During the year ended December 31, 2015, despite challenging market conditions, we continued to selectively grow our insurance business. In our North American Insurance segment, we continued to add scale to our existing lines of business and to build-out our less mature lines of business. The growth in our Global Markets Insurance segment was driven primarily from our acquisitions of the Hong Kong and Singapore operations of Royal & Sun Alliance Insurance plc (“RSA”), which closed on April 1, 2015. See Note 3 - “Acquisitions” of the audited consolidated financial statements for additional information regarding the RSA acquisitions. The results from the RSA acquisitions are also referred to as the “acquired Asian operations”. Challenging market conditions have persisted for our Reinsurance segment for the past several quarters, and we expect the trend to continue in the near term. As a result, we either did not renew or renewed with lower line sizes on several reinsurance contracts in response to these market conditions.
Our consolidated gross premiums written increased by $157.6 million, or 5.4%, for the year ended December 31, 2015 compared to the year ended December 31, 2014 driven by the growth in our North American Insurance and Global Markets Insurance segments. Our net income decreased by $406.4 million to $83.9 million compared to the year ended December 31, 2014. The decrease was primarily due to lower underwriting income, driven primarily by higher losses incurred and acquisition costs and realized investment losses primarily due to mark-to-market losses on our fixed maturity and equity security investments.
On October 29, 2015, we issued $500 million aggregate principal amount of 4.35% senior notes due October 29, 2025, with interest payable April 29th and October 29th each year, commencing April 29, 2016. We intend that the proceeds from these senior notes will be used to refinance the $500 million aggregate principal amount of 7.50% senior notes due August 1, 2016.
We reported net income of $1.8 million for the three months ended December 31, 2015 compared to a net income of $130.5 million for the three months ended December 31, 2014, a decrease of $128.7 million.
Higher net realized investment losses of $24.5 million. For the three months ended December 31, 2015 we recognized $38.8 million of realized investment losses compared to realized investment losses of $15.3 million for the three months ended December 31, 2014.
Higher underwriting expenses of $15.2 million driven by higher acquisition costs in our North American Insurance and Global Markets Insurance segments.
Higher net premiums earned in our North American Insurance segment and Global Markets Insurance segment partially offset by lower net premiums earned in our Reinsurance segment.
Annualized operating return on average shareholders’ equity is calculated using operating income and average shareholders’ equity, adjusted for other comprehensive income or loss.
We derive our revenues primarily from premiums on our insurance policies and reinsurance contracts, net of any reinsurance or retrocessional coverage purchased. Insurance and reinsurance premiums are a function of the amounts and types of policies and contracts we write, as well as prevailing market prices. Our prices are determined before our ultimate costs, which may extend far into the future, are known. In addition, our revenues include income generated from our investment portfolio, consisting of net investment income and net realized investment gains or losses, and other income related to our non-insurance operations. Investment income is principally derived from interest and dividends earned on investments, as well as distributed and undistributed income from equity method investments, partially offset by investment management expenses and fees paid to our custodian bank. Net realized investment gains or losses include gains or losses from the sale of investments, as well as the change in the fair value of investments that we mark-to-market through net income. Other income currently includes revenue from our third-party claims administration services.
Our expenses consist largely of net losses and loss expenses, acquisition costs and general and administrative expenses. Net losses and loss expenses incurred are comprised of three main components:
In certain lines of business, claims are generally reported and paid within a relatively short period of time (“short-tail lines”) during and following the policy coverage period. This generally enables us to determine with greater certainty our estimate of ultimate losses and loss expenses. The estimate of reserves for our short-tail lines of business and products, such as
Our reinsurance treaties are reviewed individually, based upon individual characteristics and loss experience emergence. Loss reserves on assumed reinsurance often have unique features that make them more difficult to estimate than direct insurance. We establish loss reserves upon receipt of advice from a cedent that a reserve is merited. Our claims staff may establish additional loss reserves where, in their judgment, the amount reported by a cedent is potentially inadequate. The following are the most significant features that make estimating loss reserves on assumed reinsurance difficult:
Reinsurance generally has a greater time lag than direct insurance in the reporting of claims. The time lag is caused by the claim first being reported to the cedent, then the intermediary (such as a broker) and finally the reinsurer. This lag can be up to six months or longer in certain cases. There is also a time lag because the insurer may not be required to report claims to the reinsurer until certain reporting criteria are met. In some instances this could be several years while a claim is being litigated. We use reporting factors based on data from the Reinsurance Association of America to adjust for time lags. We also use historical treaty-specific reporting factors when applicable. Loss and premium information are entered into our reinsurance system by our claims department and our accounting department on a timely basis.
Paid Loss Development Method. We estimate ultimate losses by calculating past paid loss development factors and applying them to exposure periods with further expected paid loss development. The paid loss development method assumes that losses are paid at a consistent rate. The paid loss development method provides an objective test of reported loss projections because paid losses contain no reserve estimates. In some circumstances, paid losses for recent periods may be too varied for accurate predictions. For many coverages, especially casualty coverages, claim payments are made slowly and it may take years for claims to be fully reported and settled. These payments may be unreliable for determining future loss projections because of shifts in settlement patterns or because of large settlements in the early stages of development. Choosing an appropriate “tail factor” to determine the amount of payments from the latest development period to the ultimate development period may also require considerable judgment, especially for coverages that have long payment patterns. When necessary, we have had to supplement our paid loss development patterns with appropriate benchmarks.
ratio method for the most recent loss years until we have sufficient experience to utilize other acceptable actuarial methodologies.
For short-tail lines, the primary assumption that changed during both 2015 as compared to 2014 and 2014 as compared to 2013 as it relates to prior year losses was that actual paid and reported loss emergence patterns were generally less severe than estimated for each year due to lower frequency and severity of reported losses. As a result of this change, we recognized net favorable prior year reserve development in both 2015 and 2014.
During the years ended December 31, 2015, 2014 and 2013, we incurred $60.5 million, $65.0 million and $13.5 million of catastrophe-related losses. We classify catastrophe losses as those losses that result from a major singular event or series of similar events (such as tornadoes) which are assigned a catastrophe loss number by industry data services, where our consolidated net losses are expected to be at least $10 million per loss event or series of similar events and where we believe it is important to our investors’ understanding of our operations.
Our overall change in the loss reserve estimates related to prior years decreased as a percentage of total carried reserves during 2015. During 2015, we had a net decrease of $81.6 million, or 1.8%, on an opening carried reserve base of $4,540.9 million, net of reinsurance recoverables. During 2014, we had a net decrease of $212.6 million, or 4.7%, on an opening carried reserve base of $4,532.0 million, net of reinsurance recoverables. We believe that these changes are reasonable given the long-tail nature of our business.
years. As of December 31, 2015 and 2014, we believe the reasonably possible variances in our expected loss ratio in percentage points for our loss years are as follows:
If our final casualty insurance and reinsurance loss ratios vary by five percentage points from the expected loss ratios in aggregate, our required net reserves after reinsurance recoverable would increase or decrease by approximately $830.9 million. This sensitivity analysis is inclusive of the acquired Asian operations. Excluding the impact of income taxes, this would result in either an increase or decrease to net income and total shareholders’ equity of approximately $830.9 million. As of December 31, 2015, this represented approximately 24% of total shareholders’ equity.
In terms of liquidity, our contractual obligations for reserves for losses and loss expenses would also increase or decrease by approximately $830.9 million after reinsurance recoverables. If our obligations were to increase, we believe we currently have sufficient cash and investments to meet those obligations.
The following tables provide our ranges of loss and loss expense reserve estimates by business segment as of December 31, 2015:
Our reinsurance treaties are generally purchased on an annual basis and are therefore subject to yearly renegotiation. The treaties typically specify ceding commissions, and may include provisions for minimum contractual premiums, required reporting to the reinsurers, responsibility for taxes, arbitration of disputes and the posting of security for the reinsurance recoverable under certain circumstances, such as a downgrade in the reinsurer’s financial strength rating. The amount of risk ceded by us to reinsurers is subject to maximum limits which vary by line of business and by type of coverage. We also purchase a limited amount of facultative reinsurance, which provides cover for specified policies, rather than for whole classes of business.
The examples below illustrate the types of treaty reinsurance arrangements in force at December 31, 2015:
General Property: We have purchased both quota share reinsurance for our general property business written in our North American Insurance and Global Markets Insurance segments, as well as excess-of-loss cover and dual-trigger industry loss warranties (“ILWs”) providing protection for specified classes of catastrophe. We have also purchased a limited amount of facultative reinsurance, which provides cover for specified general property policies.
As of December 31, 2015, approximately 99% of ceded case reserves and ceded IBNR reserves were recoverable from reinsurers who had an A.M. Best rating of “A” or higher. The following table shows a breakdown of our reinsurance recoverables by credit rating as of December 31, 2015:
(1) Includes the sum of reinsurance recoverables and reinsurance recoverables on paid losses.
The following table shows our reinsurance recoverables by operating segment as of December 31, 2015 and 2014:
As of December 31, 2015, our changes in quota share premium estimates have been adjustments of 0.2%, 2.3% and 7.7% for the 2014, 2013 and 2012 treaty years, respectively. For the 2015 treaty year, if we assume the average change of premium estimates for the past three years was a 3% change, then it is reasonably likely that our gross premiums written in our Reinsurance segment would increase or decrease by $12.9 million over the next three years. There would also be a related increase or decrease in loss and loss expenses and acquisition costs due to the increase or decrease in gross premiums written.
Other invested assets: Comprised of funds invested in a range of diversified strategies. In accordance with U.S. GAAP, the fair values of the funds are based on the NAV of the funds as reported by the fund manager. The Company does not measure its investments that are accounted for using the equity method of accounting at fair value.
The following summarizes the valuation techniques used by each of our major pricing sources:
International indices: We use international indices, which include the FTSE, and the HSBC Index, to price our non-U.S. government and government agencies securities. The observable inputs used by international indices to determine their prices are based on new issuance and secondary trades and information provided by broker-dealers.
Broker-dealer quotes: We also utilize broker-dealers to price our agency and non-agency mortgage-backed and asset-backed securities. The pricing sources include JP Morgan Securities Inc., Deutsche Bank Securities Inc., Morgan Stanley and Co., Citigroup Global Markets Inc. and other broker-dealers. When broker-dealer quotes are utilized it is primarily due to the fact that the particular broker-dealer was involved in the initial pricing of the security.
We utilize independent pricing sources to obtain market quotations for securities that have quoted prices in active markets. In general, the independent pricing sources use observable market inputs, including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, non-binding broker-dealer quotes, reported trades and sector groupings to determine the fair value. For a majority of the portfolio, we obtained two or more prices per security as of December 31, 2015. When multiple prices are obtained, a price source hierarchy is utilized to determine which price source is the best estimate of the fair value of the security. The price source hierarchy emphasizes more weighting to significant observable inputs such as index pricing and less weighting towards non-binding broker quotes. In addition, to validate all prices obtained from these pricing sources including non-binding broker quotes, we also obtain prices from our investment portfolio managers and other sources (e.g., another pricing vendor), and compare the prices obtained from the independent pricing sources to those obtained from our investment portfolio managers and other sources. We investigate any material differences between the multiple sources and determine which price best reflects the fair value of the individual security. There were no material differences between the prices from the independent pricing sources and the prices obtained from our investment portfolio managers and other sources as of December 31, 2015.
There have been no material changes to any of our valuation techniques from those used as of December 31, 2014. Based on all reasonably available information received, we believe the prices that were obtained from inactive markets were orderly transactions and therefore, reflected the current price a market participant would pay for the asset. Since fair valuing a financial instrument is an estimate of what a willing buyer would pay for our asset if we sold it, we will not know the ultimate value of our financial instruments until they are sold. We believe the valuation techniques utilized provide us with the best estimate of the price that would be received to sell our assets in an orderly transaction between participants at the measurement date.
We classify intangible assets into three categories: (1) intangible assets with finite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. Intangible assets, other than goodwill, may consist of distribution channels, renewal rights, internally generated software, non-compete covenants and insurance licenses held by subsidiaries domiciled in the United States. The following is a summary of our goodwill and other intangible assets as of December 31, 2015 and 2014:
Related to the acquisitions of the Hong Kong, Singapore and Labuan operations of RSA.
Other relevant events such as changes in management, key personnel, strategy or customers; contemplation of bankruptcy; or litigation;
We have determined that the goodwill arising from the acquisition of the Hong Kong, Singapore and Labuan operations of RSA should be allocated to the Asia insurance operations reporting unit of the Global Markets Insurance segment as the assets employed and the liabilities relate to the Asia insurance operations. All the insurance operations of the acquired RSA branches are included in the Global Markets Insurance segment.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill in order to determine the amount of impairment to be recognized. The implied fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole. The excess of the carrying value of goodwill above the implied goodwill, if any, would be recognized as an impairment charge in the consolidated statements of operations and comprehensive income.
Based on our analysis, the point estimate fair value of the Asia insurance operations reporting unit, using both a discounted cash flow model and market multiple model, was in excess of its carrying value as of the October 1, 2015 measurement date. Given the acquisitions that generated the goodwill allocated to the Asia insurance operations reporting unit occurred during the current year, the fair value of the reporting unit was higher than its carrying value. This is consistent with our expectations since the acquisitions occurred on April 1, 2015. As a result of this analysis, we concluded there was no implied goodwill impairment, and therefore, no step two goodwill impairment testing was required.
North American Insurance: Gross premiums written in our North American Insurance segment increased by $99.0 million, or 5.8%, for the year ended December 31, 2015 compared to 2014. The increase in gross premiums written was primarily due to growth in our casualty, professional liability and programs lines of business due to increased premiums on renewals and new business, and growth in our specialty lines of business due to new business. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare and our property lines of business, that did not meet our underwriting requirements, and decreased premiums on renewals;
Net investment income increased by $5.2 million, or 2.9%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was primarily due to higher interest income in the current year from our fixed maturity investments and higher returns from our hedge fund and private equity investments. These increases were partially offset by lower income from our other private securities due to an other-than-temporary impairment of $6.3 million related to one of our equity method investments. The book yield of the investment portfolio for both the years ended December 31, 2015 and 2014 was 2.1%. Our average duration increased from 2.0 years as of December 31, 2014 to 2.6 years as of December 31, 2015.
The total return of our investment portfolio, which combines net investment income and realized investment gains or losses, was 0.6% and 3.1% for the years ended December 31, 2015 and 2014, respectively. The decrease in total return was primarily due to mark-to-market losses on our fixed maturity investments and equity securities. The mark-to-market losses on our fixed maturity investments were due to higher interest rates and widening credit spreads and the mark-to-market losses on our equity securities were due to volatility in the equity markets, particularly during the three months ended September 30, 2015.
Other income represents the revenue from our third-party claims administration services that we acquired in 2014.
The net reserves for losses and loss expenses acquired relates to the acquired Asian operations.
Other expense is comprised of the expenses of our third-party claims administration services that we acquired in the prior year of $2.7 million that are included in our North American Insurance segment, transaction-related costs of $2.5 million incurred for the acquisition of the Hong Kong and Singapore operations of RSA included in our Global Markets Insurance segment and an unrealized loss of $1.0 million recorded on an ILW derivative in our Reinsurance segment.
Interest expense increased by $3.6 million, or 6.2%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in interest expense was due to the accrued interest related to the senior notes issued in October 2015. We expect interest expense to be lower in future periods, once we repay the 2006 Senior Notes on August 1, 2016, as the interest rate on the 2015 Senior notes is 4.35% compared to 7.50% for the 2006 Senior Notes.
Global Markets Insurance: Gross premiums written in our Global Markets Insurance segment increased by $47.9 million, or 20.6%, for the year ended December 31, 2014 compared to 2013. The increase was primarily due to continued growth across all existing lines of business and new lines of business, such as marine cargo and onshore construction. This growth was partially offset by the non-renewal of business across several lines of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition; and
Net premiums earned increased by $176.9 million, or 8.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013 consistent with the higher net premiums written in 2014. Each of our operating segments had higher net premiums earned during the year ended December 31, 2014 compared to the year ended December 31, 2013.
Net losses and loss expenses increased by $76.0 million, or 6.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2014 and 2013:
The current year non-catastrophe losses and loss expenses increased by $56.8 million primarily due to the growth of our operations across each of our operating segments. The improvement in the current year non-catastrophe losses and loss expense ratio was primarily due to lower reported large non-catastrophe property losses and a higher reduction in IBNR loss reserves for current year property losses during the year ended December 31, 2014 compared to the year ended December 31, 2013 in our Reinsurance segment.
Acquisition costs increased by $42.4 million, or 16.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in acquisition costs was primarily due to higher acquisition costs in our North American Insurance and Reinsurance segments. Acquisition costs as a percentage of net premiums earned were 13.5% for the year ended December 31, 2014 compared to 12.6% for 2013. The increase in the acquisition cost ratio was primarily driven by the increased profit commissions we paid related to our collateralized property catastrophe reinsurance program in our Reinsurance segment, as well as higher commissions charged by brokers in our North American Insurance segment.
Interest expense increased by $1.3 million, or 2.3%, for the year ended December 31, 2014 compared to the year ended December 31, 2013.
The foreign exchange loss decreased by $7.0 million, or 87.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease was the result of the strengthening of the U.S. dollar relative to other major currencies during the current period.
Income tax expense increased by $20.7 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase was primarily due to higher taxable income in our U.S. operations.
North American Insurance Segment. The North American Insurance segment includes our direct specialty insurance operations in the United States, Bermuda and Canada, as well as the Company's claims administration services operation. This segment provides both property and specialty casualty insurance primarily to North American domiciled accounts.
The following table summarizes the underwriting results and associated ratios for the North American Insurance segment for each of the years ended December 31, 2015, 2014 and 2013.
Premiums. Gross premiums written increased by $99.0 million, or 5.8%, for the year ended December 31, 2015 compared to 2014. The increase in gross premiums written was primarily due to growth in our casualty, professional liability and programs lines of business due to increased premiums on renewals and new business, and growth in our specialty lines of business due to new business. This growth was partially offset by the non-renewal of business, particularly in certain classes within our healthcare and our property lines of business, that did not meet our underwriting requirements, and decreased premiums on renewal.
(1) Includes our environmental, primary construction, surety, trade credit and product recall lines of business.
Net premiums written increased by $127.3 million, or 10.3%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase in net premiums written was primarily due to higher gross premiums written and lower premiums ceded. The reduction in premiums ceded was primarily due to lower cessions in our professional liability line of business. We ceded 25.2% of gross premiums written for the year ended December 31, 2015 compared to 28.3% for 2014. The decrease in the ceded written percentage was primarily due to retaining more of our gross premiums written in several lines of business in the current period than in the prior period.
For the year ended December 31, 2015, the net unfavorable prior year reserve development is comprised of the following:
Net favorable prior year reserve development primarily related to our professional liability, property and programs lines of business due to lower than expected loss emergence. The net unfavorable prior year reserve development in our professional liability line of business for the 2009 and prior loss years was due to adverse development on several large claims in the current period. The net unfavorable prior year reserve development for the 2014 loss year was primarily due to a single claim in the mergers and acquisitions line of business.
General and administrative expenses. General and administrative expenses increased by $5.0 million, or 2.3%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The increase was due to higher salary-related costs as we continue to grow our U.S. insurance operations. This was partially offset by lower performance-based compensation. The general and administrative expense ratio decreased to 17.3% for the year ended December 31, 2015 from 19.8% in 2014, due to the increase in net premiums earned outpacing the growth in expenses.
Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services operation. The increase in the net profit for this operation was primarily due to the results of this operation being included in the Company's results since the beginning of the current year, whereas the results were included in the Company's results starting in the second quarter last year, and reduced costs required to manage the operation.
Premiums. Gross premiums written increased by $143.9 million, or 9.2%, for the year ended December 31, 2014 compared to 2013. The increase in gross premiums written was primarily due to new business, both from existing lines and new lines, combined with premium rate increases across all lines of business except for our property line of business. We experienced rate decreases in our general property line of business due to the low level of reported loss activity during the year and increased competition. This growth was partially offset by the non-renewal of business, particularly in our healthcare line of business, that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.
The unfavorable reserve development for the 2011 and 2012 loss years was due to adverse development on reported claims, primarily in our healthcare, private/not for profit D&O and E&O products. The healthcare emergence was largely driven by several large claims, as well as adverse development on reported claims. The emergence in the E&O and private/not for profit D&O is due to higher than expected loss frequency. For long-tail lines, like healthcare, D&O and E&O, it may take several years for a claim to be reported or develop. This could be due to a number of factors, including among others, information becoming available in subsequent periods that allows the insured to report a claim or change in the severity of the claim, or court decisions that define insurance coverages or exclusions differently than intended when the policy was originally bound. These factors contributed to us increasing our reserve for losses and loss expenses in the current period for the 2011 and 2012 loss years, while the absence of these factors and related trend of not experiencing these factors contributed to our decreasing the reserve for losses and loss expenses for the older loss years across each line of business. In response to the underwriting experience in the healthcare, private/not for profit D&O and E&O lines, we continue to take rate action, as well as make changes to policy terms and conditions, resulting in flat or reduced gross premiums written but reduced exposures.
Other insurance-related income and expense. The other insurance-related income and expense represents the revenue and related expenses of our third-party claims administration services company that we acquired in 2014.
The increase in the current year non-catastrophe losses and loss expenses, and the related increase in the losses and loss expense ratio, was primarily due to higher incurred losses in the current year from the acquired Asian operations and higher reported aviation, trade credit, marine cargo and large non-catastrophe property losses.
For the year ended December 31, 2015, the favorable prior year reserve development in our property, professional liability and casualty lines of business was due to lower than expected loss emergence. The unfavorable prior year reserve development for the specialty and other line of business in the 2013 and 2014 loss years primarily related to the trade credit line of business due to higher frequency of reported claims above our expectations.
The net favorable prior year reserve development for loss years 2008 and prior to 2011 was a result of actual loss emergence being lower than anticipated. The unfavorable prior year reserve development in the professional liability line of business for the 2012 loss year was primarily due to higher than expected loss emergence.
Other insurance-related income and expense. The other insurance-related expenses incurred for the current and prior periods represent the transaction-related costs incurred for our acquisition of RSA's Hong Kong and Singapore operations.
Premiums. Gross premiums written increased by $47.9 million, or 20.6%, for the year ended December 31, 2014 compared to 2013. The increase was primarily due to continued growth across all existing lines of business and new lines of business, such as marine cargo and onshore construction. This growth was partially offset by the non-renewal of business across several lines of business that did not meet our underwriting requirements (which included inadequate pricing and/or terms and conditions) and continued competition.
The following table summarizes the underwriting results and associated ratios for the Reinsurance segment for the years ended December 31, 2015, 2014 and 2013.
Premiums. Gross premiums written decreased by $137.2 million, or 14.6%, for the year ended December 31, 2015 compared to 2014. The decrease was primarily due to lower premiums written across each line of business. The decrease for each line of business was driven by non-renewal of business due to poor terms and conditions, cedents retaining more of their own business, and lower premiums on renewed treaties mainly due to year-over-year rate decreases and our assuming a lower percentage of the premiums than in the prior period. These reductions were partially offset by new business written for each line of business.
The decrease in the current year non-catastrophe losses and loss expenses, and related improvement in the losses and loss expense ratio, was primarily due to lower than expected property losses during the year ended December 31, 2015 compared to the same period in 2014. These improvements in the current year non-catastrophe losses and loss expenses were partially offset by higher loss picks in our non-property reinsurance lines of business.
During the year ended December 31, 2015, we incurred property catastrophe losses and loss expenses of $32.8 million related to explosions in the port of Tianjin, China and $21.0 million in property catastrophe losses related to windstorms that occurred in the New South Wales region of Australia. During the year ended December 31, 2014, we incurred $50.0 million of catastrophe-related losses related to a hailstorm in Brisbane, Australia ($12.5 million), PCS storm #45 ($12.5 million), Windstorm Ela ($12.0 million), Typhoon Rammasun ($10.0 million) and Hurricane Odile ($3.0 million).
Acquisition costs. Acquisition costs decreased by $6.1 million, or 3.6%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease in acquisition costs was due to the decrease in net premiums earned. The acquisition cost ratio was 20.1% for the year ended December 31, 2015 compared to 18.8% for the year ended December 31, 2014. The increase in the acquisition cost ratio was primarily due to higher ceding commission paid to cedents and a greater mix of property quota share business which carries greater acquisition expenses than excess of loss contracts.
General and administrative expenses. General and administrative expenses decreased by $4.7 million, or 6.0%, for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease was primarily due to lower performance-based compensation related costs. The general and administrative expense ratios for the years ended December 31, 2015 and 2014 were 8.9% and 8.6%, respectively.
Other insurance-related income and expense. The other insurance-related expenses incurred for the current period represent the unrealized loss recorded on an ILW derivative.
Premiums. Gross premiums written increased by $4.8 million, or 0.5%, for the year ended December 31, 2014 compared to 2013. The increase in gross premiums written was driven primarily by new business and increased renewals across several major lines of business partially offset by non-renewals of certain treaties, particularly in our casualty reinsurance line of business, either due to poor terms and conditions or the cedents retaining more of their own business.
Net premiums earned increased by $52.2 million, or 6.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in net premiums earned was primarily a result of the growth in net premiums written since 2012, and the reduction in ceded earned premiums related to the non-renewal of the prior year's collateralized retrocessional catastrophe cover partially offset by the current year collateralized property catastrophe reinsurance protection.
Net losses and loss expenses. Net losses and loss expenses increased by $32.7 million, or 7.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The following is a breakdown of the loss and loss expense ratio for the years ended December 31, 2014 and 2013:
The decrease in the current year non-catastrophe losses and loss expenses and the related improvement in the losses and loss expense ratio was primarily due to lower reported large non-catastrophe property losses and a higher reduction in IBNR loss reserves for current year property losses during the year ended December 31, 2014 compared to the year ended December 31, 2013. During the year ended December 31, 2014, we incurred $18.3 million in large non-catastrophe property losses, mostly related to several storm events in the United States, compared to $34.2 million of large non-catastrophe property losses during 2013. The net impact of lower reported non-catastrophe property losses and a greater reduction in IBNR loss reserves resulted in a 4.1 percentage point decrease in the current year non-catastrophe losses and loss expense ratio.
Overall, our Reinsurance segment recorded net favorable reserve development of $90.6 million during the year ended December 31, 2014 compared to net favorable reserve development of $96.1 million for the year ended December 31, 2013, as shown in the tables below.
Acquisition costs. Acquisition costs increased by $23.2 million, or 15.7%, for the year ended December 31, 2014 compared to the year ended December 31, 2013. The increase in acquisition costs was due to the growth of the reinsurance operations, increased ceding commission paid to cedents in certain lines of business, as well as higher profit commission accruals. The increased profit commission accruals primarily related to the profit commissions we pay related to our assumed collateralized property catastrophe reinsurance program through Aeolus Re. The acquisition cost ratio was 18.8% for the year ended December 31, 2014 compared to 17.2% for the year ended December 31, 2013.
Holdings’ U.S. domiciled operating subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. In particular, payments of dividends by Allied World Assurance Company (U.S.) Inc., Allied World National Assurance Company, Allied World Insurance Company, Allied World Specialty Insurance Company, Allied World Surplus Lines Insurance Company and Vantapro Specialty Insurance Company are subject to restrictions on statutory surplus pursuant to the respective states in which these insurance companies are domiciled. Each state requires prior regulatory approval of any payment of extraordinary dividends. We have not paid a dividend to any affiliate or parent company outside of the U.S.
Allied World Assurance Company (Europe) Limited is subject to regulatory restrictions limiting its ability to declare and pay any dividends without the consent of the CBI. We have not paid a dividend to any affiliate or parent company outside of Ireland.
We have investments in “other invested assets”, comprising interests in hedge funds and private equity funds, the carrying value of which was $966.7 million as of December 31, 2015. Some of these funds have redemption notice requirements. For each of our funds, liquidity is allowed after certain defined periods based on the terms of each fund. See Note 4(b) “Investments - Other Invested Assets” to our consolidated financial statements for additional details on our “other invested assets”.
Allied World Assurance Company, Ltd uses trust accounts primarily to meet security requirements for inter-company and certain reinsurance transactions. We also have cash and cash equivalents and investments on deposit with various state or government insurance departments or pledged in favor of ceding companies in order to comply with reinsurance contract provisions and relevant insurance regulations. In addition, Allied World Assurance Company, Ltd currently has access to up to $1.15 billion in letters of credit under two letter of credit facilities, a $1.0 billion uncommitted facility with Citibank Europe plc and a $150.0 million committed Amended Secured Credit Facility. These facilities are used to provide security to reinsureds and are collateralized by us, at least to the extent of letters of credit outstanding at any given time.
Security arrangements with ceding insurers may subject our assets to security interests or require that a portion of our assets be pledged to, or otherwise held by, third parties. Both of our letter of credit facilities are fully collateralized by assets held in custodial accounts at the Bank of New York Mellon held for the benefit of the banks. Although the investment income derived from our assets while held in trust accrues to our benefit, the investment of these assets is governed by the terms of the letter of credit facilities or the investment regulations of the state or territory of domicile of the ceding insurer, which may be more restrictive than the investment regulations otherwise applicable to us. The restrictions may result in lower investment yields on these assets, which may adversely affect our profitability.
As of December 31, 2015 and 2014, $2,748.9 million and $3,585.8 million, respectively, of cash and cash equivalents and investments were deposited, pledged or held in escrow accounts in favor of ceding companies and other counterparties or government authorities to comply with reinsurance contract provisions and insurance laws.
In October 2015, Allied World Bermuda issued $500 million aggregate principal amount of 4.35% senior notes due October 29, 2025, with interest payable April 29th and October 29th each year, commencing April 29, 2016. We intend that the proceeds from these senior notes will be used to refinance the 2006 Senior Notes due to mature in August 2016. Allied World Bermuda can redeem the senior notes prior to maturity, subject to payment of a “make-whole” premium; however, Allied World Bermuda currently has no intention of redeeming the notes.
The senior notes issued in 2006, 2010 and 2015 have been unconditionally and irrevocably guaranteed for the payment of the principal and interest by Holdings.
On November 12, 2014, Allied World Bermuda gave irrevocable notice to the administrative agent under the Amended Secured Credit Facility to reduce the aggregate commitment from $450 million to $150 million. All other material items of the Amended Secured Credit Facility remain unchanged.The Amended Secured Credit Facility contains representations, warranties and covenants customary for similar bank loan facilities, including certain covenants that, among other things, require us to maintain a certain leverage ratio and financial strength rating. We are in compliance with all covenants under the Amended Secured Credit Facility as of December 31, 2015.
The investment commitments outstanding represent unfunded commitments related to our "other invested assets".