.5 million, or 2.6 percentage points of the loss ratio. Net of reinstatement premiums of $0.1 million, these events resulted in an aggregate reduction of underwriting income of $20.4 million. The losses and loss expenses of the 2016 non-notable loss events by line of business were as follows:
▪Texas Hailstorms and Kumamoto Earthquake - property lines of $5.8 million; and
The favorable development on events in the property lines was primarily related to the 2011 Thailand Floods notable loss event.
General and administration expenses for the year ended December 31, 2016 were $134.5 million compared to $155.3 million for the year ended December 31, 2015, a decrease of $20.8 million, or 13.4%. The decrease was primarily due to the impact of foreign exchange and a reduction in the performance bonus accrual.
Highlights for the for the year ended December 31, 2015 as compared to the year ended December 31, 2014 were as follows:
Gross premiums written for the year ended December 31, 2015 were $1,018.8 million compared to $1,101.8 million for the year ended December 31, 2014, a decrease of $82.9 million or 7.5%. The decrease in gross premiums written was primarily driven by:
A decrease in gross premiums written in the marine lines of $65.2 million, primarily driven by a decrease in the upstream energy and cargo lines due to ongoing market conditions and economic factors, including the worldwide reduction in oil prices, which have reduced new business and renewals. Also contributing to the decrease was a decrease in the marine hull lines primarily as a result of 18-month policies written during the year ended December 31, 2014 which were not yet due for renewal; and
A decrease in gross premiums written in the specialty lines of $7.7 million, primarily driven by a decrease in the aviation treaty lines as a result of a higher level of reinstatement premiums and adjustments to prior year policies during the year ended December 31, 2014.
Net premiums earned for the year ended December 31, 2015 were $838.1 million compared to $879.8 million for the year ended December 31, 2014, a decrease of $41.7 million, or 4.7%. The decrease was consistent with the pattern of gross premiums written and reinsurance premiums ceded as discussed above.
The loss ratio for the year ended December 31, 2015 was 41.4%, which included $146.4 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 17.5 percentage points compared to a loss ratio for the year ended December 31, 2014 of 48.1% which included $141.2 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 16.1 percentage points.
General and administration expenses for the year ended December 31, 2015 were $155.3 million compared to $150.8 million for the year ended December 31, 2014, an increase of $4.5 million, or 3.0%. The increase was primarily due to a greater retention of costs within the segment and an increase in the performance bonus accrual.
An increase in gross premiums written in the liability lines of $3.3 million. The increase was driven by increases in the contract liability and brokerage professional lines of $12.2 million and $6.3 million, respectively, and was partially offset by decreases arising from the discontinuation of underperforming programs and brokerage general liability lines.
Reinsurance premiums ceded for the year ended December 31, 2016 were $22.6 million compared to $18.9 million for the year ended December 31, 2015, an increase of $3.8 million, or 19.9% and were driven by the factors highlighted above in respect of gross premiums written.
The loss ratio for the year ended December 31, 2016 was 67.3%, which included $9.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 3.3 percentage points compared to a loss ratio for the year ended December 31, 2015 of 66.4% which included $23.0 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 8.9 percentage points. The favorable development of $23.0 million on prior accident years for the year ended December 31, 2015 primarily relates to favorable development on attritional losses and also includes the amortization of the risk premium adjustment accounted for at the time of the acquisition of Western World. This adjustment was fully amortized to income through a reduction in losses and loss expenses of $11.0 million during the year ended December 31, 2015, benefiting the loss ratio by 4.2 percentage points.
During the year ended December 31, 2016, there was one notable and one non-notable loss event that impacted Western World as set out in the table below:
Policy acquisition costs for the year ended December 31, 2016 were $64.4 million compared to $41.4 million for the year ended December 31, 2015, an increase of $23.0 million, or 7.5 percentage points of the policy acquisition costs ratio. The increase was primarily a result of an adjustment made upon the acquisition of Western World to reduce deferred acquisition costs to reflect fair value. These deferred acquisition costs would otherwise have been expensed in the amount of $21.8 million during the year ended December 31, 2015, benefiting the policy acquisition costs ratio by 8.4 percentage points.
General and administration expenses for the year ended December 31, 2016 were $43.3 million compared to $38.7 million for the year ended December 31, 2015, an increase of $4.6 million, or 11.8%. The increase was primarily due to increases in staff costs associated with the opening of new offices in Scottsdale, Atlanta, and New York.
The following table presents underwriting income by line of business for the years ended December 31, 2015 and 2014. As the Company acquired Western World on October 2, 2014 and the results of Western World have been included in the Company’s consolidated results from the date of acquisition, no meaningful comparison is available for the years ended December 31, 2015 versus 2014.
The following table presents Validus’ share of the AlphaCat segment income on an asset manager basis for the years ended December 31, 2016, 2015 and 2014:
The investment income from the AlphaCat funds and sidecars is based on equity accounting.
Total expenses for the years ended December 31, 2016, 2015 and 2014 were $11.5 million, $22.0 million and $14.0 million, respectively. The decrease of $10.5 million during the year ended December 31, 2016 as compared to 2015 and increase of $8.0 million during the year ended December 31, 2015 as compared to 2014 was primarily attributable to higher placement fees incurred in relation to raising new capital during 2015.
AlphaCat’s assets under management were $2.7 billion as at January 1, 2017, compared to $2.4 billion as at January 1, 2016. Third party assets under management were $2.5 billion as at January 1, 2017, compared to $2.1 billion as at January 1, 2016. During the year ended December 31, 2016, a total of $672.9 million of capital was raised, of which $638.4 million was raised from third parties. During the year ended December 31, 2016, $505.5 million was returned to investors, of which $365.5 million was returned to third party investors.
The following table presents the corporate and investment function’s income and expense items on a consolidated basis for the years ended December 31, 2016, 2015 and 2014:
The transaction expenses relate to costs incurred in connection with the acquisition of Western World and are primarily comprised of legal, financial advisory, and audit related services.
The Company’s managed yield-bearing portfolio had an effective yield of 2.24%, 1.91% and 1.51% for the years ended December 31, 2016, 2015 and 2014, respectively. Investment yield is calculated by dividing total managed net investment income by the average balance of the yield bearing assets managed by the Company’s portfolio managers. Average assets for the period ended is the average of the beginning, ending and intervening quarter end asset balances.
The Company issued $150.0 million of preferred shares in June 2016. Dividends paid on preferred shares were $4.5 million for the year ended December 31, 2016.
Tax benefit for the year ended December 31, 2016 was $19.8 million compared to tax expense of $6.4 million and $0.2 million for the years ended December 31, 2015 and 2014, respectively. The favorable movement of $26.2 million during the year ended December 31, 2016 as compared to 2015 was primarily due to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Flagstone acquisition. The Company believes it is now more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over the next three years and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million in the fourth quarter.
The (loss) income from investment affiliate relates to the income earned from the Company’s investments in Aquiline Financial Services Fund II L.P. and Fund III L.P. For further details, refer to Note 7 to the Consolidated Financial Statements, “Investments,” in Part II, Item 8.
Foreign exchange gains for the year ended December 31, 2016 were $10.8 million compared to losses of $8.2 million and $10.7 million for the years ended December 31, 2015 and 2014, respectively. The foreign exchange gains for the year ended December 31, 2016 were primarily attributable to the U.S. dollar strengthening against the British Pound sterling.
The operating results of an insurance or reinsurance company are also often measured by reference to its underwriting income and net operating income, which are non-GAAP financial measures. Underwriting income and net operating income available to Validus common shareholders are calculated by the addition or subtraction of certain Consolidated Statement of Income and Comprehensive Income line items from net income available to Validus common shareholders, the most directly comparable GAAP financial measure, as illustrated below.
The Company uses underwriting income as a primary measure of underwriting results in its analysis of historical financial information and when performing its budgeting and forecasting processes. Analysts, investors and rating agencies who follow the Company request this non-GAAP financial information on a regular basis. In addition, underwriting income is one of the factors considered by the compensation committee of our Board of Directors in determining the total annual incentive compensation.
Underwriting income and net operating income available to Validus common shareholders should not be viewed as a substitute for U.S. GAAP net income available to Validus common shareholders as there are inherent material limitations associated with the use of underwriting income and net operating income available to Validus common shareholders as compared to using net income available to Validus common shareholders, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income and operating income with other companies, particularly as these measures may be defined or calculated differently by other companies. Therefore, the Company provides prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income available to Validus common shareholders, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income available to Validus common shareholders and reconciliation of underwriting income and net operating income available to Validus common shareholders to net income available to Validus common shareholders.
Weighted average exercise price for those stock options that have an exercise price lower than book value per share.
Using the “as-if-converted” method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
Managed investments represent assets governed by the Company’s Investment Policy Statement (“IPS”) whereas, non-managed investments represent assets held in support of consolidated AlphaCat VIEs which are not governed by the Company’s IPS. Refer to Note 9 to the Consolidated Financial Statements, “Variable interest entities,” in Part II, Item 8 for further details.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at December 31, 2016 and December 31, 2015 was as follows:
As at December 31, 2016, the Company’s managed cash and investment portfolio totaled $6.5 billion (December 31, 2015: $6.5 billion). Refer to Note 7 to the Consolidated Financial Statements, “Investments,” in Part II, Item 8 for further details related to the Company’s managed investments.
certain minimum thresholds of cash, short-term investments, and highly-rated fixed maturity securities relative to our consolidated net reserves and estimates of probable maximum loss exposures at the 1 in 100 year threshold to provide necessary liquidity in a wide range of reasonable scenarios. As such, the Company structures its managed cash and investment portfolio to support policyholder reserves and contingent risk exposures with a liquid portfolio of high quality fixed-income investments with a comparable duration profile.