The Company leases office space in Pembroke, Bermuda where the Company’s principal executive office is located. Additionally, the Company leases office space in New Jersey, United States of America for Third Point Re USA’s operations. We renew and enter into new leases in the ordinary course of business. For further discussion of our leasing commitments at December 31, 2015, please see Note 21 - “Commitments and Contingencies” to the accompanying consolidated financial statements.
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion in conjunction with Part II, Item 6. “Selected Financial Data”, and our consolidated financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (“Annual Report”).
We are a holding company domiciled in Bermuda. Through our reinsurance subsidiaries, we provide specialty property and casualty reinsurance products to insurance and reinsurance companies on a worldwide basis. Our goal is to deliver attractive equity returns to our shareholders by combining profitable reinsurance underwriting with superior investment management provided by Third Point LLC, our investment manager. We believe that our reinsurance and investment strategy differentiates us from our competitors.
We manage our business on the basis of two operating segments: Property and Casualty Reinsurance and Catastrophe Risk Management. We also have a corporate function that includes our investment income on capital, certain general and administrative expenses related to corporate activities, interest expense and income tax expense.
We provide reinsurance products to insurance and reinsurance companies, government entities, and other risk bearing vehicles. Contracts can be written on an excess of loss basis or quota share basis, although the majority of contracts written to date have been on a quota share basis. In addition, we write contracts on both a prospective basis and a retroactive basis. Prospective reinsurance contracts cover losses incurred as a result of future insurable events. Retroactive reinsurance contracts cover the potential for changes in estimates of loss and loss adjustment expense reserves related to loss events that have occurred in the past. Retroactive reinsurance contracts can be an attractive type of contract for us as they can generate an underwriting profit should the ultimate loss and loss adjustment expenses settle for less than the initial estimate of reserves and the premiums received at the inception of the contract generate insurance float. The product lines that we currently underwrite for this operating segment are: property, casualty and specialty. We assume a minimal amount of catastrophe risk within the property and casualty segment. We anticipate that our property catastrophe exposures will consistently remain extremely low when compared to many other reinsurers with whom we compete.
In February 2015, we began reinsurance operations in the United States through Third Point Re USA, a Bermuda company licensed as a Class 4 insurer and a wholly owned operating subsidiary of Third Point Re (USA) Holdings Inc. (“TPRUSA”). The results of Third Point Re USA are reflected in the results of the Property and Casualty Reinsurance segment. Third Point Re USA and TPRUSA have a limited operating history and are exposed to volatility in their results of operations. As a result, period to period comparisons of our results of operations may not be meaningful. Third Point Re USA’s U.S. presence is a strategic component of our overall growth strategy. As a result of Third Point Re USA’s U.S. presence, we have expanded our marketing activities and have begun to broaden our profile in the U.S. marketplace. In addition to developing new opportunities, we are strengthening our relationships with existing cedents and brokers. We also intend to continue developing a firsthand understanding of cedent underwriting and claims capabilities that will benefit our underwriting decisions.
ontracts are collected before losses are paid on reinsurance contracts and proceeds are returned on deposit accounting contracts. In some instances, the interval between cash receipts and payments can extend over many years. During this time interval, we invest the cash received and seek to generate investment returns. Float is not a concept defined by U.S. GAAP and therefore, there are no comparable U.S. GAAP measures. Float, as a result, is considered to be a non-GAAP measure.
In contrast to many reinsurers with whom we compete, we have elected to limit our underwriting of property catastrophe exposures. Through December 2014, we wrote excess of loss catastrophe reinsurance through the Catastrophe Fund, which was a separately capitalized reinsurance fund vehicle. In December 2014, we announced that we would no longer accept investments in the Catastrophe Fund and that no new business would be written in the Catastrophe Reinsurer. As of December 31, 2015, all investments in the Catastrophe Fund had been redeemed.
We were incorporated on October 6, 2011 and completed our initial capitalization on December 22, 2011. We began underwriting business on January 1, 2012. We completed an initial public offering of common shares on August 20, 2013 (the “IPO”). As a result, we have a limited operating history and are exposed to volatility in our results of operations. Period to period comparisons of our results of operations may not be meaningful.
Point LLC, book value per share, diluted book value per share, growth in diluted book value per share and return on beginning shareholders’ equity.
The table below shows the key performance indicators for our consolidated business for the years ended December 31, 2015, 2014 and 2013:
See Note 22 to the accompanying consolidated financial statements for a calculation of net underwriting loss and combined ratio.
One way that we evaluate the performance of our property and casualty reinsurance results is by measuring net underwriting income (loss). We do not measure performance based on the amount of gross premiums written. Net underwriting income or loss is calculated from net premiums earned, less net loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to the underwriting activities.
Combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, net, acquisition costs, net and general and administrative expenses related to underwriting activities by net premiums earned. The combined ratio compares the amount of net premiums earned to the amount incurred in claims and underwriting related expenses. This ratio is a key indicator of a reinsurance company’s profitability. A combined ratio greater than 100% means that loss and loss adjustment expenses, acquisition costs and general and administrative expenses related to underwriting activities exceeded net premiums earned. See additional information in Note 22 to our consolidated financial statements.
Net investment income (loss) is an important measure that affects overall profitability. Net investment income (loss) is affected by the performance of Third Point LLC as our exclusive investment manager and the amount of investable cash, or float, generated by our reinsurance operations. Pursuant to our investment management agreements, Third Point LLC is required to manage our investment portfolio on substantially the same basis as its main hedge funds, subject to certain conditions set forth in our investment guidelines. These conditions include limitations on investing in private securities, a limitation on portfolio leverage, and a limitation on portfolio concentration in individual securities. Our investment management agreements allow us to withdraw cash from our investment account with Third Point LLC at any time with three days’ notice to pay claims and with five days’ notice to pay expenses.
Net investment income (loss) for the years ended December 31, 2015, 2014 and 2013 was comprised of the following:
Book value per share and diluted book value per share are non-GAAP financial measures. Book value per share is calculated by dividing shareholders’ equity attributable to shareholders by the number of issued and outstanding shares at period end. Diluted book value per share is calculated by dividing shareholders’ equity attributable to shareholders and adjusted to include unvested restricted shares and the exercise of all in-the-money options and warrants. For unvested restricted shares with a performance condition, we include the unvested restricted shares for which we consider vesting to be probable. Prior to TPRE’s initial public offering, the market share price was assumed to be equal to the fully diluted book value per share. We believe that long-term growth in diluted book value per share is the most important measure of our financial performance because it allows management and investors to track over time the value created by the retention of earnings. In addition, we believe this metric is used by investors because it provides a basis for comparison with other companies in our industry that also report a similar measure.
For the year ended December 31, 2015, diluted book value per share decreased by $0.70 per share, or 5.2%, to $12.85 per share from $13.55 per share as of December 31, 2014. For the year ended December 31, 2014, diluted book value per share increased by $0.43 per share, or 3.3%, to $13.55 per share from $13.12 per share as of December 31, 2013.
The following table sets forth the computation of basic and diluted book value per share as of December 31, 2015, 2014 and 2013 :
As of December 31, 2015, the effect of dilutive restricted shares issued to directors and employees was comprised of 301,043 restricted shares with a service condition only and 536,234 of restricted shares with a service and performance condition that were considered probable of vesting.
Return on beginning shareholders’ equity as presented is a non-GAAP financial measure. Return on beginning of year shareholders’ equity is calculated by dividing net income by the beginning shareholders’ equity attributable to shareholders. For the year ended December 31, 2013, we have adjusted the beginning shareholders’ equity for the impact of the issuance of shares in our IPO on a weighted average basis. This adjustment lowers the stated returns on beginning shareholders’ equity. We believe this metric is used by investors to supplement measures of our profitability.
Return on beginning shareholders’ equity for the years ended December 31, 2015, 2014 and 2013 was calculated as follows:
Acquisition costs consist primarily of brokerage fees, ceding commissions, premium taxes and other direct expenses that relate to writing reinsurance contracts and are presented net of commissions ceded under reinsurance contracts. We amortize deferred acquisition costs in the same proportion that the premiums are earned.
General and administrative expenses consist primarily of salaries, benefits and related payroll costs, including costs associated with our incentive compensation plan, share compensation expense, legal and accounting fees, travel and client entertainment, fees relating to our letter of credit facilities, information technology, occupancy and other general operating expenses.
Other expenses consist of investment credit expenses on deposit liabilities and reinsurance contracts and changes in the fair value of embedded derivatives in our deposit and reinsurance contracts.
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions. We believe that the accounting policies that require the most significant judgments and estimations by management are: (1) premium revenue recognition including evaluation of risk transfer, (2) loss and loss adjustment expense reserves, and (3) fair value measurements related to our investments. If actual events differ significantly from the underlying judgments or estimates used by management in the application of these accounting policies, there could be a material adverse effect on our results of operations and financial condition.
For each contract that we write, we estimate the ultimate premium for the entire contract period and record this estimate at the inception of the contract, to the extent the amount of written premium is estimable. For contracts where the full written premium is not estimable at inception, we record written premium for the portion of the contract period for which the amount is estimable. These estimates are based primarily on information in the underlying contracts as well as information provided by our clients and/or brokers. See Note 2 to our consolidated financial statements for additional information on premium revenue recognition.
During the year ended December 31, 2015, we recorded $39.3 million of changes in premium estimates on prior years’ contracts, (2014 - $(12.1) million 2013 - $(35.7) million). There was an insignificant impact on net income of these changes in premium estimates for the years ended December 31, 2015, 2014 and 2013. The 2015 increases in premium estimates were primarily due to two contracts where the cedants reported writing significantly more business than initially expected. The 2014 decreases in premium estimates were primarily due to contracts where the clients reported writing less business than initially expected. The 2013 changes in premium estimates were primarily due to return premiums on contracts that expired in 2013 and that included a contractual provision to return the unearned premiums at expiration.
Determining whether or not a reinsurance contract meets the condition for risk transfer requires judgment. The determination of risk transfer is critical to recognizing premiums written and is based, in part, on the use of actuarial pricing models and assumptions and evaluating contractual features that could impact the determination of whether a contract meets risk transfer. If we determine that a reinsurance contract does not transfer sufficient risk, we use deposit
Our loss and loss adjustment expense reserves include case reserves, reserves for losses incurred but not yet reported (“IBNR reserves”) and deferred gains on retroactive reinsurance contracts. Case reserves are established for losses that have been reported, but not yet paid, based on loss reports from brokers and ceding companies. IBNR reserves represent the estimated loss and loss adjustment expenses that have been incurred by insureds and reinsureds but not yet reported to the insurer or reinsurer, including unknown future developments on loss and loss adjustment expenses that are known to us. IBNR reserves are established by management based on actuarially determined estimates of ultimate loss and loss adjustment expenses. Deferred gains represent the underwriting profit related to retroactive exposures in reinsurance contracts at inception and are deferred and amortized over the estimated future payout of the loss and loss adjustment expense reserves. Any underwriting loss at inception related to retroactive exposures in a reinsurance contract is recognized immediately.
Inherent in the estimate of ultimate loss and loss adjustment expenses are expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. Accordingly, ultimate loss and loss adjustment expenses may differ materially from the amounts recorded in the financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, are recorded in the consolidated statements of income (loss) in the period in which they become known.
This method estimates ultimate losses by using past incurred loss development factors and applying them to exposure periods with further expected incurred loss development. Since incurred losses include payments and case reserves, changes in both of these amounts are incorporated in this method. This approach provides a larger volume of data to estimate ultimate losses than paid loss methods. Thus, incurred loss patterns may be less varied than paid loss patterns, especially for coverages that have historically been paid out over a long period of time but for which claims are incurred relatively early and case loss reserve estimates are established.
These methods are a weighted average of the a priori loss ratio and the relevant development factor method. The weighting between the two methods depends on the maturity of the business. This means that for the more recent years a greater weight is placed on the a priori loss ratio, while for the more mature years a greater weight is placed on the development factor methods. These methods avoid some of the distortions that could result from a large development factor being applied to a small base of paid or incurred losses to calculate ultimate losses. This method will react slowly if actual paid or incurred loss experience develops differently than historical paid or incurred loss experience because of major changes in rate levels, retentions or deductibles, the forms and conditions of coverage, the types of risks covered or a variety of other factors.
Our reserving methodologies use a loss reserving model that calculates a point estimate for our ultimate losses. Although we believe that our assumptions and methodologies are reasonable, the ultimate payments may vary, potentially materially, from the estimates that we have made.
The table below shows the impact of reasonably likely changes to our actuarial estimates of our client’s ceded loss on the following: loss and loss adjustment expense reserves, net; acquisition costs, net; net underwriting loss and shareholders’ equity as of and for the year ended December 31, 2015. Since many contracts that we write have sliding scale commissions, profit commissions, loss corridors or other loss mitigating features that adjust with or offset the
loss and loss adjustment expenses incurred, we consider these contractual features to be important in understanding the sensitivity of our results to changes in loss ratio assumptions.
These increases and decreases are only applied to contracts which currently have material reserves outstanding (where material is defined as more than 10% of assumed ultimate loss and loss adjustment expenses incurred, net). Assumed ultimate losses and loss adjustment expenses incurred, net, represents the sum we would be obligated to pay for fully developed claims (i.e., paid losses plus outstanding reported losses and IBNR losses). The impact to shareholder’s equity does not consider the cash flow, and thus, investment income considerations associated with an increase or decrease in subject ultimate loss and loss adjustment expenses, net.
Our investments are managed by Third Point LLC and are carried at fair value. Our investment manager, Third Point LLC, has a formal valuation policy that sets forth the pricing methodology for investments to be used in determining the fair value of each security in our portfolio. The valuation policy is updated and approved at least on an annual basis by Third Point LLC’s valuation committee (the “Committee”), which is comprised of officers and employees who are senior business management personnel of Third Point LLC. The Committee meets on a monthly basis. The Committee’s role is to review and verify the propriety and consistency of the valuation methodology to determine the fair value of investments. The Committee also reviews any due diligence performed and approves any changes to current or potential external pricing vendors.
Securities listed on a national securities exchange or quoted on NASDAQ are valued at their last sales price as of the last business day of the period. Listed securities with no reported sales on such date and over-the-counter (“OTC”) securities are valued at their last closing bid price if held long by us, and last closing ask price if held short by us.
Private securities are those not registered for public sale and are carried at an estimated fair value at the end of the period, as determined by Third Point LLC. Valuation techniques, used by Third Point LLC, may include market approach, last transaction analysis, liquidation analysis and/or using discounted cash flow models where the significant inputs could include but are not limited to additional rounds of equity financing, financial metrics such as revenue multiples or price-earnings ratio, discount rates and other factors. In addition, we or Third Point LLC may employ third party
valuation firms to conduct separate valuations of such private securities. The third party valuation firms provide us or Third Point LLC with a written report documenting their recommended valuation as of the determination date for the specified investments.
Our holdings in asset-backed securities are private-label issued, non-investment grade securities, and none of these securities were guaranteed by government sponsored entities. These investments are valued using broker quotes or a recognized third-party pricing vendor. See “Quantitative and Qualitative Disclosures About Market Risk”.
We value our investments in affiliated investment funds at fair value, which is an amount equal to the sum of the capital account in the limited partnership generally determined from financial information provided by the investment manager of the investment funds. The resulting net gains or net losses are reflected in the consolidated statements of income (loss).
We perform several processes to ascertain the reasonableness of the valuation of all of our investments comprising our investment portfolio. These processes include (i) obtaining and reviewing weekly and monthly investment portfolio reports from Third Point LLC, (ii) obtaining and reviewing monthly NAV and investment return reports received directly from our third-party fund administrator, which are compared to the reports noted in (i), and (iii) monthly update discussions with Third Point LLC regarding the investment portfolio, including, their process for reviewing and validating pricing obtained from outside service providers.
guidelines, new entrants, investment results including interest rate levels and the credit ratings and financial strength of competitors.
While management believes pricing remains adequate for certain types of business on which we focus, there is significant underwriting capacity currently available. Market conditions remain challenging, having deteriorated during the year, and we believe they could deteriorate further in the near term. The segment with the greatest pricing pressure is property catastrophe reinsurance due to an influx of capacity from collateralized reinsurance and other insurance-linked securities vehicles and the absence of significant catastrophe events over the past three years. In response to deteriorating property catastrophe market conditions, traditional reinsurers are more aggressively pursuing our targeted lines of business.
After four years of significant premium growth and float generation, we believe we have reached a level that allows us to rationalize our expense base and appropriately utilize our capital. Given the continued deterioration in market conditions and our focus on improving our underwriting results, we expect to remain selective in our underwriting which may slow the rate of growth in gross written premium.
The primary driver of our results of operations is the performance of our investments managed by Third Point LLC. Given the nature of the underlying investment strategies, we expect volatility in our investment returns and therefore in our consolidated net income (loss). The decrease in net investment income (loss) for the year ended December 31, 2015 was a result of lower investment returns, primarily driven by losses in our long equity and performing credit portfolios, partially offset by positive returns in structured credit, sovereign debt and short equity positions.
The other key changes in net income (loss) for the year ended December 31, 2015 compared to the year ended December 31, 2014 were primarily due to the following:
The increase in net underwriting loss includes developments on prior years’ contracts resulting in an increase in the net underwriting loss of $7.8 million for the year ended December 31, 2015. In addition, we recorded $2.7 million in current year net underwriting losses in the year ended December 31, 2015 as a result of windstorms and other storm activity in Texas. The remaining increase in net underwriting loss was due to a higher combined ratio on a larger in-force underwriting portfolio reflecting a deterioration of underwriting conditions.
The increase in general and administrative expenses related to corporate activities for the year ended December 31, 2015 compared to 2014 was primarily due to greater payroll and related expenses as a result of expansion in the U.S., separation costs and increased share compensation expense.
The change in net income for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to the following:
The decrease in net investment income for the year ended December 31, 2014 was a result of lower investment returns partially offset by higher average investments managed by Third Point LLC. See the discussion of net investment income (loss) under “Corporate Function” below for explanations of the investment returns on investments managed by Third Point LLC and total net investment income (loss) for the years presented.
The improvement in the net underwriting loss was due to a higher in-force book of business for 2014 and a lower combined ratio. The lower combined ratio was primarily due to a lower general and administrative expense ratio, which continued to decrease due to proportionately higher net premiums earned in 2014.
The increase in income tax expense for the year ended December 31, 2014 was a result of withholding taxes and uncertain provisions related to certain investment transactions in certain foreign jurisdictions.
The determination of our reportable segments is based on the manner in which management monitors the performance of our operations. For the periods presented, our business comprises two operating segments - Property and Casualty Reinsurance and Catastrophe Risk Management. We have also identified a corporate function that includes investment results, certain general and administrative expenses related to corporate activities, interest expense and income tax expense.
We write a small number of large contracts so individual renewals or new business can have a significant impact on premiums recognized in a period;
Our reinsurance contracts are subject to significant judgment in the amount of premiums that we expect to recognize and changes in premium estimates are recorded in the period they are determined.
As a result of these factors, period to period comparisons may not be meaningful.
Changes in renewal premiums during the year ended December 31, 2015 resulted in a net increase in premiums of $12.9 million primarily due to increases in participations and underlying premium volume on contracts that renewed in the year. Premiums can change on renewals of contracts due to a number of factors, including: changes in our line size or participation, changes in the underlying premium volume and pricing trends of the client’s program as well as other contractual terms and conditions.
We recognized $100.4 million of premium in 2014 that did not renew in 2015, consisting of $55.4 million for contracts that we made a decision not to renew in 2015 due to changes in pricing and/or terms and conditions and $45.0 million for one reserve cover that was not subject to renewal in 2015.
Changes in renewal premiums during the year ended December 31, 2014 resulted in increased premiums of $34.5 million.
Other changes, such as amendments to existing contracts to increase coverage or to add other terms resulted in additional premiums of $12.9 million in the year ended December 31, 2014 compared to additional premiums of $8.0 million for similar reasons for the year ended December 31, 2013.
We recorded $140.9 million of premium in 2013 that did not have a comparable premium in 2014, primarily due to a multi-year contract written in 2013.
We did not renew five reinsurance contracts accounting for $101.0 million of premiums for the year ended December 31, 2013, primarily as a result of pricing and other changes in reinsurance contract structure, terms and conditions.
The year ended December 31, 2015 reflects net premiums earned on a larger in-force underwriting portfolio, including new business written, compared to the years ended December 31, 2014 and 2013. In addition, net premiums earned for the year ended December 31, 2015 includes net premiums earned of $108.1 million (2014 - $83.1 million and 2013 - $39.8 million) related to retroactive exposures in reinsurance contracts.
The reinsurance contracts we write have a wide range of initial loss ratio estimates. As a result, our net loss and loss expense ratio can vary significantly from period to period depending on the mix of business. For example, property quota share contracts have a lower initial loss ratio compared to other casualty and specialty lines of business.
Acquisition costs include commissions, brokerage and excise taxes. Acquisition costs are presented net of commissions on reinsurance ceded. The reinsurance contracts we write have a wide range of acquisition cost ratios. As a result, our acquisition cost ratio can vary significantly from period to period depending on the mix of business. For example, our property quota share contracts have a higher initial acquisition cost ratio compared to other casualty and specialty lines of business due to inuring catastrophe reinsurance, which increases the acquisition cost ratio on those contracts. Our property quota share contracts are typically structured to limit the amount of property catastrophe exposure we assume. As a result, inuring catastrophe reinsurance for the property catastrophe exposure reduces the amount of premium we assume relative to the acquisition costs or is an additional component of the acquisition costs. Furthermore, a number of our contracts have a sliding scale commission or profit commission feature that will vary depending on the expected loss expense for the contract. As a result, changes in estimates of loss and loss adjustment expenses on a contract can result in changes in the sliding scale commissions or profit commissions and a contract’s overall acquisition cost ratio.
For the year ended December 31, 2013, we recorded $1.3 million of net favorable prior years’ reserve development. The net $1.3 million of favorable prior years’ reserve development was accompanied by net increases of $2.3 million in acquisition costs, resulting in a net increase of $1.0 million in net underwriting loss. The net adverse development was primarily a result of deterioration in attritional loss experience on certain workers’ compensation, auto and property contracts that did not result in offsetting changes in acquisition costs.
Net investment income (loss) allocated to the Property and Casualty Reinsurance segment consists of net investment income (loss) on float. The decrease in net investment income (loss) on float for the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily due to lower investment returns compared to the prior year and an increase in the total amount of float generated by our reinsurance operations. The decrease in net investment income on float for the year ended December 31, 2014 compared to the year ended December 31, 2013 was also due to lower investment returns on investments managed by Third Point LLC but partially offset by an increase in the total amount of the investments attributable to float managed by Third Point LLC. See the discussion of net investment income (loss) under “Corporate Function” below for explanations of the investment returns on investments managed by Third Point LLC and total net investment income (loss) for the years presented.
The increase in general and administrative expenses allocated to underwriting activities for the year ended December 31, 2015 compared to the year ended December 31, 2014 was primarily due to increased headcount and related employee costs, increased share compensation expense, and increased credit facility fees due to higher usage of our letter of credit facilities. Although general and administrative expenses increased compared to the prior year, the general and administrative expense ratio decreased due to proportionately higher net premiums earned during the current year period. The increase in general and administrative expenses for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to increased headcount and related employee costs partially offset by lower stock compensation expense as a result of the IPO which occurred in the year ended December 31, 2013 and resulted in higher stock compensation expense during that year.
The increase in other expenses for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to an increased number of reinsurance contracts written in 2014 that had interest crediting features.
The following table sets forth net income (loss) and the period over period changes for the Corporate Function for the years ended December 31, 2015, 2014 and 2013:
The net investment results for the year ended December 31, 2015 were primarily attributable to losses in our long equity and performing credit portfolios. Losses were partially offset by profitable performance in structured credit, sovereign debt and short equity positions. Within credit, a large sovereign debt investment added meaningfully to returns for the year. Losses in the performing credit book were driven primarily from modest investments in the energy sector. Structured credit was a significant contributor to returns for the year. During the year, our investment manager, Third Point LLC, reduced net exposure by both exiting long positions and adding to the short portfolio. The investment manager maintains high conviction in the portfolio’s core positions and is actively monitoring exposures. Refer to “ITEM 3. Quantitative and Qualitative Disclosures about Market Risks” for a list of risks and factors that could adversely impact our investments results.
Our investment manager, Third Point LLC, manages several funds and may manage other client accounts besides ours, some of which have, or may have, objectives and investment portfolio compositions similar to ours. Because of the similarity or potential similarity of our investment portfolio to other clients of our investment manager, and because,
as a matter of ordinary course, Third Point LLC provides its clients, including us, and investors in its main hedge funds with results of their respective investment portfolios following the last day of each month, those other clients or investors indirectly may have material nonpublic information regarding our investment portfolio. To address this, and to comply with Regulation FD, we will continue to post on our website under the heading Investment Portfolio Returns located in the Investors section of the website, following the close of trading on the New York Stock Exchange on the last business day of each month, our preliminary monthly investment results for that month, with additional information regarding our monthly investment results to be posted following the close of trading on the New York Stock Exchange on the first business day of the following month.
In February 2015, TPRUSA issued $115.0 million of senior notes bearing 7.0% interest. As a result, our consolidated results of operations include interest expense of $7.2 million for the year ended December 31, 2015.
For the years ended December 31, 2015, 2014 and 2013, we recorded income tax expense (benefit), as follows:
During the first quarter of 2015, we completed the capitalization of our U.S. entities and commenced U.S. underwriting operations. Third Point Re USA made an election under Section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be taxed as a U.S. entity. As a result, we expect to be subject to U.S. income tax on income generated by Third Point Re USA and TPRUSA.
Our investment portfolio is concentrated in tradeable securities and is marked to market each day. Pursuant to our investment guidelines as specified in our two investment management agreements with Third Point LLC, at least 60% of our portfolio must be invested in securities of publicly traded companies and governments of OECD high income countries, asset-backed securities, cash, cash equivalents and gold and other precious metals. We can liquidate all or a portion of our investment portfolio at any time with not less than three days’ notice to pay claims on our reinsurance contracts, and with not less than five days’ notice to pay for expenses, and on not less than 30 days’ notice in order to satisfy a requirement of A.M. Best. Since we do not write excess of loss property catastrophe contracts or other types of reinsurance contracts that are typically subject to sudden, acute, liquidity demands, we believe the liquidity provided by our investment portfolio will be sufficient to satisfy our liquidity requirements.
As of December 31, 2015, $1,182.3 million, or 51.0% of our total investments in securities were classified as Level 1 assets, which are defined as securities valued using quoted prices available in active markets. See Note 4 to our consolidated financial statements for additional information on the framework for measuring fair value established by U.S. GAAP disclosure requirements.
As of December 31, 2015, Third Point Re could pay dividends to Third Point Reinsurance Ltd. of approximately $261.1 million (December 31, 2014 - $326.1 million). Third Point Re USA is also restricted by the amount of capital and surplus that is available for the payment of dividends. In order to remain in compliance with the Net Worth Maintenance Agreement, Third Point Re must have committed funds sufficient to, and must continue to, maintain a minimum level of capital at Third Point Re USA of $250.0 million. Failure to maintain the minimum level of capital required by the Net Worth Maintenance Agreement could limit or prevent Third Point Re USA from paying dividends to us. As a result, Third Point Re USA could pay dividends ultimately to Third Point Reinsurance Ltd. of approximately $11.1 million as of December 31, 2015.
In addition to the regulatory and other contractual constraints to paying dividends, we manage the capital in each of our operating subsidiaries to support our current ratings with A.M. Best. After four years of significant premium growth and float generation, we have reached a level that allows us to rationalize our expense base and appropriately utilize our capital. Given the continued deterioration in market conditions and our focus on improving our underwriting results, we plan to remain selective in our underwriting which may slow the growth rate of our gross written premium.
Our cash flows from operations generally represent the difference between: (l) premiums collected and investment earnings realized and (2) loss and loss expenses paid, reinsurance purchased and underwriting and other expenses paid. Net cash provided by underwriting activities results from excluding investment earnings realized from our operating cash flows results in net cash provided by underwriting activities. Cash flows from operations may differ substantially from net income (loss) and may be volatile from period to period depending on the underwriting opportunities available to us and other factors. Due to the nature of our underwriting portfolio, claim payments can be unpredictable and may need to be made within relatively short periods of time. Claim payments can also be required several months or years after premiums are collected.
Cash flows used in investment activities primarily reflects investment activities related to our separate accounts managed by Third Point LLC. Cash flows used in investing activities for the year ended December 31, 2015 reflects the investment of the net proceeds from our issuance of Notes as part of the initial capitalization of Third Point Re USA and float generated from our reinsurance operations partially offset by payments to settle two deposit liability contracts. Cash flows used in investing activities for the year ended December 31, 2014 reflects the investment of float generated from our reinsurance operations. Cash flows used in investing activities for the year ended December 31, 2013 reflects the investment of the net proceeds from our IPO and the investment of float generated by our reinsurance operations.
For the period from inception until December 31, 2015, we have had sufficient cash flow from the proceeds of our initial capitalization and IPO, the issuance of Notes in February 2015, and from our operations to meet our liquidity requirements. We expect that projected operating and capital expenditure requirements and debt service requirements for at least the next twelve months will be met by our balance of cash, cash flows generated from operating activities and investment income. We may incur additional indebtedness in the future if we determine that it would be an efficient part of our capital structure.
As of December 31, 2015, total shareholders’ equity was $1,395.9 million compared to $1,552.0 million as of December 31, 2014. The decrease was primarily due to a net loss of $87.4 million and net distributions of non-controlling interests of $83.9 million, partially offset by issuance of common shares and share compensation expense totaling $15.2 million in the current year period. The net distributions of non-controlling interests included $24.1 million related to our investment in our joint ventures. In addition, the Catastrophe Fund distributed $119.4 million (Third Point Re’s share - $59.4 million) of capital resulting in a distribution of non-controlling interests for the Catastrophe Fund of $60.0 million for the year ended December 31, 2015. See Note 17 to our consolidated financial statements for additional information regarding our non-controlling interests.
As of December 31, 2015, total cash and net investments managed by Third Point LLC was $2,062.8 million, compared to $1,802.2 million as of December 31, 2014. The increase was primarily due to the net proceeds from our debt issuance of $113.2 million and net float of $147.1 million generated by our reinsurance operations, partially offset by net investment losses on investments managed by Third Point LLC of $29.6 million.
The indenture governing the Notes contains customary events of default, and limits our ability to merge or consolidate or to transfer or sell all or substantially all of our assets and TPRUSA’s ability to create liens on the voting securities or profit participating equity interests of Third Point Re USA, its wholly-owned insurance subsidiary. In certain circumstances specified in the indenture governing the Notes, certain of our existing or future subsidiaries may be required to guarantee the Notes. Interest on the Notes is subject to adjustment from time to time in the event of a downgrade or subsequent upgrade of the rating assigned to the Notes or in connection with certain changes in the ratio of consolidated total long-term indebtedness to capitalization (each as defined in the indenture governing the Notes). As of December 31, 2015, we were in compliance with all of the covenants under the indenture governing the Notes, and during the twelve months then ended, no event requiring an increase in the interest rate applicable to the Notes occurred.
In December 2011, Third Point Re acquired from NetJets Sales Inc. (“NetJets”), two 12.5%, five year, undivided interests in two aircraft. In September 2014, Third Point Re acquired an undivided 6.25% interest in one additional aircraft for a five year period, with a minimum commitment period of two and a half years. The agreement with NetJets provides for monthly management fees, occupied hourly fees and other fees.
See our consolidated financial statements and notes thereto and required financial statement schedules commencing on page.