Our executive and administrative office is located at 400 Atlantic Street, Stamford, CT. The lease for this space expires in October 2023. Additionally, we operate in various locations with non-cancelable operating leases including:
Throughout this Annual Report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the presentation of Net Income (Loss), Book Value, Book Value per Share, Net Losses and LAE Reserves and Combined Ratio, we show certain non-GAAP financial measures as defined in Regulation G that we believe are valuable in managing our business and drawing comparisons to our peers. These non-GAAP measures are Net Operating Earnings, Underwriting Profit (Loss), and Adjusted Net Losses and LAE Ratio.
The Combined Ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in three components. First, the Loss Ratio is represented by Net Losses and LAE divided by Net Earned Premiums. The second component is the Commission Expense Ratio, which is Commission Expenses divided by Net Earned Premiums. The third component is the Other Operating Expense Ratio, which reflects the sum of Other Operating Expenses and Other Underwriting Income (Expense), divided by Net Earned Premiums. All items included in these components of the Combined Ratio are presented in our GAAP Consolidated Financial Statements. The sum of the Loss Ratio, Commission Expense and Other Operating Expense Ratio is the Combined Ratio. The difference between the Combined Ratio and 100% reflects the rate of Underwriting Profit (Loss). For example, a Combined Ratio of 85% implies that for every $100 of premium we earn, we record $15 of Underwriting Profit.
Net Operating Earnings is a “non-GAAP financial measure” as defined in Regulation G. Net Operating Earnings is comprised of Net Income excluding After-Tax Net Realized Gains (Losses), After-Tax Other than Temporary Impairment (“OTTI”) Losses Recognized in Earnings, After-Tax Foreign Exchange Gains (Losses), and the impact of the Tax Act at enactment recognized in our Consolidated Statements of Income. We believe that showing Net Income exclusive of Realized Gains and Losses, Net OTTI Losses Recognized in Earnings, Foreign Exchange Gains and Losses, and the impact of the Tax Act at enactment reflects the underlying fundamentals of our business.
Underwriting Profit (Loss) represents one measure of the pre-tax profitability of our insurance operations and is derived by subtracting the following from Net Earned Premiums: Net Losses and LAE, Commission Expenses, Other Operating Expenses and Other Underwriting Income (Expense). This information is available in total and by segment in the Notes to Consolidated Financial Statements. The nearest comparable GAAP measure is Income Before Income Taxes which, in addition to Underwriting Profit (Loss), includes Net Investment Income, OTTI, Net Realized Gains (Losses) on Investments, Interest Expense and Other Income (Loss). While this measure is presented in the footnotes to the Consolidated Financial Statements, it is considered a “non-GAAP financial measure” as defined in Regulation G when presented elsewhere on a consolidated basis.
A reconciliation of total Underwriting Profit (Loss) and its components to Income Before Income Taxes (the nearest GAAP financial measure) can be found in the Notes to the Consolidated Financial Statements and in Item 7, Segment Results. We believe that presentation of Underwriting Profit (Loss) provides investors and other users of our financial information with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.
The Net Losses and LAE ratio is a major component of our Underwriting Profit (Loss). In order to better understand the impact of this ratio on Underwriting Profit (Loss), we present the impact of reinsurance reinstatement premiums (“RRPs”), development on current AY results and development on prior AY results to arrive at our Adjusted Net Losses and LAE Ratio.
Additionally, our new U.K. based insurance company, NIIC, which is a wholly-owned direct subsidiary of our Parent Company, began writing business in the first quarter of 2017.
(1) - Includes Other Operating Expenses and Other Underwriting Income (Expense).
Underwriting Loss was $37.7 million for the year ended December 31, 2017, which decreased $73.6 million from the same period in 2016. This was driven by $84.8 million of catastrophe events (“CAT”), which includes $67.5 million due to Hurricanes Irma, Maria and Harvey, $34.3 million of Net Prior Accident Year (“AY”) Reserve Strengthening, and $31.9 million of Additional Net Current AY Reserve Development, as compared to $26.8 million of CAT events, $35.7 million of Additional Net Current AY Reserve Development, and $28.5 million of Net Prior AY Reserve Release, for the same period in 2016. This was partially offset by increased production across all of our reporting segments, and net reinsurance reinstatement premium (“RRP”) benefit of $2.4 million.
Underwriting profit was $35.9 million for the year ended December 31, 2016, which decreased by $22.2 million from the same period in 2015, driven by $26.8 million of CAT events plus related RRPs of $1.8 million, $35.7 million of Additional Net Current AY Reserve Development due to large loss activity in our Int’l Insurance segment, and an increase in Other Operating Expense as we continued to invest in our European expansion and GlobalRe reporting segment. These items were partially offset by $28.5 million of Net Prior AY Reserve Release due to favorable loss emergence and increased production.
$116.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $67.5 million from Hurricanes Harvey, Irma and Maria, $4.2 million from Typhoon Hato, $3.5 million from the Puebla, Mexico Earthquake, and $9.6 million of other CAT events. In addition, we incurred $31.9 million of additional weather-related losses and large loss events. This compares to $62.5 million of Additional Net Current AY Reserve Development for the same period in 2016, which included CAT losses related to the Alberta Wildfires ($11.7 million), Hurricane Matthew ($7.1 million), Ecuador Earthquake ($3.8 million) and Taiwan Earthquake ($3.3 million), as well as large losses in our Int’l Insurance Marine and P&C operating segments.
$62.5 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 of which $26.8 million was due to CAT losses, including $11.7 million related to the Alberta Wildfires, $7.1 million due to Hurricane Matthew, $3.8 million due to the Ecuador earthquake and $3.3 million due to the Taiwan earthquake. Additionally, we incurred $35.7 million of non-CAT net current AY development, mostly due to large losses in our Int’l Insurance Marine and Int’l Insurance P&C operating segments. This compares to $48.5 million of Additional Net Current AY Reserve Development for the same period in 2015 primarily related to large loss activity.
Our Company had four credit related OTTI losses totaling $2.1 million in our Equity Securities portfolio during the year ended December 31, 2017. Our Company had one credit related OTTI loss of $0.2 million from our Fixed Maturities portfolio during the year ended December 31, 2016. Our Company had three credit related OTTI losses totaling $1.7 million from our Equity Securities portfolio during the year ended December 31, 2015.
See Note 1 - Organizations & Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein for additional information regarding the foreign currency adjustment.
We recorded an effective tax rate of 45.9%, 29.6% and 31.0% for December 31, 2017, 2016 and 2015, respectively. The net one-time charge related to the Tax Act increased our 2017 effective income tax rate by 26.3 points. Conversely, the rate for 2017 benefited by 6.7 points from tax related to stock compensation, which is now recorded in earnings as income tax benefit or expense, effective with the 2017 adoption of accounting standards update 2016-09. In addition, our effective tax rate for each of the years benefitted due to tax-exempt investment income and dividends received deduction by 11.5 points in 2017, 6.1 points in 2016 and 5.1 points in 2015. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. Our effective tax rate in years after 2017 is expected to benefit materially from the enactment of the Tax Act. Future changes in tax laws could significantly impact our provision for income taxes, the amount of taxes payable, our deferred tax asset and liability balances, and stockholders’ equity. See the risk factor Changes in tax laws could increase our corporate taxes, reduce our deferred tax assets or affect pricing of some of our products in Item 1A - Risk Factors for additional information regarding the impact of the Tax Act.
The following tables summarize our Consolidated Financial Results by reporting segment for the years ended December 31, 2017, 2016 and 2015:
(2) - Includes Other Operating Expenses and Other Underwriting Income (Expense).
The following tables summarize our financial results by operating segment for our U.S. Insurance reporting segment for the years ended December 31, 2017, 2016 and 2015:
Gross Written Premiums increased $53.6 million for the year ended December 31, 2016 compared to the same period in 2015 due to strong growth across all of our operating segments. Our P&C operating segment increased $34.9 million driven by new business production from our Auto and Property products of $20.9 million and $13.3 million, respectively. In addition, our Marine and Professional Liability operating segments increased $11.3 million and $7.4 million, respectively, as compared to the same period in 2015, driven by new business production in our Craft, Cargo and Fishing Vessel products, as well as increased renewal premiums in our E&O and D&O divisions despite a difficult rate environment.
For the year ended December 31, 2017, Ceded Written Premiums were $267.0 million, resulting in a retention ratio of 73.0% of Net Written Premiums to Gross Written Premiums. This compares to $235.8 million for the same period in 2016, resulting in a retention ratio of 74.3%. The decrease in the retention ratio was driven by our P&C and Marine operating segments, partially offset by an increase in the retention ratio for our Professional Liability operating segment.
For the year ended December 31, 2016, Ceded Written Premiums were $235.8 million, resulting in a retention ratio of 74.3%. This compares to $268.8 million for the same period in 2015, resulting in a retention ratio of 69.0%. The increase in the retention ratio was mostly due to the reduction in proportional reinsurance coverage that supports our Excess Casualty and Environmental risks within our P&C operating segment, the nonrenewal of our E&O proportional reinsurance treaty in the fourth quarter of 2015 within our Professional Liability segment, and the year over year effect of RRPs. For the year ended December 31, 2016, RRPs decreased $4.6 million to $0.8 million as compared to $5.4 million in the prior year, primarily due to the reduction in large loss activity within our Marine operating segment. These items were partially offset by increases in our proportional reinsurance coverage within our Marine operating segment.
The following tables present the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 2.5 points as compared to the same period in 2016 driven by our Marine and Professional Liability operating segments, partially offset by a decrease in our P&C operating segment.
$5.6 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to a $4.1 million large loss in our Hull product and $1.6 million of CAT loss primarily from Hurricanes Harvey, Maria and Irma.
$13.4 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 mostly related to large loss activity within our D&O division. This compares to $6.0 million of Net Prior AY Reserve Strengthening primarily within our D&O division due to unfavorable development on large claims and bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.
Partially offsetting the impact of the above items on the Reported Net Losses and LAE Ratio are changes in the mix of business driving the overall decrease in Adjusted Net Losses and LAE Ratio.
For the year ended December 31, 2016, the Reported Net Losses and LAE Ratio for our P&C operating segment decreased 1.3 points as compared to the same period in 2015. This was primarily driven by:
$1.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 compared to $5.0 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to losses within our Energy & Engineering product.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment increased 11.9 points as compared to the same period in 2015, primarily due to:
Our Commission Expense Ratio for the year ended December 31, 2017 increased 0.2 points as compared to the same period in 2016, mostly driven by our Professional Liability operating segment, partially offset by a decrease in our Marine operating segment.
Other Operating Expenses for the year ended December 31, 2017 increased $0.8 million as compared to the same period in 2016, primarily due to an increase in costs associated with new business initiatives and applicable support, partially offset by a reduction in performance-based incentive compensation costs.
Gross written premiums increased $72.5 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to increases in our P&C and Professional Liability operating segments of $50.4 million and $22.6 million, respectively. Our P&C operating segment had growth of $24.6 million in our Property division, mostly driven by our expanded coverage for international exposures, as well as growth of $10.9 million and $6.9 million from our Energy & Engineering and Casualty divisions, and the commencement of the Political Violence & Terrorism product in 2016. The increase in our Professional Liability operating segment was due to new business production across all divisions.
For the year ended December 31, 2016 average renewal premium rates decreased 4.1%, due to decreases of 1.6%, 8.0%, and 3.5% in our Marine, P&C and Professional Liability operating segments, respectively. The impact of this has been offset by new business production and the commencement of the Political Violence & Terrorism product.
Ceded Written Premiums were $165.3 million, resulting in a retention ratio of 67.0%, for the year ended December 31, 2017 compared to $138.5 million, resulting in a retention ratio of 71.4%, for the same period in 2016. The decrease in the retention ratio was primarily driven by our P&C operating segment, whereby 100% of the unexpired risk on our North American Property business was ceded effective January 1, 2017 as part of strategic actions taken to exit this book of business. Additionally, the impact of an increase in ceded RRPs related to Hurricanes Irma, Maria and Harvey and an increase in excess of loss reinsurance negatively impacted retention in that operating segment.
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio for our Marine operating segment increased 27.7 points as compared to the same period in 2016, primarily driven by:
$6.5 million of Net Prior AY Reserve Strengthening due to adverse loss development for the year ended December 31, 2017 primarily related to our Cargo, Specie and Protection & Indemnity products. This compares to $22.1 million of Net Prior AY Reserve Releases due to better than expected loss emergence for the same period in 2016.
$32.6 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $9.8 million from Hurricanes Maria, Harvey and Irma, $4.2 million from Typhoon Hato, and $6.2 million due to large loss activity in our P&I product. This compares to $18.8 million for the same period in 2016, primarily attributable to the Ecuador Earthquake, Hurricane Matthew and a large loss from our Cargo product relating to a satellite loss.
$18.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $14.9 million from Hurricanes Irma, Maria and Harvey, $1.8 million from the Puebla, Mexico Earthquake and $1.8 million of attritional losses in our International Property product. This compares to $37.1 million for the same period in 2016, consisting of weather-related losses in our Property division and adverse loss emergence from our Energy & Engineering division as well as CAT losses attributable to Hurricane Matthew, the Alberta Wildfires and the Taiwan Earthquake.
A $0.5 million RRP expense primarily due to the CAT losses this year, compared to a $2.4 million expense for the same period in 2016.
$5.5 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to our E&O and D&O products.
$5.2 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2017 related to large loss development on our D&O and E&O business. This compares to $4.1 million of Net Prior AY Reserve Strengthening related to bad debt expense due to lower expectation of recoveries from a large reinsurer for the same period in 2016.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio increased 6.2 points as compared to the same period in 2015 driven by an increase in our P&C operating segment, partially offset by decreases in our Professional Liability and Marine operating segments.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Marine operating segment decreased 6.0 points as compared to the same period in 2015, primarily driven by:
Changes in the mix of business resulting from the repositioning of certain Hull and Cargo products drove the 4.2 point decrease in Adjusted Net Losses and LAE Ratio.
$18.8 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016 primarily driven by the Ecuador Earthquake, Hurricane Matthew and unfavorable loss emergence relating to a large Cargo loss. This compares to $23.4 million of Additional Net Current AY Reserve Development for the same period in 2015 attributable to large loss activity.
$22.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 due to better than expected loss emergence. This compares to $21.9 million of Net Prior AY Reserve Releases due to better than expected loss emergence for the same period in 2015.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our P&C operating segment increased 40.1 points as compared to the same period in 2015, primarily driven by:
$7.1 million of Net Prior AY Reserve Releases for the year ended December 31, 2016 related to favorable loss emergence. This compares to $8.5 million of Net Prior AY Reserve Releases for the same period in 2015.
Changes in the mix of business are driving the 2.4 point increase in Adjusted Net Losses and LAE Ratio from the same period in 2015.
For the year ended December 31, 2016, our Reported Net Losses and LAE Ratio for our Professional Liability operating segment decreased 7.0 points as compared to the same period in 2015, primarily driven by:
$4.1 million of Net Prior AY Reserve Strengthening for the year ended December 31, 2016 due to an increase in our reserve for uncollectible reinsurance. This compares to $4.2 million of Net Prior AY Reserve Strengthening for the same period in 2015 due to a large loss.
For the year ended December 31, 2017, Other Operating Expenses decreased $2.9 million as compared to the same period in 2016 due to a reduction in performance-based incentive compensation costs, reduced employee expenses and favorable foreign exchange rates, partially offset by higher Lloyd’s charges due to increased volumes of European business attracting higher foreign levies and professional fees.
Gross Written Premiums increased $58.8 million for the year ended December 31, 2017, compared to the same period in 2016, with growth across all of our segment’s products. Our A&H product had significant growth increasing $24.1 million attributable to new business and increased renewal business. Growth was seen in our P&C, Surety and Agriculture business, as well as an increase of $4.9 million in assumed RRPs, primarily attributable to CAT losses from Hurricanes Harvey, Irma and Maria, period over period.
Gross written premiums decreased $10.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the nonrenewal of a significant excess of loss treaty within our A&H product and to a lesser extent rate reductions in our Marine product. The decline in Gross written premiums was partially offset by new premiums in our P&C, Professional Liability and Agriculture products and to a lesser extent an increase in assumed RRPs in our P&C and Marine products.
Ceded Written Premiums were $8.4 million, resulting in a retention ratio of 94.9%, for the year ended December 31, 2016 compared to $6.9 million, resulting in a retention ratio of 96.1%, for the same period in 2015. The decrease was primarily due to an increase in ceded RRPs in our Marine product and an increase in excess of loss costs in our P&C product.
Net Earned Premiums for the year ended December 31, 2017 increased $14.3 million as compared to the same period in 2016, primarily due to continued growth in our P&C, Agriculture and Specialty Casualty products. In addition, there was an increase in net assumed RRP benefit with a $6.1 million net RRP benefit for the year ended December 31, 2017, compared to a $1.6 million net RRP benefit for the same period in 2016. The net assumed RRP benefit in 2017 was primarily related to RRPs on Hurricanes Irma and Harvey. Partially offsetting these increases in Net Earned Premiums was the impact from non-renewals in 2016 and late 2015 in our A&H products earning into 2017 as compared to 2016.
Net Earned Premiums decreased $4.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to significant non-renewals in our A&H products, and to a lesser extent, rate reductions in our Marine product. This decline was partially offset by a change in estimated earnings in our Surety product, growth in our P&C, Agriculture and Professional Liability products, as well as an increase in assumed RRPs in our P&C product.
The following table presents the impact of Net RRPs and Reserve Releases or (Development / Strengthening) on our Net Losses and LAE Ratio for the years ended December 31, 2017, 2016 and 2015:
For the year ended December 31, 2017, our Reported Net Losses and LAE Ratio increased 20.3 points as compared to the same period in 2016. This was primarily driven by:
$45.4 million of Additional Net Current AY Reserve Development for the year ended December 31, 2017 primarily attributable to CAT losses of $34.9 million from Hurricanes Maria, Irma and Harvey, $1.8 million from the Puebla, Mexico Earthquake, and $8.7 million from other weather-related losses during the year. This compares to $3.9 million for the same period in 2016, mostly related to CAT losses including the Alberta Wildfires ($5.1 million), the Ecuador Earthquake ($2.7 million) and the Taiwan Earthquake ($0.9 million), partially offset by favorable loss emergence on the current AY, mostly driven by our A&H product.
The Adjusted Net Losses and LAE Ratio decreased 4.5 points year over year due to changes in mix of business with proportionally less earnings coming from our A&H product, which carries a higher loss ratio, and an increase in earnings from our P&C products, which carry lower loss ratios.
$3.9 million of Additional Net Current AY Reserve Development for the year ended December 31, 2016, of which $9.3 million was due to CAT losses including $5.1 million related to the Alberta Wildfires, $2.7 million due to the Ecuador Earthquake and $0.9 million due to the Taiwan Earthquake, partially offset by $5.4 million of favorable loss emergence on the current AY, mostly driven by our A&H product. This compares to $1.2 million of Net Current AY Reserve Development for the same period in 2015, mostly related to two large Marine losses.
The Commission Expense Ratio increased 1.6 percentage points for the year ended December 31, 2016 compared to the same period in 2015, resulting from an increase in earned premium for our P&C, Agriculture and Professional Liability products that attract higher commission rates, as well as additional profit commission expenses in our A&H and P&C products.
NIIC, our wholly-owned UK Insurance company, may pay dividends out of its statutory profits subject to the restrictions imposed under UK Company law and European Insurance regulation (Solvency II). As of December 31, 2017, the maximum amount available for the payment of dividends by NIIC without prior regulatory approval is $8.4 million.
The Bilateral and Club Facilities contain customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. These credit facilities also provide for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. As of December 31, 2017, our Company was in compliance with all covenants.
We generally maintain the ability to issue certain classes of debt and equity securities via a universal shelf registration statement filed with the SEC, which is renewed every three years. The shelf registration provides us the means to access the debt and equity markets relatively quickly. Our current shelf registration was filed on April 14, 2015 with the SEC and expires in 2018. We intend to renew our current shelf registration prior to its expiration. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
Our ability to underwrite is dependent upon the financial strength of NIC, NSIC, Lloyd’s and NIIC business. Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are important to our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of our Company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. We could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.
U.S. insurance companies, NIC and NSIC, utilize the financial strength ratings from A.M. Best and S&P for underwriting purposes. NIC and NSIC are both rated “A” (Excellent - positive outlook) by A.M. Best and “A” (Strong - stable outlook) by S&P. The Syndicate utilizes the ratings from A.M. Best and S&P for underwriting purposes, which apply to all Lloyd’s syndicates. Lloyd’s is rated “A” (Excellent - stable outlook) by A.M. Best and A+ (Strong - negative outlook) by S&P. NIIC utilizes the financial strength ratings from AM Best and S&P for underwriting purposes. NIIC is rated “A” (Excellent - stable outlook) by AM Best and “A” (Strong - stable outlook) by S&P.
The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amounts in the above table exclude reinsurance recoveries of $809.8 million. See “Business - Loss Reserves” included herein.
Our investment portfolio is invested primarily in publicly traded, investment grade, fixed income securities with an average credit quality of AA-/Aa3 as rated by S&P or Moody’s Investors Service (“Moody’s”). As of December 31, 2017, our portfolio had a duration of 3.5 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of December 31, 2017 and December 31, 2016, all Fixed Maturities and Equity Securities held by us were classified as available-for-sale.
Invested assets increased from December 31, 2016 due to operating cash flows. Operating cash flows were primarily directed to municipal bonds and to a lesser extent Residential Mortgage Obligations, some of which are floating rate securities which protect against interest rate risk in a rising rate environment. The decrease in Common Stocks is due to the liquidation of our Common Stock Equity Securities portfolio in December 2017, the proceeds of which were invested in U.S. Treasuries as we reassess our actively managed common stock equity strategy.
The following table sets forth the amount of our Fixed Maturities as of December 31, 2017 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating.
Details of our Corporate Exposures portfolio as of December 31, 2017 are presented below:
Our Company has significant natural catastrophe exposures throughout the world. We estimate that the largest exposure to loss from a 1 in 250 year single natural catastrophe event comes from a hurricane on the east coast of the U.S. As of December 31, 2017, our Company estimates that the probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $182.1 million and $39.9 million, respectively, including the cost of RRPs.
Hurricanes Harvey, Irma and Maria, which occurred in the third quarter of 2017, the Alberta Wildfires, which occurred in the second quarter of 2016 and Hurricane Joaquin, which occurred in the fourth quarter of 2015 generated substantial losses in our U.S. and Int’l Marine and P&C operating segments, as well as in our GlobalRe reporting segment. As of December 31, 2017, the net reserves for Hurricanes Harvey, Irma and Maria total $40.7 million, the net reserves for the Alberta Wildfires total $1.5 million and the net reserves for Hurricane Joaquin were fully paid. Management believes that should any adverse loss development for gross claims occur from the aforementioned hurricanes and wildfires, it would be contained within the reinsurance program.
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricanes Harvey, Irma and Maria for the year ended December 31, 2017:
Reinsurance recoverable includes the balances due to us from reinsurance companies for paid and unpaid losses and loss expenses, based on contracts in force, and are presented net of a reserve for uncollectible reinsurance which is determined based upon a review of the financial condition of the reinsurers and other factors. We determine the reinsurance recoverable on unpaid losses and loss expenses using actuarial estimates, as well as a determination of our ability to cede unpaid losses and loss expenses under existing reinsurance contracts. Although reinsurance makes the reinsurer liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to the policyholders. Accordingly, our Company bears credit risk with respect to the reinsurers. Specifically, the reinsurers may not pay claims made by our Company on a timely basis, or they may not pay some or all of these claims. Either of these events would increase the costs and could have a material adverse effect on our business.
Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known less the amount paid to date. Our actuaries calculate indicated IBNR loss reserves by UWY for major product groupings using standard actuarial methodologies, which are projection or extrapolation techniques, including: (a) the loss ratio method, (b) the loss development method, and (c) the Bornhuetter-Ferguson method. Each of these methodologies is generally applicable to both long tail and short tail lines of business depending on a variety of circumstances. Informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process due to numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves, including:
The following table provides a sensitivity analysis of our Net Reserves for Losses and LAE as of December 31, 2017:
(2) - Calculated using average diluted shares of 30,071 for the year ended December 31, 2017.
A range of reasonable estimates has been developed based on the historical volatility of held reserves versus current estimates for the purposes of this sensitivity analysis. Our Company’s lines of business, the market pricing adequacy and our Company’s underwriting strategies have changed dynamically over the past ten years. The impact from the shift on ranges will be greater for lines with longer emergence patterns. The individual lines will also have greater variance than the range for the entire book of business. The statistical variation is expected to have a somewhat higher range of deterioration than savings. The computation of each range represents the central 50.0% of outcomes. The movement within our reporting segments in an individual year may not fall within this range. There is a significant risk that the potential volatility of the current reserve estimates could differ in a material manner from the historical trends. The total reserve variability is not equal to the sum of the segment variability due to the benefit of diversification.
Reinsurance recoverables are established for the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts, which could be subject to interpretations that differ from our own based on judicial theories of liability. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. We bear credit risk with respect to our reinsurers, which can be significant considering that certain of the reserves remain outstanding for an extended period of time.
We recognize deferred tax assets and liabilities, which primarily result from temporary differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of our assets and liabilities. At each balance sheet date, we assess the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction, principally derived from available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. We regularly review our deferred tax assets for recoverability, taking into consideration our history of earnings, expectations for future earnings, taxable income in carryback years and the expected timing of the reversals of existing temporary differences. When we believe it is more likely than not that a deferred tax asset will not be realized, we establish a valuation allowance for that deferred tax asset. Our valuation allowance as of December 31, 2017 is $1.8 million.
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determine the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Refer to Note 4, Fair Value, in the Notes to Consolidated Financial Statements for additional information.