We lease office space in Bermuda, where our principal executive office is located and our casualty reinsurance segment is based. We also lease offices in (1) Chapel Hill, North Carolina, where our U.S. holding company, James River Group is based, (2) Raleigh, North Carolina, Rancho Santa Margarita, California and Saratoga Springs, New York where we conduct business in our Specialty Admitted Insurance segment and (3) Richmond, Virginia, Scottsdale, Arizona and Atlanta, Georgia for the conduct of business in our Excess and Surplus Lines segment. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed.
The following tables present selected historical financial information of James River Group Holdings, Ltd. derived from our consolidated balance sheets as of December 31, 2016, 2015, 2014, 2013 and 2012, and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity and cash flows for each of the five years in the period ended December 31, 2016, which have been audited by Ernst & Young LLP.
You should read this selected financial data along with the consolidated financial statements and accompanying notes included elsewhere in this Annual Report, as well as the section of this Annual Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Adjusted net operating income is a non-GAAP measure. We define adjusted net operating income as net income excluding net realized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, severance costs associated with terminated employees, impairment charges on goodwill and intangible assets, gains on extinguishment of debt, expenses on a leased building we are deemed to own for accounting purposes, and professional services and other expenses associated with securities offerings and the payment of special dividends. We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating income should not be viewed as a substitute for net income in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Measures” for a reconciliation of adjusted net operating income to net income in accordance with GAAP.
For the year ended December 31, 2016, 67.6% of our group-wide gross written premiums originated from the U.S. E&S lines market including business assumed by our Casualty Reinsurance segment. We also have a specialty admitted insurance business in the United States. We intend to concentrate substantially all of our underwriting in casualty insurance and reinsurance, and for the year ended December 31, 2016, we derived 98.1% of our group-wide gross written premiums from casualty insurance and reinsurance. We focus on writing business in specialty markets where our underwriters have particular expertise and where we have long-standing distribution relationships; maintaining a strong balance sheet with appropriate reserves; monitoring reinsurance recoverables carefully; managing our investment portfolio actively without taking undue risk; using technology to monitor trends in our business; responding rapidly to market opportunities and challenges; and actively managing our capital.
We report our business in four segments: Excess and Surplus Lines, Specialty Admitted Insurance, Casualty Reinsurance and Corporate and Other.
The Corporate and Other segment consists of the management and treasury activities of our holding companies and interest expense associated with our debt.
The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do not discount this reserve. We estimate the reserve using individual case-basis valuations of reported claims and statistical analyses. We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business we write and the limited operating experience of the Casualty Reinsurance segment and of the fronting and program business in the Specialty Admitted Insurance segment. In applying this judgment, we generally establish reserves that are above our internal actuaries’ estimate. As such, we seek to establish reserves that will ultimately prove to be adequate. If we have indications that claims frequency or severity exceeds our initial
Our Casualty Reinsurance segment generally establishes case reserves based on reports received from ceding companies or their brokers. For excess of loss contracts, we are typically notified of insurance losses on specific contracts, and we record case reserves based on the estimated ultimate losses on each claim. For proportional contracts, we typically receive aggregated claims information and record case reserves based on that information.
We also use statistical analyses to estimate the cost of losses and loss adjustment expenses that have been incurred but not reported to us (“IBNR”). Those estimates are based on our historical information, industry information and estimates of future trends that may affect the frequency of claims and changes in the average cost of claims (severity) that may arise in the future.
The Company’s gross reserve for losses and loss adjustment expenses at December 31, 2016 was $943.9 million. Of this amount, 68.0% relates to IBNR. The Company’s gross reserve for losses and loss adjustment expenses by segment are summarized as follows:
The Company’s net reserve for losses and loss adjustment expenses at December 31, 2016 was $761.1 million. Of this amount, 66.9% relates to IBNR. The Company’s net reserve for losses and loss adjustment expenses by segment are summarized as follows:
Our Reserve Committee consists of our Chief Actuary, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Accounting Officer. Additionally, the presidents and chief actuaries of each of our three operating segments assist in the evaluations of their respective segments. The Reserve Committee meets quarterly to review the actuarial recommendations made by each chief actuary and uses its best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our balance sheet. The Reserve Committee believes that using judgment to supplement the actuarial recommendations is necessary to arrive at a best estimate given the nature of the business that we write and the limited operating experience of the Casualty Reinsurance segment, the fronting and program business in the Specialty Admitted Insurance segment and the commercial auto underwriting division in the Excess and Surplus Lines segment.
given to the Incurred Loss Development method and the Paid Loss Development method than the Expected Loss method. The Bornhuetter-Ferguson Incurred Loss Development and Paid Loss Development methods blend features of the Expected Loss method and the Incurred and Paid Loss Development methods. The Bornhuetter-Ferguson methods are typically used for the more recent prior accident years.
The table below quantifies the impact of extreme reserve deviations from our expected value at December 31, 2016. The total carried net reserve for losses and loss adjustment expenses is displayed alongside 5th, 50th and 95th percentiles of likely ultimate net reserve outcomes. The estimates of these percentiles are a result of a reserve variability analysis using a simulation approach.
The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $56.7 million, reduce after-tax net income by $55.3 million, reduce shareholders’ equity by $55.3 million and reduce shareholders’ tangible equity by $55.3 million, in each case at or for the period ended December 31, 2016.
The impact of recording the net reserve for losses and loss adjustment expenses at the lowest value from the sensitivity analysis above would be to reduce losses and loss adjustment expenses incurred by $93.2 million, increase after-tax net income by $84.1 million, increase shareholders’ equity by $84.1 million, and increase tangible equity by $84.1 million, in each case at or for the year ended December 31, 2016. Such changes in the net reserve for losses and loss adjustment expenses would not have an immediate impact on our liquidity, but would affect cash flow and investment income in future periods as the incremental or reduced amount of losses are paid and investment assets adjusted to reflect the level of paid claims.
Historically, our reserve selections for the Excess and Surplus Lines segment gave more weight to industry indications due to our limited operating history. When we reviewed the Excess and Surplus Lines segment’s reserve parameters in 2013, we had ten years of accumulated historical data of the Company to analyze, and we felt that we had enough history to give more weight to our own experience. Our initial expected loss ratios and our paid loss development factors and incurred loss development factors were adjusted to more closely resemble our own internal indications. Method weights were also changed as management, in consultation with our actuaries, deemed appropriate. These changes had the cumulative effect of reducing our then best estimate for the reserve for losses and loss adjustment expenses.
IBNR reserve estimates are inherently less precise than case reserve estimates. A 5% change in net IBNR reserves at December 31, 2016 would equate to a $25.5 million change in the reserve for losses and loss adjustment expenses at such date, a $23.5 million change in after-tax net income, a 3.4% change in shareholders’ equity and a 5.0% change in tangible equity, in each case at or for the year ended December 31, 2016.
A $23.7 million redundancy developed in 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This favorable reserve development included $24.1 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $10.0 million of favorable development from the 2015 accident year, $10.7 million of favorable development from the 2014 accident year and $4.5 million from the 2013 accident year. This favorable development occurred because our actuarial studies at December 31, 2016 showed that the experience on our casualty business continued to be below our initial expected ultimate loss ratios driven by
We consider a number of factors in assessing whether an impairment is other-than-temporary, including (1) the amount and percentage that current fair value is below cost or amortized cost, (2) the length of time that the fair value has been below cost or amortized cost and (3) recent corporate developments or other factors that may impact an issuer’s near term prospects. In addition, for fixed maturity securities, we also consider the credit quality ratings for the securities, with a special emphasis on securities downgraded to below investment grade. We also consider our intent to sell available-for-sale fixed maturity securities in an unrealized loss position, and if it is “more likely than not” that we will be required to sell these securities before a recovery in fair value to their amortized cost or cost basis. For equity securities, we evaluate the near-term prospects of these investments in relation to the severity and duration of the impairment, and we consider our ability and intent to hold these investments until they recover their fair value. As a starting point for our evaluation, we compare the fair value of each available-for-sale security to its amortized cost or cost to identify any securities with a fair value less than amortized cost or cost.
The Company holds a participation in a loan issued by a company that produces and sells power to Puerto Rico through a power purchase agreement with Puerto Rico Electric Power Authority (“PREPA”), a public corporation and governmental agency of the Commonwealth of Puerto Rico. PREPA’s credit strength has been affected by the economic conditions in Puerto Rico, thus raising doubt about its ability to make full and timely payments on the debt obligations held by the Company. We determined that a credit allowance was needed at December 31, 2016, 2015, and 2014 on loans issued by companies that produce and supply power to Puerto Rico. Accordingly, we established credit allowances totaling $177,000, $414,000, and $752,000 at December 31, 2016, 2015 and 2014, respectively. At December 31, 2016, the loan had a carrying value of  $1.7 million and unpaid principal of  $2.0 million.
assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment manager that obtains fair values from independent pricing services.
Other specifically identified intangible assets with lives ranging from 7.0 to 27.5 years include relationships with customers and brokers. These intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company evaluates intangible assets with definite lives for impairment when impairment indicators are noted that indicate that the carrying value of these assets may not be recoverable. If indicators of impairment are present, fair value is calculated using estimated future cash flows expected to be generated from the use of those assets. An impairment loss is recognized only if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or asset group is not recoverable if it exceeds the sum of the
Reinsurance premium estimates are reviewed by management periodically. Any adjustment to these estimates is recorded in the period in which it becomes known. The impact of any premium adjustments on net income is offset by corresponding changes to related policy acquisition costs and losses and loss adjustment expenses. For the years ended December 31, 2016, 2015 and 2014, these adjustments were immaterial.
In May 2015, the FASB issued ASU 2015-09, Insurance (Topic 944), Disclosures about Short-Duration Contracts. ASU 2015-09 requires additional disclosures about short-duration contracts on a disaggregated basis that provides useful information to readers of the financial statements. The disclosures include annual tabular disclosures of paid and incurred losses and loss adjustment expense by accident year for up to 10 years. This ASU also requires disaggregated information on claim frequency and incurred-but-not-reported liabilities for each accident year. The required disclosures also include the average annual percentage payout of incurred claims by age. ASU 2015-09 was adopted in 2016. Increased disclosures were made to adopt this ASU.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The guidance requires that, prospectively, all tax effects related to share-based payments be made through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in capital under the current guidance. The ASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the current requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. This ASU is effective for fiscal years beginning after December 15, 2016.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require financial assets measured at amortized cost, such as bank loan participations held for investment, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Upon adoption, this ASU will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. The Company has not yet completed the analysis of how adopting this ASU will affect Company’s financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 was issued to address the diversity in practice of how certain cash receipts and payments are classified in the statement of cash flows. The update addresses specific issues, including distributions received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the update will be applied using the retrospective transition method. The Company has not yet completed the analysis of how adopting this ASU will affect our financial statements, but does not expect a material impact on our statement of cash flows.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Underwriting profit includes fee income of $14.2 million and $5.0 million for the year ended December 31, 2016 and 2015, respectively.
shareholders in 2015. Also included in net realized investment losses in 2015 are $3.9 million of impairment losses on two bank loans to oil and gas companies in the energy sector whose market values had declined significantly in response to declining energy prices.
Interest expense for the years ended December 31, 2016 and 2015 include $1.4 million and $661,000, respectively, relating to finance expenses in connection with a minority interest in a real estate partnership pursuant to which we are deemed an owner for accounting purposes. The debt is nonrecourse to us and was not arranged by us. See Note 1 to the Notes to the Audited Consolidated Financial Statements for additional information with respect to our minority interest.
Our expense ratio was 31.2% and 33.5% for the years ended December 31, 2016 and 2015, respectively. The reduced expense ratio for 2016 reflects the 25.1% increase in the Excess and Surplus segment’s net earned premiums and an increase in fee income for the Company as a whole. Our Excess and Surplus Lines segment (our largest segment with 58.4% of consolidated net earned premiums for the year ended December 31, 2016) has significant scale and produces a lower expense ratio than our other operating segments. Fee income for the Company increased year over year from $5.0 million to $14.2 million, as we grew our fee business in both the Excess and Surplus Lines segment and the Specialty Admitted Insurance segment.
Commercial Auto division (representing 29.7% of this segment’s 2016 business) which increased $36.3 million (or 49.2%) over the prior year.
Loss Ratio. The loss ratio of 62.6% for the year ended December 31, 2016 includes $24.1 million, or 8.0 percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of 54.5% for the year ended December 31, 2015 includes $25.4 million, or 10.6 percentage points, of net favorable development in our loss estimates for prior accident years. The significant favorable reserve development in this segment reflects benign loss activity and continuing positive loss trends.
Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess and Surplus Lines segment decreased slightly by 0.8%, from $47.6 million for the year ended December 31, 2015 to $47.2 million for the year ended December 31, 2016.
Expense Ratio. The expense ratio of 35.4% for the year ended December 31, 2016 decreased from 36.7% in the prior year. The expense ratio declined in 2016 for this segment primarily due to a 25.1% increase in net earned premiums as the fronting and program business continued to achieve scale. The gross written premiums on this fronting and program business were $142.6 million and $55.0 million for the years ended December 31, 2016 and 2015, respectively. We believe the expense ratio for this segment will continue to decline as this segment increases premium volume in its new businesses and territories during 2017 and in future periods.
Expense Ratio. The expense ratio of the Casualty Reinsurance segment increased from 32.8% for the year ended December 31, 2015 to 34.8% for the year ended December 31, 2016, as net earned premiums decreased 9.1% in 2016 while underwriting expenses decreased by 3.6%.
Of our total cash and invested assets of  $1,442.1 million at December 31, 2016, $109.8 million represents the cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $1,017.5 million, is comprised of fixed maturity and equity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of accumulated comprehensive income or loss. Also included in our investments are $203.5 million of bank loan participations, $55.4 million of other invested assets, $50.8 million of short-term investments, and $5.1 million of fixed maturity securities classified as trading and held at the U.S. holding company. Our trading portfolio is carried at fair value with changes to the value reported as net investment income in our consolidated income statement.
The $203.5 million of bank loan participations are classified as held-for-investment and reported at amortized cost, net of an allowance for credit losses. Changes in this credit allowance are included in realized gains or losses. These bank loan participations are primarily senior, secured floating-rate debt which are generally rated “BB,” “B,” or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below investment grade. Bank loans include assignments of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and similar loans and investments. At December 31, 2016 and 2015, the fair market value of these securities was $203.1 million and $180.1 million, respectively.
The Company invests selectively in private debt and equity opportunities. These investments comprise the Company’s other invested assets and are primarily focused in renewable energy, limited partnerships, and bank holding companies. Equity interests in various renewable energy LLCs managed by an affiliate of the Company’s largest shareholder, the D.E. Shaw Affiliates, generated investment income of $3.5 million and $3.9 million for the years ended December 31, 2016 and 2015, respectively. These investments had a carrying value of $27.1 million at December 31, 2016. Investments in bridge loans for renewable energy projects, primarily with affiliates of D.E. Shaw, had investment income $450,000 and $3.1 million for the years ended December 31, 2016 and 2015, respectively. In 2016, the Company received a $6.5 million repayment on one note. During 2015, the Company invested a total of $36.3 million in these notes and received maturities and repayments totaling $30.8 million. The Company has invested in several limited
Market values of energy sector holdings were negatively impacted in 2015 by declining oil and gas prices. Net realized investment losses of $4.5 million for the year ended December 31, 2015 were principally related to impairments of two energy loans totaling $3.9 million and $3.6 million of net realized losses on sales of bank loans, mostly in the energy sector. Sales of fixed maturities and equities, a portion of which were used to fund the special dividend in the fourth quarter, generated net realized gains of $2.0 million and $1.0 million, respectively, offsetting some of the energy sector losses.
Management also concluded that three non-energy sector loans were impaired at December 31, 2016. At December 31, 2016, the impaired loans had a carrying value of  $3.2 million, unpaid principal of  $3.5 million, and an allowance for credit losses of  $221,000. At December 31, 2015, one non-energy sector loan was impaired with a carrying value of  $689,000, unpaid principal of  $722,000, and an allowance for credit losses of  $34,000.
The aggregate allowance for credit losses was $943,000 at December 31, 2016 on five impaired loans with a total carrying value of  $6.5 million and unpaid principal of  $7.6 million. At December 31, 2015, the aggregate allowance for credit losses was $4.3 million on five impaired loans with a total carrying value of $6.3 million and unpaid principal of  $11.1 million.
At December 31, 2016, the Company had no investments in securitizations of alternative-A mortgages, sub-prime mortgages, or collateralized debt obligations.
Other expenses for the years ended December 31, 2016 and 2015 were $1.6 million and $730,000, respectively. In 2016, these expenses include $1.5 million of employee severance costs. In 2015, these expenses include $276,000 of expenses associated with a related party leasing arrangement for a minority-interest in a real estate limited partnership pursuant to which we were deemed to be an owner for accounting purposes, $170,000 of severance expenses, and $284,000 of legal, tax, and other professional services related to the formation of James River UK, the December 2015 dividend, and a securities registration statement.
Interest expense was $8.4 million and $7.0 million for the years ended December 31, 2016 and 2015, respectively. See “- Liquidity and Capital Resources - Sources and Uses of Funds” for information regarding our senior bank debt facility and trust preferred securities.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
The results of operations for the years ended December 31, 2015 and 2014 included certain non-recurring items that are significant to the operating results of the Company. These items (on a pre-tax basis) include:
significantly in response to declining energy prices. Net realized investment losses in 2014 include $2.0 million of impairment losses related to our investment exposure to fixed maturity securities and bank loan participations issued by entities in the Commonwealth of Puerto Rico.
The results of operations for the years ended December 31, 2015 and 2014 also include $730,000 and $1.1 million, respectively, of other expenses. Other expenses for 2015 include $284,000 of legal, tax, and other professional services related to the formation of James River UK, the December 2015 dividend, and a securities registration statement. Other expenses for 2014 include $183,000 of due diligence costs for various merger and acquisition activities which were not consummated. Other expenses for 2015 and 2014 include $276,000 and $299,000, respectively, of expenses associated with a related party leasing arrangement for a minority-interest in a real estate limited partnership pursuant to which we were deemed to be an owner for accounting purposes. Other expenses for 2015 and 2014 also include $170,000 and $600,000 of employee severance costs.
Our income before taxes and net income for the years ended December 31, 2015 and 2014 reconcile to our adjusted net operating income as follows:
The net premium retention for the Company decreased from 86.8% to 82.3% for the years ended December 31, 2014 and 2015, respectively. The decrease in retention is due primarily to the Specialty Admitted Insurance segment, which saw a decline in its net premium retention from 61.0% for the year ended December 31, 2014 to 49.4% for the year ended December 31, 2015. The decrease is driven by the segment’s fronting and program business. Fronting and program business generally has much lower net premium retention than our workers’ compensation business which we write on an admitted basis. For the year ended December 31, 2015, the net retention on the segment’s fronting and program business was 22.6%, while the net retention on the workers’ compensation business was 90.4%. This compares to net retention on the segment’s fronting and program of 30.7% and a retention of the workers’ compensation business of 90.5% for year ended December 31, 2014.
Underwriting results include fee income of  $3.2 million and $883,000 for the years ended December 31, 2015 and 2014, respectively.
Loss Ratio. The loss ratio of 54.5% for the year ended December 31, 2015 includes $25.4 million, or 10.6 percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of 55.2% for the year ended December 31, 2014 includes $27.3 million, or 13.9 percentage points, of net favorable development in our loss estimates for prior accident years. The significant favorable reserve development in this segment reflects benign loss activity and continuing positive loss trends. Our actuarial studies indicated that our loss experience on our shorter-tailed general casualty business for the 2014 accident year is better than our initial expected ultimate loss ratios and that the loss experience on the remainder of our casualty business continued to be below our initial expected ultimate loss ratios.
Expense Ratio. The expense ratio of 36.7% for the year ended December 31, 2015 decreased from 46.5% in the prior year. The higher expense ratio in the prior year for this segment relates to infrastructure and personnel costs associated with the ramp up of this segment’s fronting and program business. The gross written premiums on this fronting and program business were $55.0 million and $29.3 million for the years ended December 31, 2015 and 2014, respectively. Many of the infrastructure and personnel costs necessary to produce and administer this business (by necessity) precede the production and earning of these premiums.
Underwriting Profit. As a result of the items discussed above, the underwriting profit improved from $33,000 for the year ended December 31, 2014 to $1.1 million for the year ended December 31, 2015.
Loss Ratio. The loss ratio for the year ended December 31, 2015 of 68.6% included $12.6 million, or 7.1 percentage points, of adverse reserve development in our loss estimates for prior accident years. The loss ratio for the year ended December 31, 2014 of 66.3% included $5.7 million, or 3.3 percentage points, of net adverse reserve development in our loss estimates for the prior accident years.
Equity interests in various renewable energy LLCs managed by an affiliate of the Company’s largest shareholder, the D.E. Shaw Affiliates, generated investment income of  $3.9 million and $5.2 million for the years ended December 31, 2015 and 2014, respectively. These investments had a carrying value of  $26.0
million at December 31, 2015. Investments in bridge loans for renewable energy projects, primarily with affiliates of D.E. Shaw, had investment income of   $3.1 million for the year ended December 31, 2015 compared to none in 2014. During 2015, the Company invested a total of  $36.3 million in these notes and received maturities and repayments totaling $30.8 million. The Company has invested in several limited partnerships that invest in concentrated portfolios of high yield bonds of companies undergoing financial stress, publicly-traded small cap equities, loans of middle market private equity sponsored companies, and equity tranches of collateralized loan obligations (CLOs). Losses from these partnerships were $1.5 million and $128,000 for the years ended December 31, 2015 and 2014, respectively. Together, these limited partnerships had a carrying value of  $17.5 million at December 31, 2015. The Company also holds $4.5 million of subordinated notes issued by a bank holding company affiliated with the Chairman and Chief Executive Officer of the Company. Interest income from the notes was $343,000 for the years ended December 31, 2015 and 2014.
In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred. The Company previously held two municipal bonds issued by the Commonwealth of Puerto Rico. Puerto Rico’s weak economic conditions and heavy debt burden heightened the risk of default on the bonds and management concluded that the bonds, which had been downgraded to below investment grade, were other-than-temporarily impaired, at June 30, 2014. The Company recognized impairment losses of $660,000 and $1.4 million on these bonds for the years ended December 31, 2015, and 2014, respectively. The bonds were sold during the second quarter of 2015 and a net realized gain of   $22,000 was recognized on the sales.
The Company holds participations in two loans issued by companies that produce and supply power to Puerto Rico through power purchase agreements with PREPA. PREPA’s credit strength and ability to make timely payments has been impacted by the economic conditions in Puerto Rico, thus raising doubt about the companies’ ability to meet the debt obligations held by the Company. Management concluded that the loans were impaired at December 31, 2014 and established an allowance for credit losses on the loans of  $752,000. At December 31, 2015, the allowance for credit losses on these loans was $414,000. The loans had a carrying value of $3.9 million at December 31, 2015 and unpaid principal of $4.6 million.
During 2014 and 2015 we held a number of bank loans to oil and gas companies in the energy sector. The market values of these loans have declined significantly in response to declining energy prices. In total, the Company had eight loans to oil and gas companies in the energy sector with a carrying value of  $15.8 million and a market value of   $11.7 million at December 31, 2015. Management concluded that two of these loans were impaired as of December 31, 2015, and accordingly, an allowance for credit losses of   $3.9 million was established on the loans. After recording this impairment, the loans had a carrying value of  $1.7 million at December 31, 2015 and unpaid principal of  $5.8 million. Management also concluded that one non-energy sector loan held at December 31, 2015 should be considered impaired and an allowance for credit losses of  $34,000 was established on the loan. After recording this impairment, the loan had a carrying value of  $689,000 at December 31, 2015 and unpaid principal of  $722,000. There was no allowance for credit losses on these loans at December 31, 2014.
At December 31, 2015, our available-for-sale investment portfolio of fixed maturity and equity securities had net unrealized gains of  $6.5 million representing 0.7% of the cost or amortized cost of the portfolio. Additionally, at December 31, 2015, 86.6% of our fixed maturity security portfolio was rated “A-” or better by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical
The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (both available-for-sale and trading) by rating as of December 31, 2015:
Corporate available-for-sale fixed maturity securities include public traded securities and privately placed bonds is shown below as of December 31, 2015:
Interest expense was $7.0 million and $6.3 million for the years ended December 31, 2015 and 2014, respectively. See “- Liquidity and Capital Resources - Sources and Uses of Funds” for information regarding our senior bank debt facility and trust preferred securities.
The Company recorded $597,000 of amortization of intangibles for each of the years ended December 31, 2015 and 2014, respectively.
The Company completed its impairment tests and fair value analyses for goodwill and other intangible assets during the fourth quarter. No impairment was present for the years ended December 31, 2015 or 2014.
At December 31, 2016, our Bermuda holding company had $3.0 million of cash and cash equivalent assets. At December 31, 2016, our U.S. holding company had $76.5 million of cash and invested assets, comprised of cash and cash equivalents of  $12.9 million, fixed maturity securities of  $5.1 million, other invested assets of $34.2 million, and short-term investments of $24.3 million, which are not subject to regulatory restrictions. Additionally, our U.K. intermediate holding company had no invested assets and cash of less than one thousand dollars at December 31, 2016.
Our net written premiums to surplus ratio (defined as net written premiums to regulatory capital and surplus) is reviewed by management as well as our rating agency as a component of leverage and efficiency of deployed capital. Our net written premiums to surplus ratio was 0.9x, 0.8x, and 0.8x for the years ended December 31, 2016, 2015, and 2014, respectively.
The Company has a $215.0 million senior revolving credit facility (the “Facility”). The Facility is comprised of the following at December 31, 2016:
A $102.5 million secured revolving facility used by JRG Re to issue letters of credit for the benefit of third-party reinsureds. This portion of our credit facility is secured by our investment securities. At December 31, 2016, the Company had $38.4 million of letters of credit issued under the secured facility.
A $112.5 million unsecured revolving facility to meet the working capital needs of the Company. All unpaid principal on the revolver is due at maturity. Interest accrues quarterly and is payable in arrears at 3-month LIBOR plus a margin of 1.625%, which is subject to change according to terms in the credit agreement. At December 31, 2016 and 2015, the Company had a drawn balance of  $73.3 million outstanding on the unsecured revolver.
The facility has been amended from time to time since its inception in 2013. On December 7, 2016, the Company entered into an Amended and Restated Credit Agreement for the Facility which, among other things, extended the maturity date of the Facility until December 7, 2021 and modified other terms including reducing the rate of interest and reducing the number of financial covenants. On May 20, 2015, under a provision of the credit agreement, the Company requested, and the lenders subsequently agreed, to increase the secured revolving facility by $40.0 million to its current total capacity of $102.5 million. On December 15, 2015, the Company closed on an amendment which accommodated the organization and capitalization of an intermediate holding company in the United Kingdom. In connection with the amendment, the intermediate holding company entered into a payment guaranty of the Company’s obligations under the senior revolving credit facility. An amendment effective December 30, 2015 adjusted certain financial covenants.
In 2016, we declared $66.3 million of dividends payable to our shareholders. These dividends were funded by total dividends of  $80.0 million that we received from JRG Re.
The junior subordinated debt contains certain covenants with which we are in compliance as of December 31, 2016. All of these securities are currently redeemable at par.
The following is a summary of our Excess and Surplus Lines segment’s ceded reinsurance in place as of December 31, 2016:
For policies with an occurrence limit of  $1.0 million or higher, the excess casualty treaty is set such that our retention is $1.0 million or less. For policies where we also write an underlying primary casualty policy, the net excess casualty limit is added to our retention on the primary casualty coverage, which results in a total retention of  $2.0 million or less on any one risk.
The property catastrophe reinsurance treaty has a limit of  $40.0 million with one reinstatement.
Quota share coverage for 85% of the first $1.0 million per occurrence and excess of loss coverage for $1.0 million in excess of $1.0 million per occurrence.
Excess of loss coverage for $4.0 million in excess of  $1.0 million.
At December 31, 2016, we had reinsurance recoverables on unpaid losses of  $182.7 million and reinsurance recoverables on paid losses of  $2.9 million, and all material recoverable amounts were from companies with A.M. Best ratings of  “A-” or better or collateral had been posted by the reinsurer for our benefit.
The following table sets forth our most significant reinsurers by amount of reinsurance recoverables and the amount of reinsurance recoverables pertaining to each such reinsurer as well as its A.M. Best rating as of December 31, 2016:
The Company is also exposed to credit risk relating to insurance contracts with an insured in which the Company pays losses and loss adjustment expenses on the contract. The Company has an indemnity agreement with this insured and is contractually entitled to receive reimbursement for a significant portion of the losses and loss adjustment expenses paid on behalf of the insured party (a non-insurance entity). The insured party is required to collateralize all amounts currently due to the Company and to provide additional collateral sufficient to cover the unpaid losses and loss adjustment expenses related to the contracts. At December 31, 2016, the cash collateral held by the Company from this insured exceeds the amount of claims receivable and unpaid reported losses and loss adjustment expenses outstanding. This is a growing relationship, and as such, there is an exposure to reported losses on this contract growing at a faster pace than our collateral from the insured grows. To mitigate this risk, we closely monitor our exposure compared to our collateral held, and we request additional collateral from the insured when our analysis indicates that we have uncollateralized exposure. Based on our relationship with the insured and the cash collateral held, management does not believe that this exposure is material.
Our sources of operating funds consist primarily of premiums written, investment income, reinsurance recoveries and proceeds from offerings of debt and equity securities and from sales and redemptions of investments. We use the operating cash flows primarily to pay operating expenses, losses and loss adjustment expenses, and income taxes. Cash flow from operations may differ substantially from net income. The potential for a large claim under an insurance or reinsurance contract means that substantial and unpredictable payments may need to be made within relatively short periods of time. We have generated positive cash flow from operations in each of the three years ended December 31, 2016, 2015, and 2014. The following table summarizes our cash flows:
Cash used in investing activities in 2016 reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities and bank loan participations. Cash and cash equivalents comprised 7.6% of total cash and invested assets at December 31, 2016. Cash used in financing activities in 2016 is primarily due to the $66.0 million of dividends to shareholders in 2016. These dividends were funded with an $80.0 million dividend received from JRG Re.
Cash and cash equivalents comprised 7.9% of total cash and invested assets at December 31, 2015. Cash used in financing activities in 2015 is primarily due to the $47.4 million of dividends to shareholders in 2015. These dividends (and the related $2.5 million of U.S. dividend withholding taxes) were funded with a $47.5 million dividend received through our U.K. intermediate holding company and a $4.8 million dividend received from JRG Re.
The A.M. Best financial strength rating for our group’s regulated insurance subsidiaries is “A” (Excellent). This rating reflects A.M. Best’s opinion of our insurance subsidiaries’ financial strength, operating performance and ability to meet obligations to policyholders and is not an evaluation directed towards the protection of investors. The rating for our operating insurance and reinsurance companies of “A” (Excellent) is the third highest rating of the thirteen ratings issued by A.M. Best and is assigned to insurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.
In 2016, 496,550 options were exercised at a weighted average exercise price of $16.02 per share. In 2015, 1,047,500 options were exercised at a weighted average exercise price of  $15.66 per share. There were no option exercises during the year ended December 31, 2014. The Company granted 706,203 and 10,627 non-qualified share options at an exercise price of $32.07 and $24.32 per option during 2016 and 2015, respectively. The Company granted 993,518 non-qualified share options in conjunction with its initial public offering during December 2014, each with an exercise price of $21.00 per option. In addition, 33,039
The following table illustrates our contractual obligations and commercial commitments by due date as of December 31, 2016:
We believe that the disclosure of underwriting profit (loss) by individual segment and of the Company as a whole is useful to investors, analysts, rating agencies and other users of our financial information in
We define adjusted net operating income as net income excluding certain non-operating expenses such as net realized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, severance costs associated with terminated employees, and interest expenses on a leased building that we are deemed to own for accounting purposes. We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.
One of our key financial measures that we use to assess our longer term financial performance is our percentage growth in tangible equity per share and return on tangible equity. We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. For the year ended December 31, 2016 our tangible equity increased from $459.7 million at December 31, 2015 to $472.5 million at December 31, 2016, an increase of 1.7% per share. Absent the $66.3 million in dividends to shareholders in 2016, our tangible book value per share grew 15.9% for the year. Using a five quarter average methodology to determine our average shareholders’ equity, our operating return on tangible shareholders’ equity was 14.6% for the year ended December 31, 2016 and 13.0% for the year ended December 31, 2015.