Our insurance subsidiaries lease 175,318 square feet of office space in numerous cities throughout the United States. All of these leases expire within seven years. The most significant leased office spaces are located in Miami, Florida and Cerritos, California. Refer to Note 14 - Commitments and Contingencies to the Consolidated Financial Statements for further information about leases. We own a 33,515 square foot call center in McAllen, Texas, a 50,900 square foot call center in Tucson, Arizona, and three properties in Birmingham, Alabama - a 116,433 square foot building, a 62,808 square foot warehouse and a 120,493 square foot building which serves as our corporate headquarters. The properties identified above are used by all segments reported in the Notes to Consolidated Financial Statements.
Gross written premium grew 1.0% in 2016 compared with 2015 primarily from growth in Texas personal auto and countrywide Commercial Vehicle partially offset by declines in Florida as well as states where we are running off business. Refer to Results of Operations - Underwriting - Premium for a more detailed discussion of our gross written premium.
Included in net earnings for the year ended December 31, 2016, was $15.6 million ($24.0 million pre-tax) of favorable development on prior accident year loss and LAE reserves. This development was primarily due to decreases in severity estimates in Florida bodily injury and personal injury protection coverages related to accident years 2015 and prior, partially offset by increases in severity estimates in California material damage and bodily injury coverages as well as bodily injury coverages in our commercial vehicle product, all related to accident year 2015. This compares with $18.8 million ($28.9 million pre-tax) of favorable development for 2015. The following table displays GAAP combined ratio results by accident year developed through December 31, 2016:
Our book value per share increased 2.7% from $61.66 at December 31, 2015, to $63.31 at December 31, 2016. This increase was primarily due to net earnings partially offset by shareholder dividends and share repurchases.
For each subset of the business evaluated, each test generates a point estimate based on development factors applied to known paid and incurred losses and claim counts. Selections of development factors are based on historical loss development patterns with adjustment based on professional actuarial judgment where anticipated development patterns vary from those seen historically. Deviations from historical loss development patterns may occur due to changes in items such as claims settlement and payment practices, business mix, coverage limits and deductibles, inflation trends in auto repair and medical costs and legal and regulatory trends affecting claims settlements. This estimation of IBNR requires selection of hundreds of such factors. A single point estimate for the subset being evaluated is then selected from the results of various tests, based on a combination of simple averages of the point estimates of the various tests and selections based on professional actuarial judgment.
Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. When possible, we make quantitative and qualitative modifications to, or selections of, such factors where deviations from historical trends in these key areas exist. We analyze the adequacy of reserves using actuarial data and analytical reserve development techniques, including projections of ultimate paid losses, to determine the ultimate amount of reserves. The list of historical trends provided above are non-exhaustive examples of major factors that we take into account in developing these estimates.
million. These ranges do not present a forecast of future redundancy or deficiency since actual development of future losses on current loss reserves may vary materially from those estimated in the year-end 2016 reserve tests. Reserves recorded are our best estimate of the ultimate amounts that will be paid.
Calendar year losses incurred for ECOs, gross and net of reinsurance, over the past five calendar years have ranged from $1.1 million to $4.2 million, averaging $2.1 million per year. Losses for 2016, 2015 and 2014 have been $1.1 million, $2.4 million and $4.2 million, respectively.
The $24.0 million favorable reserve development during the twelve months ended December 31, 2016, was primarily due to decreases in severity estimates in Florida bodily injury and personal injury protection coverages related to accident years 2015 and prior, partially offset by increases in severity estimates in California material damage and bodily injury coverages as well as bodily injury coverages in our commercial vehicle product, all related to accident year 2015.
The determination of whether unrealized losses on investments are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors we considered and resources we used in our determination include:
For fixed maturity securities that are other-than-temporarily impaired, we assess our intent to sell and the likelihood that we will be required to sell the security before recovery of our amortized cost. If a fixed maturity security is considered other-than-temporarily impaired but we do not intend to and are not more than likely to be required to sell the security before our recovery to amortized cost, the amount of the impairment is separated into a credit loss component and the amount due to all other factors. The excess
The National Association of Insurance Commissioners’ (NAIC) model law for risk-based capital (RBC) provides formulas to determine the amount of capital that an insurance company needs to ensure that it has an acceptable expectation of not becoming financially impaired. At December 31, 2016, the capital ratios of all our insurance subsidiaries exceeded the RBC requirements.
Our insurance subsidiaries generate liquidity to satisfy their obligations, primarily by collecting and investing premiums in advance of paying claims and generating investment income on their $1.4 billion investment portfolio. Our insurance subsidiaries generated positive cash flows from operations of approximately $114.0 million in 2016, $80.2 million in 2015 and $117.9 million in 2014.
On February 29, 2016, we filed a "shelf" registration statement with the Securities and Exchange Commission registering securities, and as long as it remains effective, it will allow us to sell any combination of senior or subordinated debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units in one or more offerings should we choose to do so in the future. This shelf registration statement expires March 1, 2019.
Our Board of Directors previously authorized a share and debt repurchase program. On November 4, 2014, our Board of Directors increased the authority to a total of $75 million and extended the date to execute the program from December 31, 2014, to December 31, 2016. On November 1, 2016, our Board approved the extension of the date to execute the program from December 31, 2016, to December 31, 2017. During 2016 we repurchased 131,829 shares at an average cost, excluding commissions, of $79.41 per share. As of December 31, 2016, we had $34.9 million of authority remaining under this program.
We believe that cash balances, cash flows generated from operations or borrowings, and maturities and sales of investments are adequate to meet our future liquidity needs and those of our insurance subsidiaries.
Our contractual obligations and those of our insurance subsidiaries as of December 31, 2016, were ($ in thousands):
Approximately 91.3% of our fixed maturity portfolio at December 31, 2016, was rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. The average credit rating of our fixed maturity portfolio was AA- at December 31, 2016. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated or non-investment grade. We believe that a high quality investment portfolio is more likely to generate stable and predictable investment returns.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. We periodically review the third party pricing methodologies used by our primary independent pricing service to verify that prices are determined in accordance with fair value guidance in U.S. GAAP, including the use of observable market inputs, and to ensure that assets are properly classified in the fair value hierarchy.
The following table presents the returns, gross of investment expenses, of our investment portfolios based on quarterly investment balances as reflected in the financial statements, excluding equities invested in a rabbi trust:
The $13.9 million and $7.3 million balances in payable for securities purchased at December 31, 2016, and December 31, 2015, respectively, represent fixed income securities and treasury stock purchased in the normal course of business that had not settled prior to the end of their respective years.
Our fixed maturity portfolio is comprised of substantially all fixed rate investments with primarily short-term and intermediate-term maturities. We strive to maintain a "laddered" portfolio, with maturities and prepaid principal spread across the maturity spectrum. This portfolio composition allows flexibility in reacting to fluctuations of interest rates. In addition, higher market rates available for new funds available for investment partially mitigate the risk of loss in fair value. We manage the portfolios of our insurance companies to achieve an adequate risk-adjusted return while maintaining sufficient liquidity to meet policyholder obligations.
The following table provides information about our fixed maturity investments at December 31, 2016, which are sensitive to interest rate risk. The table shows expected principal cash flows by expected maturity date for each of the five subsequent years and collectively for all years thereafter. Callable bonds and notes are included based on call date or maturity date depending upon which date produces the most conservative yield. Mortgage-Backed Securities (MBS) and sinking fund issues are included based on maturity year adjusted for expected payment patterns. The cash flows presented take into consideration historical relationships of market yields and prepayment rates. However, the actual prepayment rate may differ from historical trends resulting in actual principal cash flows that differ from those presented below.
We manage credit risk by diversifying our portfolio to avoid concentrations in any single industry group or issuer and by limiting investments in securities with lower credit ratings. The largest investment in any one issuer, excluding the U.S. Government or
government-sponsored entities, is $16.2 million or 1.2% of the fixed income investment portfolio, and the top five investments make up 4.5% of the fixed income portfolio. All of the fixed maturities owned at December 31, 2016, were producing their stated rate of investment income.
Equity price risk is the potential economic loss from adverse changes in equity security prices. Our exposure to equity price risk is limited, as our equity investments comprise only 6.1% of our total investment portfolio. At December 31, 2016, the fair value of our equity portfolio was $90.6 million.
We implemented rate revisions in various states with an overall rate increase of 8.6% during 2016. Policies in force at December 31, 2016, decreased 6.8% compared with the same period of 2015.
The decrease in Personal Auto gross written premium was primarily due to a decline in Florida in response to rate increases totaling 12.8% implemented throughout the year as well as lower premium in states where we are running off business. This decrease was partially offset by growth in Texas, which grew 63.2% compared with the prior year.
The gross written premium growth in our Commercial Vehicle product was primarily due to renewal business growth and higher average premiums in California and Texas.
We implemented rate revisions in various states with an overall rate increase of 5.4% during 2015. Gross written premium grew despite the decline in policies in force primarily due to an increase in average premiums per policy.
In addition to reporting financial results in accordance with GAAP, we report results on a statutory basis for insurance regulatory purposes. We evaluate underwriting profitability based on a combined ratio calculated using statutory accounting principles. The statutory combined ratio represents the sum of the following ratios: (i) losses and LAE incurred as a percentage of net earned premium; and (ii) underwriting expenses incurred, net of installment and other fees, as a percentage of net written premium. Certain expenses are treated differently under statutory and GAAP accounting principles. Under GAAP, commissions, premium taxes and other variable costs incurred in connection with successfully writing new and renewal business are capitalized as deferred policy acquisition costs and amortized on a pro rata basis over the period in which the related premium is earned. On a statutory basis, these items are expensed as incurred. Additionally, bad debt charge-offs on agent balances and premium receivables are included only in the GAAP combined ratios.
The statutory combined ratio for the twelve months ended December 31, 2016, increased by 1.2 points from the same period of 2015. The twelve months ended December 31, 2016, included $24.0 million of favorable development on prior year loss and LAE reserves compared with $28.9 million of favorable development on prior year loss and LAE reserves in 2015. Excluding the effect of development from both periods, the statutory combined ratio increased by 0.8 point for the twelve months ended December 31, 2016, compared with 2015.
The 1.0 point decline in the Personal Auto combined ratio for the twelve months ended December 31, 2015, was primarily due to an increase in net written premium, resulting in a reduction of the underwriting ratio.
The 20.2 points increase in the Commercial Vehicle product combined ratio during the twelve months ended December 31, 2015, was primarily due to increases in both frequency and severity, resulting in higher new business loss ratios in 2015, particularly in Florida, as well as favorable development on loss and LAE reserves recognized in the twelve months ended December 31, 2014.
The increase in installment and other fee income charged to policyholders during 2016 was primarily related to an increase in processing fees.
Investment income primarily includes gross investment revenue net of investment management fees and any changes reflect fluctuations in market rates and average invested assets as shown in the following table ($ in thousands):
Other income was primarily comprised of commission from the sales of third party insurance policies and items of a non-recurring nature. Other income for the year ended December 31, 2015, increased $0.5 million primarily as a result of a growth in the sales of these policies.
The GAAP effective tax rate has decreased in 2016 primarily as a result of a more significant impact from tax-exempt interest and the dividends-received deduction due to lower pre-tax income. Refer to Note 5 - Income Taxes to the Consolidated Financial Statements for additional information on income taxes.
Consolidated Statements of Earnings: Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income: Years ended December 31, 2016, 2015, and 2014
Consolidated Statements of Changes in Shareholders’ Equity: Years ended December 31, 2016, 2015, and 2014