Selected consolidated statement of operations data, ending consolidated balance sheet data and share data for the years ended December 31, 2017, 2016, 2015, and 2014, and for the period from June 24, 2013 to December 31, 2013 follows. These historical results are not necessarily indicative of results to be expected from any future period.
The following is a discussion and analysis of our results of operations for the years ended December 31, 2017, 2016 and 2015, and our financial condition as of December 31, 2017 and 2016. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes thereto included elsewhere in this report.
This discussion contains forward-looking statements that are not historical facts, including statements about our beliefs and expectations. These statements are based upon current plans, estimates and projections. Our actual results may differ materially from those projected in these forward-looking statements as a result of various factors. See "Forward Looking Statements" appearing at the beginning of this report and "Risk Factors" contained in Item 1A herein.
The majority of our property catastrophe business is originated during the key January and June annual renewal periods. We experienced continued competition during the January 1, 2017 and June 1, 2017 renewal periods, due to the absence of any significant market changing industry catastrophe losses or other events prior to 2017. As a result, we experienced an overall risk adjusted rate decrease of approximately 3% on the risks we wrote at January 1 and June 1, 2017, versus those written in 2016.
We experienced significant losses in the latter half of 2017, primarily from property damage caused by Hurricanes Harvey, Irma and Maria making landfall in the United States and Puerto Rico in the third quarter. The financial impact to the insurance industry from these catastrophe events is estimated to collectively be above $100 billion and these catastrophe events had a meaningful impact on our results. Through our active portfolio construction and leveraging our partnership with Sompo International, our actual losses from these events were in line with our modeled results given the magnitude of the global events. Over the January 1, 2018 renewal period, pricing reflected the impact of the 2017 loss events as our renewing business experienced an overall price increase of approximately 12% reflecting a reversal of pricing declines experienced in recent years.
We reinsure exposures throughout the world against various natural catastrophe perils. The Manager manages our net exposure to these perils using a combination of industry third-party models, proprietary models, underwriting judgment and purchases of outwards reinsurance and/or derivative instruments.
The following discussion should be read in conjunction with the "Risk Factors" contained in Item 1A herein, in particular the risk factor entitled "Our stated catastrophe and enterprise-wide risk management exposures are based on estimates and judgments which are subject to significant uncertainties."
The Manager monitors our net exposure to any one catastrophe loss event in any single zone within certain broadly defined major catastrophe zones at each treaty renewal date. Our last major treaty renewal date was January 1, 2018. On January 1, 2018 our estimated net exposures by zone were in compliance with our underwriting guidelines. Namely, our estimated net exposure from any one catastrophe loss event in any individual zone was at or below 50% of our then-projected shareholders’ equity at December 31, 2017.
Our single event loss estimates represent snapshots as of the time of such estimates. The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, losses incurred, the expiration of existing policies, and changes in our ceded reinsurance and derivative protections.
During 2017, 2016 and 2015 we wrote $46.1 million, $43.2 million and $38.6 million of reinsurance premiums, respectively, all of which represented indemnity reinsurance contracts relating to property catastrophe risks. The increase in reinsurance premiums written in 2017, compared to 2016 and 2015 was primarily due to higher reinstatement premiums recorded on the retrocessional quota share agreement with Sompo International (the "Sompo International Quota Share Agreement") arising from the major loss events occurring in 2017 as compared to the prior years. Additionally, in comparison to 2015 higher premiums resulted from an increased proportion of our capital deployed to the Sompo International Quota Share Agreement. See "Reinsurance Premiums and Acquisition Costs" in Note 1 of the Notes to Consolidated Financial Statements.
Our reinsurance premiums written and earned during 2017, 2016 and 2015 included $4.7 million, $1.5 million and $0.3 million, respectively of reinstatement premiums.
During 2017, our in-force derivative contracts included the 2017 Outward ILW Swaps, the 2016 Outward ILW Swaps and the 2016 Inward ILW Swap. During 2016, our in-force derivative contracts included the 2016 and 2015 Inward ILW Swaps and the 2016 Outward ILW Swap. During 2015, our in-force derivative contracts included the 2015 Inward ILW Swap and the 2015 Outward ILW Swap.
The following table summarizes the components of our consolidated loss and LAE incurred and our loss and LAE ratios for the years ended December 31, 2017, 2016 and 2015:
During 2017 we established $79.0 million of loss and LAE reserves for estimated losses incurred during the year primarily driven by the catastrophe events summarized in the following table together with reported attritional losses and incurred but not reported ("IBNR") reserves. The losses shown are net of an estimated $5.0 million recovery (separate from the $4.7 million ILW Swap recovery) associated with Hurricane Irma that the Company benefited from through the BW Retrocessional Agreement. In addition, during the year ended December 31, 2017, we recognized $1.1 million of net adverse loss and LAE reserve development for estimated losses incurred primarily during 2016. The prior year loss and LAE development we recognized during 2017 was the result of new or revised loss information received from our cedants in respect of multiple 2016 loss events.
During 2016 we established $13.7 million of losses and LAE, of loss and LAE reserves for estimated losses incurred during the year, primarily driven by the catastrophe events summarized in the following table, together with reported attritional losses and incurred but not reported ("IBNR") reserves.
During 2015, we established $2.6 million of losses and LAE reserves for estimated losses incurred during the year, reflected as a combination of case and IBNR reserves. There were no individually significant known loss events that impacted us during the 2015 period. In addition, during the year ended December 31, 2015, we recognized $0.6 million of net favorable loss and LAE reserve development for estimated losses incurred during 2014. The prior year loss and LAE development we recognized during 2015 was primarily the result of new or revised loss information received from our cedants.
Our reinsurance acquisition costs, which we normally recognize over the underlying risk period of the related contracts, include commissions, brokerage costs, premium taxes and excise taxes, in each case, when applicable, and are normally a set percentage of gross premiums written. Our reinsurance acquisition costs may also include profit commissions, which are paid to ceding companies in the event of favorable loss experience.
Our reinsurance acquisition costs relating to commissions, brokerage costs, fronting fees and related costs in 2017 were higher than the costs incurred during 2016 and 2015, due to higher net premiums earned during the period. Our profit commissions incurred, which fluctuate based on our loss experience, were lower in 2017 compared to 2016 and 2015 as a result of the reduced profitability from the Sompo International Quota Share Agreement driven by the third quarter 2017 catastrophe events.
The following table summarizes our general and administrative expenses for the years ended December 31, 2017 , 2016 and 2015.
See Note 11 of the Notes to Consolidated Financial Statements for detailed information regarding the nature of the expenses that we incur pursuant to the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement.
The expenses we have incurred pursuant to the Investment Management Agreement and the Administrative Services Agreement have remained consistent in 2017, 2016 and 2015. During 2017 we incurred $0.4 million of performance fees pursuant to the Underwriting and Insurance Management Agreement compared to $0.5 million during 2016. In 2015 performance fees were higher due to the increased profitability of the Company.
Our public company expenses incurred during the years presented consisted of director fees, corporate insurance premiums, audit fees, share-based compensation and other expenses associated with being a publicly traded company. The modest increase in these expenses during the year ended December 31, 2017, versus those of 2016 and 2015, is due to higher corporate advisory expenses.
The primary sources of cash for the Company’s operating subsidiaries are capital contributions, premium collections, issuances of and net income from insurance-linked securities and reinsurance recoveries. The primary uses of cash for the Company’s operating subsidiaries are payments of loss and LAE, reinsurance acquisition costs, general and administrative expenses, including fees payable to the Manager, ceded reinsurance, purchases of and net losses from insurance-linked securities and dividends and distributions. As a result of the net loss recorded in 2017, until such time as Blue Capital Re extinguishes its retained deficit position, the payment of dividends are subject to return of capital restrictions. Blue Capital Re may not reduce its total statutory capital by 15% or more, as set out in its previous year’s financial statements, unless it has received the prior approval of the BMA. Total statutory capital consists of Blue Capital Re’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any other fixed capital designated by the BMA as statutory capital. As of December 31, 2017, Blue Capital Re could pay a dividend or return additional paid-in-capital totaling approximately $23.9 million (2016 - $45.9 million) without prior regulatory approval based upon Bermuda law and regulations.
As of December 31, 2017 and 2016, the Company held $6.0 million and $4.7 million of cash and cash equivalents of which: (i) $nil and $3.1 million, respectively, was pledged to trust accounts established for the benefit of third parties; and (ii) $6.0 million and $1.6 million represented unencumbered cash on hand, respectively.
As of December 31, 2017 and 2016, we had no outstanding borrowings under the 2016 Credit Facility.
On May 1, 2015, we renewed and amended our 364-day Credit Agreement (the "2014 Credit Agreement") which permitted us to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The 2014 Credit Agreement expired on April 29, 2016.
the applicable contract). As a result of the significant losses incurred from the catastrophe events of 2017, in line with contractual requirements for buffer loss provisions in the treaties that the Company enters into, collateral that we would typically expect to be available at the key 2018 renewal dates will not be available for deployment. As of January 1, 2018 approximately 13% of projected shareholders' equity was unavailable for deployment as a result of buffer loss provision terms. We expect this locked up collateral will be released systematically through the course of 2018 and 2019.
As a result of the net loss recorded in the year ended December 31, 2017, management estimates that the Company will not pay a Performance Fee in 2018 or 2019 due to the rolling three year high water mark provision.
Certain Termination Provisions Associated with the Foregoing Agreements. We may not terminate the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement for five years after the completion of the IPO, whether or not the Manager’s performance results are satisfactory. Upon any
termination or non-renewal of either of the Investment Management Agreement or the Underwriting and Insurance Management Agreement (other than for a material breach by, or the insolvency of, the Manager), we must pay a one-time termination fee to the Manager equal to 5% of our GAAP shareholders’ equity, calculated as of the most recently completed quarter prior to the date of termination.
Neither the Company nor its operating subsidiaries had any commitments for operating leases or capital expenditures at December 31, 2017 and neither the Company nor its operating subsidiaries expect any material expenditures of this type during the next 12 months or for the foreseeable future.
We experienced a net increase (decrease) in our cash and cash equivalents of $1.3 million, $(1.4) million and $(5.4) million during 2017, 2016 and 2015 respectively.
During the year ended December 31, 2016, our premium collections, net releases of cash and cash equivalents from trusts established by Blue Water Re and cash inflows from other operating activities exceeded our payments of general and administrative expenses by $30.4 million. We also paid $18.8 million in dividends to holders of Common Shares and RSUs and repaid $13.0 million under the 2014 Credit Agreement during the period.
The two primary bases we use for estimating the ultimate loss associated with a large event are: (i) actual and precautionary claims advice received from the cedant; and (ii) the nature and extent of the impact the event is estimated to have on the industry as a whole and the affected underlying contracts. Immediately after a loss event, the estimated industry market loss is the primary driver of our ultimate loss from such event. In order to estimate the nature and extent of the event, we rely on output provided by commercially available catastrophe models, as well as proprietary models developed by Sompo International and utilized by the Manager. The exposure of each cedant potentially affected by the event is analyzed on the basis of this output. As the amount of information received from cedants increases during the period following an event, so does our reliance on this information.
As a reinsurer, we rely on loss information reported to brokers by primary insurers who, in turn, must estimate their own losses at the policy level, often based on incomplete and changing information. The information we receive varies by cedant and may include paid losses, estimated case reserves and an estimated provision for IBNR reserves. Reserving practices and the quality of data reporting vary among ceding companies, which adds further uncertainty to the estimation of our ultimate losses. The nature and extent of information we receive from ceding companies and brokers also vary widely depending on the type of coverage, the contractual reporting terms (which are affected by market conditions and practices) and other factors. Due to the lack of standardization of the terms and conditions of reinsurance contracts, the wide variability of coverage provided to individual clients and the tendency of those coverages to change rapidly in response to market conditions, the ongoing economic impact of such uncertainties and inconsistencies cannot be reliably measured. Additional risks to us involved in the reporting of retrocessional contracts include varying reserving methodologies used by the original cedants and an additional reporting lag due to the time required for the retrocedant to aggregate its assumed losses before reporting them to us. Additionally, the number of contractual intermediaries are typically greater for retrocessional business than for insurance and reinsurance business, thereby further increasing the time lag and imprecision associated with loss reporting.
Subsequent adjustments of written premium, based on reports of actual premium by the ceding companies, or revisions in estimates of ultimate premium, are recorded in the period in which they are determined. Such adjustments are generally determined after the associated risk periods have expired, in which case the premium adjustments are fully earned when written.
We will continue to be an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of at least $1 billion (as indexed for inflation); (ii) December 31, 2018; (iii) the date on which
Since we have elected not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, our consolidated financial statements may not be comparable to those emerging growth companies that have chosen to take advantage of the extended transition period afforded by the JOBS Act.
The financial statements and supplementary data have been filed as a part of this Annual Report on Form 10-K as indicated in the Index to Consolidated Financial Statements and Financial Statement Schedules appearing on page 75 of this report.