is a continuous focus on our net expense ratio. Our strategy across our segments is to maintain premium rates, deploy capital judiciously, manage our expenses and focus on the businesses in which we have expertise, which we believe should provide opportunities for greater returns.
On September 25, 2015, we acquired Warranty Solutions, a Wells Fargo business ("Warranty Solutions") for approximately $156.2 million in cash. Warranty Solutions designs, markets, administers and underwrites vehicle service contracts for new and used automobiles through a national network of more than 70 active agencies and 1,500 franchised and independent dealers. The goodwill and intangible assets associated with the acquisition was initially measured at $84.2 million. The goodwill and intangible assets, as well as Warranty Solutions' results of operations, are included as a component of the Specialty Risk and Extended Warranty segment. We are in the process of completing our acquisition accounting and expect to have it completed in 2016. As a result of this acquisition, we recorded approximately $22.8 million of written premium and $24.3 million of service and fee income for the year ended December 31, 2015.
operations are included in our Specialty Program segment. We recorded approximately $39.4 million of written premium related to CorePointe during the year ended December 31, 2015.
On January 6, 2015, we acquired Oryx Insurance Brokerage, Inc. ("Oryx") for approximately $30.6 million in cash and a contingent earn-out provision valued at $7.0 million. Oryx, established in 1996, is a managing general agent and wholesaler providing insurance products to the construction industry in upstate New York. For 2014, Oryx placed $80.0 million in premiums through over 135 agencies with the majority of business underwritten by us. As a result of the acquisition, we obtained certain identifiable intangible assets of approximately $18.5 million and recorded goodwill of approximately $24.4 million. The goodwill and intangible assets, as well as Oryx's results of operations, are included as a component of the Specialty Program segment. As a result of our underwriting relationship with Oryx, we had approximately $93.3 million and $72.2 million of gross written premium during the years ended December 31, 2015 and 2014, respectively. In addition, we recorded approximately $0.4 million of service and fee income related to Oryx during the year ended December 31, 2015.
On October 1, 2014, we acquired Comp Options Insurance Company, Inc. (“Comp Options”), a Florida-based workers' compensation insurer, from an affiliate of Blue Cross & Blue Shield of Florida, for approximately $34.3 million in cash. Comp Options offers workers' compensation insurance to small businesses with low-hazard risk profiles in the state of Florida. The goodwill and intangible assets, as well as Comp Options' results of operations, are included as a component of the Small Commercial Business segment. As a result of this acquisition, we recorded approximately $65.1 million and $18.7 million of written premium during the years ended December 31, 2015 and 2014, respectively. In addition, we recorded approximately $3.2 million and $1.0 million of service and fee income for the years ended December 31, 2015 and 2014, respectively.
On January 3, 2014, we completed the acquisition of Insco Insurance Services, Inc. (“Insco Dico”) and its subsidiaries for a acquisition price of approximately $88.7 million. Insco Dico's subsidiaries include Developers Surety and Indemnity Company and Indemnity Company of California, which offer surety insurance to developers and contractors in all 50 states with California as the largest state. In addition, Insco Dico's subsidiary, Builders Insurance Services, markets general liability insurance policies to contractors in several states in the western region of the U.S. The goodwill and intangible assets, as well as Insco Dico's results of operations, are included as a component of the Small Commercial Business segment. The identifiable intangible assets consist of agency relationships, which have a 20 year life, and licenses that have an indefinite life. As a result of this transaction, we recorded approximately $71.3 million and $55.5 million of written premium for the years ended December 31, 2015 and 2014, respectively. In addition, we recorded approximately $1.0 million and $3.7 million of service and fee income for the years ended December 31, 2015 and 2014, respectively.
We provide NGHC and its affiliates information technology development services in connection with the development and licensing of a policy management system at a cost which is currently 1.25% of gross written premium of NGHC and its affiliates plus our costs for development and support services. We provide development services at a price of cost plus 20%. In addition, we provide NGHC and its affiliates printing and mailing services at a per piece cost for policy and policy related materials, such as invoices, quotes, notices and endorsements, associated with the policies we process for NGHC and its affiliates on the policy management system. We recorded recorded approximately $35.9 million, $25.6 million and $24.2 million of fee income for the years ended December 31, 2015, 2014 and 2013, respectively, related to this agreement.
We manage the assets of certain of NGHC's subsidiaries, including the assets of reciprocal insurers managed by subsidiaries of NGHC, for an annual fee equal to 0.20% of the average aggregate value of the assets under management for the preceding quarter if the average aggregate value for the preceding quarter is $1 billion or less and 0.15% of the average aggregate value of the assets under management for the preceding quarter if the average aggregate value for that quarter is more than $1 billion. We managed approximately $2.4 billion of assets as of December 31, 2015 related to this agreement. As a result of this agreement, we earned approximately $2.7 million, $2.0 million and $1.7 million of asset management fees for the years ended December 31, 2015, 2014 and 2013, respectively.
We currently have a 50% ownership interest in each of four entities (collectively, the “LSC Entities”) formed for the purpose of acquiring life settlement contracts, with a subsidiary of NGHC owning the remaining 50% interest. The LSC Entities are: Tiger Capital LLC (“Tiger”); AMT Capital Alpha, LLC (“AMT Alpha”); AMT Capital Holdings, S.A. (“AMTCH”); and AMT Capital Holdings II, S.A. (“AMTCH II”).
We account for investments in life settlements in accordance with ASC 325-30, Investments in Insurance Contracts, which states that an investor shall elect to account for its investments in life settlement contracts by using either the investment method or the fair value method. The election is made on an instrument-by-instrument basis and is irrevocable. We have elected to account for these policies using the fair value method. Refer to Note 4. "Fair Value of Financial Instruments" for a discussion of the determination of the fair value of our investment in life settlement contracts.
Total capital contributions of $1.1 million and $36.1 million were committed to the LSC Entities during the years ended December 31, 2015 and 2014, respectively, of which our proportionate share was $0.6 million and $17.9 million in those same periods. The LSC Entities used the contributed capital to pay premiums and purchase policies. Our investments in life settlements and premium finance loans were approximately $264.0 million and $264.5 million as of December 31, 2015 and 2014, respectively, and are included in Prepaid expenses and other assets on the Consolidated Balance Sheet. We recorded a gain on investment in life settlement contracts, net of profit commission, of approximately $19.8 million, $12.3 million and $13.8 million, for the years ended December 31, 2015, 2014 and 2013, respectively.
Net Earned Premium. Net earned premium is the earned portion of our net written premiums. We earn insurance premiums on a pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums, which are earned in subsequent periods over the remaining term of the policy. Our workers’ compensation insurance and commercial package policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2015 for an employer with a constant payroll during the term of the policy, we would earn half of the premiums in 2015 and the other half in 2016. We earn our specialty risk and extended warranty coverages over the estimated exposure time period. The terms vary depending on the risk.The coverages range in duration from one month to 120 months. Our U.S. warranty business has an average duration of 57 months, while our European warranty business has an average duration of 43 months and our European casualty business has average duration of 12 months.
Ceding commission on reinsurance transactions is a commission we receive from ceding gross written premium to third party reinsurers, and is netted against acquisition costs and other underwriting expenses. In connection with the Maiden Quota Share, which is our primary source of ceding commissions, the amount we receive is a blended rate based on a contractual formula contained in the individual reinsurance agreements, and the rate may not correlate specifically to the cost structure of the individual segments. The ceding commissions we receive cover a portion of our capitalized direct
acquisition costs and a portion of other underwriting expenses. Ceding commissions received from reinsurance transactions that represent recovery of capitalized direct acquisition costs are recorded as a reduction of capitalized unamortized deferred acquisition costs and the net amount is charged to expense in proportion to net premium revenue recognized. Ceding commissions received from reinsurance transactions that represent the recovery of other underwriting expenses are recognized in the income statement over the insurance contract period in proportion to the insurance protection provided and classified as a reduction of acquisition costs and other underwriting expenses. Ceding commissions received, but not yet earned, that represent the recovery of other underwriting expenses are classified as a component of accrued expenses and other current liabilities. We allocate earned ceding commissions to its segments based on each segment’s proportionate share of total acquisition costs and other underwriting expenses recognized during the period.
Other Expense. Other expense includes those charges that are related to the amortization of tangible and intangible assets and non-insurance fee generating activities in which we engage, including salaries and benefits expenses and other charges directly attributable to non-insurance fee generating activities, such as those generated by Builders & Tradesman's Insurance Services, Inc. ("BTIS"), CNH Industrial Canada Insurance and CNH Industrial Insurance Agency Inc. (collectively, "CNH"), First Nonprofit Insurance Company ("FNIC"), Oryx Insurance Brokerage, Inc., RS Acquisition Holdco, LLC and it subsidiaries (collectively, "Risk Services"), TMI Solutions, LLC, Warrantech Corporation and its subsidiaries (collectively, "Warrantech") and Warranty Solutions.
Interest Expense. Interest expense represents amounts we incur on our outstanding indebtedness at the then-applicable interest rates.
For example, as of December 31, 2015, the average cost per workers’ compensation claim was $12,481, which was a 3.0% increase over the claims severity from 2001 - 2014 of $12,121. In 2015, claims frequency (number of claims per $1.0 million of payroll) increased to .986 from .982, an increase of .39%, for the period between 2001 and 2015.
On a quarterly basis, we review our reserves to determine whether the expected loss emergence based on our actuarial assumptions is consistent with the actual loss emergence to date. We also perform monthly diagnostic reviews in the form of reported and paid loss ratios to date and compare to comparable historical points to detect any possible anomalous results. In the event of a result that looks materially different from our previous loss history, we would seek to determine the causes (e.g., underwriting, claims, inflation, and/or regulatory) and may adjust our reserves depending on the identified cause. For example, if the emergence of our total incurred losses were 5% greater than what our loss emergence patterns (development factors) would have predicted, we may adjust our reserves for the periods in question. In 2015, 2014 and 2013, our liabilities for unpaid losses and LAE attributable to prior accident years increased by $33.9 million, $18.6 million and $30.9 million, respectively. This was primarily driven by unfavorable loss development in our Small Commercial Business and Specialty Program segments, as well as a portion of our European casualty business in 2015. We will continue to monitor the accuracy of our loss development factors and related actuarial assumptions, as well as the adequacy of our reserves.
Fair Value of Financial Instruments. Our estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820 Fair Value Measurements and Disclosures. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the ASC 820 hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. Additionally, valuation of fixed maturity investments is more subjective when markets are less
Fixed Maturities. We utilize a pricing service to estimate fair value measurements for all of our fixed maturities. The pricing service utilizes market quotations for fixed maturity securities that have quoted market prices in active markets. Since fixed maturities other than U.S. treasury securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements using relevant market data, benchmark curves, sector groupings and matrix pricing. The pricing service we utilize has indicated it will produce an estimate of fair value only if there is verifiable information to produce a valuation. As the fair value estimates of most fixed maturity investments are based on observable market information rather than market quotes, the estimates of fair value other than U.S. Treasury securities are included in Level 2 of the hierarchy. U.S. Treasury securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted prices. Our Level 2 investments include obligations of U.S. government agencies, municipal bonds, corporate debt securities and other mortgage backed securities.
Other-than-temporary-impairment (“OTTI”). Quarterly, our Investment Committee (“Committee”) evaluates each security that has an unrealized loss as of the end of the subject reporting period for “OTTI”. We generally consider an investment to be impaired when it has been in a significant unrealized loss position (in excess of 35% of cost if the issuer has a market capitalization of under $1 billion and in excess of 25% of cost if the issuer has a market capitalization of $1 billion or more) for over 24 months. In addition, the Committee uses a set of quantitative and qualitative criteria to review our investment portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of our investments. The criteria the Committee primarily considers include:
whether management intends to sell the security and, if not, whether it is not more than likely than not that we will be required to sell the security before recovery of its amortized cost basis;
Based on guidance in FASB ASC 320-10-65, in the event of the decline in fair value of a debt security, a holder of that security that does not intend to sell the debt security and for whom it is not more than likely than not that such holder will be required to sell the debt security before recovery of its amortized cost basis, is required to separate the decline in fair value into (a) the amount representing the credit loss and (b) the amount related to other factors. The amount of total decline in fair value related to the credit loss shall be recognized in earnings as an OTTI with the amount related to other factors recognized in accumulated other comprehensive loss, net of tax. OTTI credit losses result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process, and different judgments and assumptions could affect the timing of the loss realization. During 2015, 2014 and 2013, we recorded impairment write-downs of approximately $19.2 million, $8.0 million and $2.9 million, respectively, after determining that certain of our investments were OTTI.
Business Combinations. We account for business combinations under the acquisition method of accounting, which requires us to record assets acquired, liabilities assumed and any non-controlling interest in the acquiree at their respective fair values as of the acquisition date in our consolidated financial statements. We account for the insurance and reinsurance contracts under the acquisition method as new contracts, which requires us to record assets and liabilities at fair value. We adjust the fair value of loss and loss adjustment expense reserves by recording the acquired loss reserves based on our existing accounting policies and then discounting them based on expected reserve payout patterns using a current risk-free rate of interest. This risk free interest rate is then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be
reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and our best estimate of the fair value of such reserves at the acquisition date is recorded either as an intangible asset or an other liability, as applicable, and amortized proportionately to the decrease in the acquired loss and loss adjustment expense reserves over the payout period for the acquired loss and loss adjustment expense reserves. We record contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value recorded through earnings. The determination of fair value may require management to make significant estimates and assumptions. The purchase price is the fair value of the total consideration conveyed to the seller and we record the excess of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill. We assign fair values to intangible assets based on valuation techniques including the income and market approaches. We expense costs associated with the acquisition of a business in the period incurred. We include the results of operations of an acquired business in our consolidated financial statements from the date of the acquisition.
Goodwill and Intangible Assets. We account for goodwill and intangible assets in accordance with ASC 820, Business Combinations and ASC 350, Intangibles - Goodwill and Other. We record an acquisition price paid that is in excess of net assets (“goodwill”) arising from a business combination as an asset, and it is not amortized. We amortize intangible assets with a finite life over the estimated useful life of the asset. We do not amortize intangible assets with an indefinite useful life. We review our finite-lived intangible assets for impairment when events or change in circumstances indicate that the carrying value of such intangible assets may not be recoverable from estimated cash flows. We test goodwill and intangible assets with indefinite lives for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in the consolidated statement of operations.
Net Written Premium. Net written premium increased $303.4 million, or 7.7%, to $4,260.1 million from $3,956.6 million for the years ended December 31, 2015 and 2014, respectively. The increase by segment was: Small Commercial Business - $49.7 million; Specialty Risk and Extended Warranty - $117.1 million; and Specialty Program - $136.7 million. Net written premium increased for the year ended December 31, 2015 compared to 2014 due to an increase in gross written premium, which was partially offset by a decrease in the retention of gross written premium to 62.7% from 65.0% for the years ended December 31, 2015 and 2014, respectively. The decrease in retention resulted primarily from an increase in business written that is covered under the Maiden Quota Share in 2015 and the assumption of non-recurring premium during the first quarter of 2014 that was not subject to the Maiden Quota Share. Additionally, the increase in net written premium was partially offset by $174 million of non-recurring unearned premium we assumed from Tower during the first quarter of 2014. Absent this assumption, net written premium would have increased approximately $477 million, or 13.1%.
Net Earned Premium. Net earned premium increased $495.2 million, or 14.0%, to $4,021.7 million from $3,526.6 million for the years ended December 31, 2015 and 2014, respectively. The increase by segment was: Small Commercial Business - $280.1 million; Specialty Risk and Extended Warranty - $72.8 million; and Specialty Program - $151.2 million. The increase was partially offset by a decrease in Personal Lines Reinsurance - $8.9 million. The increase in net earned premium resulted from the increase in gross written premium in 2015.
Net Realized Gains (Losses) on Investments. We had net realized gains on investments of $8.1 million and $16.4 million for the years ended December 31, 2015 and 2014, respectively. The decrease related to higher other than temporary impairment of fixed maturity securities, which were $19.2 million and $8.0 million for the years ended December 31, 2015 and 2014, respectively.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $122.6 million, or 14.3%, to $979.5 million for the year ended December 31, 2015 from $856.9 million for the year ended December 31, 2014. Acquisition costs and other underwriting expenses were reduced in each period by ceding commission primarily earned through the Maiden Quota Share, whereby we receive a ceding commission of 31% of premiums ceded for all business except retail commercial package business, for which we receive a ceding commission of 34.375% for premiums ceded. The ceding commission earned during the years ended December 31, 2015 and 2014 was $526.8 million and $405.1 million, respectively. Ceding commission increased period over period as a result of increased premium writings and was reasonably consistent period over period as a percentage of ceded earned premiums. The expense ratio remained consistent at 24.3% in both 2015 and 2014.
Other. Other expenses increased $30.4 million, or 7.0%, to $466.8 million for the year ended December 31, 2015 from $436.4 million for the year ended December 31, 2014. The increase resulted primarily from the expansion of our product warranty registration and claims handling services for CNH. We also incurred an additional $17.3 million of depreciation and amortization expense in 2015 compared to 2014.
Net Gain on Investment in Life Settlement Contracts. We recognized a gain on investment in life settlement contracts of $19.8 million for the year ended December 31, 2015 compared to a gain of $12.3 million for the year ended December 31, 2014. The increase resulted from a higher number of maturities in 2015 than in 2014.
Equity in Earnings of Unconsolidated Subsidiaries - Related Party. Equity in earnings of unconsolidated subsidiaries - related party decreased by $3.0 million for the year ended December 31, 2015 to $25.4 million compared to $28.4 million for the year ended December 31, 2014. We had equity income from NGHC of $9.6 million and $14.7 million in 2015 and 2014, respectively, related to decreases in our ownership percentages of NGHC as a result of public offerings by NGHC in 2015 and 2014. This year over year decrease was partially offset by an increase in earnings from our proportionate share of equity income from NGHC's results of operations in 2015 compared to 2014.
Net Written Premium. Net written premium increased $1,390.9 million, or 54.2%, to $3,956.6 million from $2,565.7 million for the years ended December 31, 2014 and 2013, respectively. The increase by segment was: Small Commercial Business - $947.1 million; Specialty Risk and Extended Warranty - $389.7 million; and Specialty Program - $120.0 million. The increase was partially offset by a decrease in Personal Lines Reinsurance - $65.8 million. Net written premium increased for the year ended December 31, 2014 compared to the same period in 2013 due to the increase in gross written premium in 2014 compared to 2013, and the increase in retention of gross written premium because of growth in lines of business in our Small Commercial Business segment and Specialty Risk and Extended Warranty segment that are not covered by the Maiden Quota Share. Our overall retention of gross written premium was 65.0% and 62.3% for the years ended December 31, 2014 and 2013 , respectively.
Net Earned Premium. Net earned premium increased $1,260.6 million, or 55.6%, to $3,526.6 million from $2,266.0 million for the years ended December 31, 2014 and 2013, respectively. The increase by segment was: Small Commercial Business - $773.0 million; Specialty Risk and Extended Warranty - $420.4 million; and Specialty Program - $158.2 million. The increase was partially offset by a decrease in Personal Lines Reinsurance - $91.1 million. The increase in net earned premium resulted from the increase in gross written premium in 2014 and the increase in retention of gross written premium to 65.0% in 2014 compared to 62.3% in 2013.
Service and Fee Income. Service and fee income increased $78.2 million, or 23.6%, to $409.7 million from $331.6 million for the years ended December 31, 2014 and 2013, respectively. The Specialty Risk and Extended Warranty segment increased fees by approximately $54.1 million during the year ended December 31, 2014 for the administration of commercial property and casualty insurance, and from product warranty registration and claims handling services. Additionally, we had an increase of $11.0 million in fees related to a small acquisition during the second quarter of 2014. Finally, services provided to ACP Re, Maiden and NGHC also generated higher fees of approximately $6.9 million during 2014 compared to 2013.
Interest Expense. Interest expense for the years ended December 31, 2014 and 2013 was $45.9 million and $34.7 million, respectively. The increase was primarily related to interest expense on the $250 million of 6.125% notes due 2023 issued in August of 2013 and the letter of credits outstanding under our Funds at Lloyd's credit facility.
Acquisition Gain on Purchase. We recognized a gain on acquisition of approximately $48.7 million related to the purchases of CCPH, FNIC and Sequoia during 2013. We did not recognize any gains on acquisition during 2014.
Equity in Earnings of Unconsolidated Subsidiaries - Related Party. Equity in earnings of unconsolidated subsidiaries - related party increased by $16.8 million for the year ended December 31, 2014 to $28.4 million compared to $11.6 million for the year ended December 31, 2013. A majority of the increase resulted from an increase in earnings from our proportionate share of equity income from NGHC's results of operations. Additionally, we had equity income from NGHC of $14.7 million and $8.6 million in 2014 and 2013, respectively, related to decreases in our ownership percentages of NGHC related to their public offerings in 2014 and 2013.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $166.9 million for the year ended December 31, 2015 compared to $134.3 million for the year ended December 31, 2014. The increase resulted primarily from an increase in the level of earned premium during the year ended December 31, 2015 compared to 2014, combined with a stable combined ratio during the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Small Commercial Business Segment Results of Operations 2014 Compared to 2013
Net Written Premium. Net written premium increased $947.1 million, or 101.3%, to $1,882.4 million from $935.3 million for the years ended December 31, 2014 and 2013 , respectively. The increase in net premium resulted from an increase in gross written premium for the year ended December 31, 2014 compared to the year ended December 31, 2013, as well as an increase in the retention of gross written premium period over period caused by growth in lines of business that are not covered by the Maiden Quota Share. Our retention of gross written premium for the segment was 62.8% and 56.3% for the years ended December 31, 2014 and 2013, respectively.
Loss and Loss Adjustment Expenses; Loss Ratio. Loss and loss adjustment expenses increased $506.9 million, or 92.4%, to $1,055.5 million for the year ended December 31, 2014 from $548.6 million for the year ended December 31, 2013. Our loss ratio for the segment for the year ended December 31, 2014 decreased to 65.7% from 65.8% for the year ended December 31, 2013. The loss ratio remained stable year over year as current accident year selected ultimate losses were lower than selected ultimate losses from prior years. This was partially offset by premium assumed in 2014 through the Cut Through Reinsurance Agreement with Tower, which had higher ultimate loss selections than our policies in similar lines of business. Additionally, we wrote approximately 25.7% of the segment's gross written premium in the state of California in 2014 compared to 23.8% in 2013. We assign a higher ultimate loss selection to policies written in the state of California than for workers' compensation policies written in other states. We did not have any material increases or decreases as a result of prior year loss development.
of business through the Cut Through Reinsurance Agreement, and an increase in commercial package and excess and surplus lines business, which have higher policy acquisition costs than other business we write.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio increased to $134.3 million for the year ended December 31, 2014 compared to $72.4 million for the year ended December 31, 2013. The increase resulted primarily from an increase in the level of earned premium during the year ended December 31, 2014 compared to 2013, partially offset by higher loss and loss adjustment expenses during the year ended December 31, 2014 as compared to the year ended December 31, 2013.
Net Earned Premium. Net earned premium increased $72.8 million, or 5.9%, to $1,305.0 million for the year ended December 31, 2015 from $1,232.2 million for the year ended December 31, 2014. As net written premium is earned ratably over the term of a policy, the increase in net earned premium resulted from the increase in net written premium period over period.
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $11.5 million, or 4.5%, to $265.2 million for the year ended December 31, 2015 from $253.8 million for the year ended December 31, 2014. Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the years ended December 31, 2015 and 2014 of $142.7 million and $120.3 million, respectively. Although ceding commission increased period over period, the segment received a smaller allocation of ceding commission for its proportionate share of our overall policy acquisition expense as a result of the growth in our Small Commercial Business segment. Our expense ratio was 20.3% for the year ended December 31, 2015, which is consistent compared to 20.6% for the year ended December 31, 2014.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio decreased to $157.6 million for the year ended December 31, 2015 compared to $160.7 million for the year ended December 31, 2014. This decrease resulted primarily from an increase in the loss ratio during the year ended December 31, 2015 compared to 2014, partially offset by an increase in earned premium during the year ended December 31, 2015 as compared to the year ended December 31, 2014.
Specialty Risk and Extended Warranty Segment Results of Operations 2014 Compared to 2013
Acquisition Costs and Other Underwriting Expenses; Expense Ratio. Acquisition costs and other underwriting expenses increased $102.7 million, or 67.9%, to $253.8 million for the year ended December 31, 2014 from $151.2 million for the year ended December 31, 2013 . Acquisition costs and other underwriting expenses were reduced by ceding commission earned during the year ended December 31, 2014 and 2013 of $120.3 million and $83.2 million, respectively. Although ceding commission increased period over period, the segment received a smaller allocation of ceding commission for its proportionate share of our overall policy acquisition expense as a result of the growth in our Small Commercial Business segment. As a result, our expense ratio increased to 20.6% for the year ended December 31, 2014 compared to 18.6% for the year ended December 31, 2013. Additionally, the increase in the expense ratio in 2014 related to higher policy acquisition costs incurred by AmTrust at Lloyd's, which was acquired at the end of 2013.
Net Earned Premium Less Expenses Included in Combined Ratio (Underwriting Income). Net earned premium less expenses included in combined ratio were $35.6 million and $38.6 million for the years ended December 31, 2015 and 2014, respectively. The decrease of $3.1 million resulted primarily from an increase in the combined ratio in 2015 compared to 2014.
Net Written Premium. Net written premium increased $120.0 million , or 19.3% , to $740.5 million for the year ended December 31, 2014 from $620.5 million for the year ended December 31, 2013. The increase in net written premium resulted from an increase of gross written premium for the year ended December 31, 2014 compared to the year ended December 31, 2013, partially offset by a lower retention of gross written premium during 2014 compared to 2013. Our overall retention of gross written premium for the segment was 67.0% and 70.5% for the years ended December 31, 2014 and 2013, respectively. The decrease in the retention of gross written premium in 2014 related to an increase in business covered under the Maiden Quota Share.
Net Earned Premium. Net earned premium increased $158.2 million , or 30.4% , to $678.6 million for the year ended December 31, 2014 from $520.4 million for the year ended December 31, 2013. As premiums written earn ratably over an annual period, the increase in net premium earned resulted from higher net written premium for 2014 compared to 2013. Additionally, increase in net earned premium was positively impacted in 2014 from the segment having 81% of its total net written premium for the year generated during the first nine months of 2014 compared to 77% in 2013.
Our investment portfolio, which consists of cash, cash equivalents, restricted cash and cash equivalents, fixed maturity securities, equity securities, and short-term investments, but excludes life settlement contracts, other investments, and equity investments, increased $1.4 billion, or 26.3%, to $7.0 billion at December 31, 2015 from $5.5 billion as of December 31, 2014. Our investment portfolio is primarily classified as available-for-sale, as defined by ASC 320, Investments - Debt and Equity Securities. This increase in our investment portfolio during the year ended December 31, 2015 was primarily attributable to the acquisitions of CorePointe, Springfield, and Warranty Solutions, as well as the utilization of excess cash from our debt and equity offerings during 2015. Our fixed maturity securities had a fair value of $5.4 billion and an amortized cost of $5.5 billion as of December 31, 2015. Our equity securities, including both available-for-sale and trading securities, had a fair value of $131.8 million with a cost of $136.3 million as of December 31, 2015. Securities sold but not yet purchased represent our obligations to deliver the specified security at the contracted price and thereby create a liability to purchase the security in the market at prevailing rates. We account for sales of securities under repurchase agreements as collateralized borrowing transactions and we record these sales at their contracted amounts.
The table below summarizes the average duration by type of fixed maturity as well as detailing the average yield as of December 31, 2015 and 2014:
As of December 31, 2015, the weighted average duration of our fixed income securities was approximately 5.6 years and had an average yield of 3.3%.
Impairment of investment securities results in a charge to operations when a market decline below cost is deemed to be other-than-temporary. We write down investments immediately that we consider to be impaired based on the above criteria collectively.
The table below summarizes the gross unrealized losses of our available-for-sale fixed maturity and available-for-sale equity securities by length of time the security has continuously been in an unrealized loss position as of December 31, 2015:
We are organized as a holding company with seventeen domestic and five international insurance company subsidiaries, as well as various other non-insurance subsidiaries. Our primary liquidity needs include payment of interest on various debt facilities, stockholder dividends and taxes. Our income is generated primarily from our insurance subsidiaries, service and fee income and investment income.
The laws of the jurisdictions in which our insurance subsidiaries are organized regulate and restrict, under certain circumstances, their ability to pay dividends to us. As of December 31, 2015 and 2014, respectively, our insurance subsidiaries would have been permitted to pay dividends in the aggregate of approximately $621.6 million and $844.0 million, respectively. Our insurance subsidiaries paid dividends to us of $63.6 million, $7.4 million and $6.9 million in 2015, 2014 and 2013, respectively. In addition, the terms of our debt arrangements limit our ability to pay dividends on our common stock, and future borrowings may include prohibitions and restrictions on dividends. Additional information regarding our dividends is presented in “Item 1. Business - Regulation”, in “Item 1A. Risk Factors” and in “Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchase of Equity Securities - Dividend Policy” appearing elsewhere in this Form 10-K.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short-term and long-term basis. Cash payments for claims were $1,860.4 million, $1,441.2 million, and $953.2 million in 2015, 2014 and 2013, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums) net of amounts ceded to our third party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our total investment portfolio has increased from $5.51 billion (excluding $31.2 million of other investments) as of December 31, 2014 to $6.96 billion (excluding $99.0 million of other investments) as of December 31, 2015. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.
Net cash used in investing activities was $1,727.7 million for the year ended December 31, 2015. Net cash used in investing activities was $1,038.9 million for the year ended December 31, 2014. In 2015, net cash used in investing activities primarily included approximately $1,184 million for the net purchase of fixed maturity and equity securities, approximately $242 million for acquisitions, approximately $168 million for capital expenditures and approximately $195 million for an increase of restricted cash, partially offset by the receipt of approximately $102 million from life settlement contract payouts. In 2014, net cash used in investing activities primarily included approximately $736 million for the net purchase of fixed maturity and equity securities, $125 million for a loan to ACP Re, approximately $81 million for acquisitions, approximately $25 million for the acquisition of life settlement contracts, approximately $77 million for capital expenditures and approximately $85 million for an increase of restricted cash, partially offset by the receipt of approximately $10 million from life settlement contract payouts and $20 million from the sale of a subsidiary.
Our five-year, $350 million credit facility is a revolving credit facility with a letter of credit sublimit of $175 million and an expansion feature of not more than an additional $150 million. In September 2014, we replaced our $200 million credit facility with this current facility. As of December 31, 2015, we had outstanding borrowings of $130 million and outstanding letters of credit of $117.8 million, which reduced the availability for letters of credit to $57.2 million, and the total aggregate availability under the facility to $102.2 million.
Fees payable under this facility include a letter of credit participation fee (equal to the margin applicable to Eurodollar borrowings), a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range based on our consolidated leverage ratio, which was greater than or equal to 25% but less than 30%, resulting in a commitment fee rate of 0.200%).
Fees payable under this letter of credit facility include a letter of credit issuance fee payable on the secured portion of the letters of credit at the rate of 0.50% and on the unsecured portion of the letters of credit determined based on AII’s then-current financial strength rating issued by A.M. Best. As of December 31, 2015, the applicable letter of credit fee rate on the unsecured portion was 1.15% based on AII’s A.M. Best financial strength rating of “A”. We also pay a commitment fee of 0.35% per year on the aggregate unutilized and uncanceled amount of the facility, and a facility fee upon closing of 0.15% of the total aggregate commitment.
We have an outstanding principal balance of $213.2 million of Convertible Senior Notes due 2044 (“2044 Notes”), with a carrying value of $163.1 million, that bear interest at a rate equal to 2.75% per year, payable semiannually in arrears on June 15th and December 15th of each year. Interest expense recognized on the 2044 Notes was $12.2 million and $0.5 million for the years ended December 31, 2015 and 2014, respectively. Additionally, we have an outstanding principal balance of $6.0 million of Convertible Senior Notes due 2021 (“2021 Notes”), with a carrying value of $5.2 million, that bear interest at a rate equal to 5.5% per year, payable semiannually in arrears on June 15th and December 15th of each year. Interest expense recognized on the 2021 Notes was $0.8 million, $13.9 million, and $14.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. For further information on the 2044 Notes and the 2021 Notes, including contingent interest on the 2044 Notes, conversion triggers, redemption and repurchase features and the exchange of 2021 Notes for 2044 Notes, see Note 12. “Debt” in the audited consolidated financial statements included elsewhere in this report.
We have outstanding $250 million aggregate principal amount of our 6.125% notes due 2023 that bear interest at a rate equal to 6.125% per year, payable semiannually in arrears on February 15th and August 15th of each year. The interest rate will increase by 0.50% per year if our consolidated leverage ratio exceeds 30% and will increase an additional 1.00% per year (for an aggregate increase of 1.50% per year) if our consolidated leverage ratio exceeds 35%. As of December 31, 2015, the consolidated leverage ratio was less than 30%. Interest expense recognized on these notes was approximately $15.6 million, $15.6 million and $5.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. For further information on these notes, including restrictive covenants and events of default, see Note 12. “Debt” in the audited consolidated financial statements included elsewhere in this report.
We have outstanding $135 million aggregate principal amount of our 7.50% subordinated notes due 2055 (the "7.50% 2055 Notes") that bear interest at a rate equal to 7.50% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing December 15, 2015. The 7.50% 2055 Notes mature on September 15, 2055. We have the right to redeem the 7.50% 2055 Notes, in whole or in part, on September 16, 2020, or on any interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the 7.50% 2055 Notes plus accrued and unpaid interest to, but not including, the date of redemption. The 7.50% 2055 Notes are our subordinated unsecured obligations and are structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. Interest expense, including amortization of deferred origination costs, recognized on the 7.50% 2055 Notes was $2.9 million for the year ended December 31, 2015. For further information on the 7.50% 2055 Notes, see Note 12. "Debt" in the audited consolidated financial statements included elsewhere in this report.
We have outstanding $124 million aggregate principal amount of our four junior subordinated debenture notes ("2035-2037 Notes"). These debenture notes, maturing between 2035 and 2037, were issued by us using the proceeds from issuing trust preferred securities in connection with establishing four special purpose trusts. The debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The debentures contain covenants that restrict declaration of dividends on our common stock under certain circumstances, including default of payment. We recognized interest expense, including amortization
of deferred origination costs, of approximately $7 million, $8 million and $8 million for the years ended December 31, 2015, 2014 and 2013, respectively, related to these trust preferred securities. For further information on the 2035-2037 Notes, see Note 12. "Debt" in the audited consolidated financial statements included elsewhere in this report.
In 2015, fixed maturities increased $1,180.5 million and resulted primarily from utilizing cash from common and preferred stock offerings, debt issuances and operations along with acquisitions. The increase in reinsurance recoverable is directly related to the increase in loss and loss expense reserves. Other assets increased $323.7 million and resulted from increases in deferred tax assets and tax receivable along with continued expansion of our fee business.
We structure our reinsurance programs by analyzing our tolerance for risk in each line of business and on an overall consolidated basis, based on a number of factors, including market conditions, pricing, competition and the inherent risks associated with each business type. We generally purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophe losses and volatility. We retain underwriting risk in certain lines of business in order to capture a greater proportion of expected underwriting profits. We have chosen not to purchase any reinsurance on businesses where volatility or catastrophe risks are considered remote and policy limits are within our risk tolerance.
In our proportional reinsurance programs, we generally receive a commission on the premium ceded to reinsurers. This “ceding commission” compensates our insurance companies for the direct costs associated with production of the business, the servicing of the business during the term of the policies ceded, and the costs associated with placement of reinsurance that benefits the
The following table summarizes the top ten reinsurers that account for approximately 83% of our reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as of December 31, 2015:
As per the NWCRP Articles of Agreement, reinsurance is provided through a 100% quota share reinsurance agreement entered into among the servicing carrier (TIC) and the participating companies (all carriers writing in the state) pursuant to the Articles of Agreement.
AII receives a ceding commission of 31% of ceded written premiums with respect to all Covered Business other than retail commercial package business, for which the ceding commission remains 34.375%. With regards to the Specialty Program portion of Covered Business only, we will be responsible for ultimate net loss otherwise recoverable from Maiden Reinsurance to the extent that the loss ratio to Maiden Reinsurance, which will be determined on an inception to date basis from July 1, 2007 through the date of calculation, is between 81.5% and 95% (the “Specialty Program Loss Corridor”). For purposes of determining whether
We recorded approximately $510.8 million, $405.1 million and $276.6 million of ceding commission during 2015, 2014 and 2013, respectively, as a result of the Maiden Quota Share.
We currently own 255 life settlement contracts with a carrying value of $264.0 million. In order for us to derive the economic benefit of the face value of the policies, we are required to make these premium payments. The contractual obligations are on a consolidated basis. As we have a 50% ownership interest in these life insurance policies and premium finance loans, NGHC has an obligation for 50% of the above contractual obligations.
The interest related to the debt by period is as follows: $53.6 million - less than 1 year, $106.6 million - 1 - 3 years, $100.1 million - 3 - 5 years and $1,012.9 million - more than 5 years. In addition, included within debt and interest is $168 million related to the Maiden collateral loan and $6.5 million of associated interest.