The net loss ratio is calculated by dividing net losses and loss expenses by net premiums earned.
Endurance Specialty Holdings Ltd. ("Endurance Holdings") was organized as a Bermuda holding company on June 27, 2002. Endurance Holdings has nine wholly-owned operating subsidiaries:
Endurance Specialty Insurance Ltd. ("Endurance Bermuda"), domiciled in Bermuda with branch offices in Switzerland and Singapore;
Endurance American Specialty Insurance Company ("Endurance American Specialty"), domiciled in Delaware;
Through its operating subsidiaries based in Bermuda, the United States and the United Kingdom, the Company focuses on underwriting specialty lines of personal and commercial property and casualty insurance and reinsurance on a global basis. The Company's portfolio of specialty lines of business is organized into two business segments - Insurance and Reinsurance.
On October 5, 2016, the Company entered into an agreement and plan of merger (the "Merger Agreement") with Sompo and Volcano International Limited, an indirect, wholly-owned subsidiary of Sompo ("Merger Sub"). The Merger Agreement provides for, subject to the satisfaction or waiver of specified conditions, the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as an indirect, wholly-owned subsidiary of Sompo. At the effective
time of the Merger, each issued and outstanding ordinary share of the Company will be automatically canceled and converted into the right to receive $93.00 in cash, without interest.
The Merger was approved at a special general meeting of the Company's ordinary and preferred shareholders held on January 27, 2017. The Merger is expected to close as soon as practicable following the satisfaction of customary closing conditions including, but not limited to, regulatory approvals and the absence of any law, injunction or order restraining the Merger. There can be no assurance that the Merger will occur.
Under the terms of the Merger Agreement, the aggregate consideration for the Merger will be approximately $6,304.0 million in cash. The purchase will be financed by Sompo from existing sources of liquidity and supplementary facilities. If the Merger is terminated under certain circumstances, the Company is obligated to pay Sompo a cash termination fee of $204.9 million together with Sompo's expenses related to the Merger up to a cap of $15.8 million. The Company is contractually obligated to pay investment banking fees upon the closing of the Merger.
The aggregate consideration for the acquisition of Montpelier consisted of the issuance of 20.7 million Endurance Holdings common shares valued at $1.4 billion, 841,926 Endurance Holdings restricted share units with an aggregate fair value of $33.3 million assigned as purchase consideration, and $451.1 million of cash. The cash consideration was funded through a dividend of $9.89 per Montpelier common share paid by Montpelier to its common shareholders prior to the closing of the acquisition.
The Company's consolidated statements of income and comprehensive income for the year ended December 31, 2015 include the results of operations of Montpelier for the period from August 1, 2015 through December 31, 2015.
As part of the acquisition of Montpelier, the Company acquired Montpelier's Lloyd's of London operations.
Also as part of the acquisition of Montpelier, the Company acquired Montpelier's collateralized reinsurance and third party asset management operations operated under the name "Blue Capital" (Blue Capital is a registered trademark of the Company), which includes BCML, a wholly-owned Bermuda subsidiary that provides investment and insurance management services to the Blue Capital vehicles, including Blue Water Re and Blue Water Re II, wholly-owned Bermuda-based special purpose insurers licensed under the Insurance Act 1978 of Bermuda, as amended and its related regulations (the "Bermuda Insurance Act") that provide collateralized property catastrophe reinsurance coverage and related products. Blue Capital was launched in 2012 as an asset management platform offering a range of catastrophe reinsurance-linked investment products to institutional and retail investors.
Effective December 29, 2015, Montpelier Reinsurance Ltd., a wholly-owned Bermuda domiciled Class 4 insurer ("Montpelier Re"), merged with and into Endurance Bermuda with Endurance Bermuda as the surviving company.
The Company is entitled to receive management and performance fees from BCRH and the BCGR Cell for the services that it performs for these entities through BCML.
The Company's revenues also include income generated from its investment portfolio. The Company's investment portfolio is comprised of fixed maturity investments, short-term investments and equity securities that are held as either trading or available for sale and other investments, comprised of alternative funds that are accounted for under the equity method of accounting. In accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), trading securities are carried at fair value with unrealized gains and losses recognized through earnings while the available for sale investments are carried at fair value with unrealized gains and losses included on the Company's balance sheet in accumulated other comprehensive loss as a separate component of shareholders' equity. If unrealized losses are considered to be other-than-temporary due to the Company's intent to sell or requirement to sell such securities, or credit related factors, such losses are included in earnings as net impairment losses recognized in earnings. For other investments, the Company increases or decreases the value of these investments for the Company's share of income or loss, less dividends, through net investment income.
In 2017, management believes the following four primary influences may affect the market for the Company's insurance and reinsurance products - the continuation of the challenging global economy, continued pricing competition in most of the markets in which the Company operates, continued volatility in agriculture commodity prices, and a low interest rate environment. The United States and other markets around the world have continued to experience unsettled economic conditions, including high levels of unemployment, significant governmental regulation initiatives and continued uncertainty in the financial markets. Although some economies are slowly recovering, the lower levels of economic activity are likely to continue to suppress growth in demand for insurance and reinsurance. In addition, increased capital investment and new forms of reinsurance in the industry are likely to have a continuing negative impact on pricing, particularly in catastrophe exposed property insurance and reinsurance. This is likely to result in a continued competitive global insurance and reinsurance market in 2017. The Company's agriculture insurance business will be influenced by the volatility of agriculture commodity prices, which could lead to decreased premium and risk exposure levels, which may be partially offset by higher demand for agriculture insurance due to recent yield and price volatility. Lastly, the current low interest rate environment may result in a lower appetite for longer duration risks that are not adequately priced as there will be reduced investment earnings from underwriting cash flows.
In addition to the applicable risk period, the Company's estimate of its reinsurance premiums written is based on the type of reinsurance contracts underwritten. For excess of loss reinsurance contracts, the deposit premium, as defined in the contract, is generally considered to be the best estimate of the reinsurance contract's written premium at inception. The Company earns reinstatement premiums upon the occurrence of a loss under the reinsurance contract. Reinstatement premiums are calculated in accordance with the contract terms based upon the ultimate loss estimate associated with each contract. Excess of loss reinsurance contracts accounted for approximately 18%, 16%, and 19% of the Company's gross premiums written during the years ended December 31, 2016, 2015, and 2014, respectively. For proportional reinsurance contracts, the Company estimates premiums, commissions and related expenses based on broker and ceding company estimates. In addition to broker and ceding company estimates, the Company's management also utilizes its judgment in establishing proportional reinsurance contract premium estimates after considering the following factors:
Premiums on the Company's excess of loss and proportional reinsurance contracts are estimated at the time the business is underwritten. Accordingly, this is the amount the Company records as written premium in the period the reinsurance contracts are underwritten. As actual premiums are reported by the ceding companies, management evaluates the appropriateness of the original premium estimates and any adjustments to these estimates are recorded in the period in which they become known. The Company has not historically experienced material adjustments to its initial premium estimates for its excess of loss reinsurance contracts. For proportional contracts, as is customary in the reinsurance market, there is a time lag from the point when premium and related commission and expense activity is recorded by a ceding company to the point when such information is reported by the ceding company to the Company, either directly or through a reinsurance intermediary. This time lag can vary from one to several months or calendar quarters. In addition, uncertainty in premium estimates arises due to changes in renewal rates or rate of new business acceptances by the cedant insurance companies and changes in the rates being charged by cedants. Changes to original premium estimates for proportional contracts could be material and such adjustments may directly and significantly impact earnings in the period they are determined because the subject premium may be fully or substantially earned.
Under U.S. GAAP, the Company is not permitted to establish loss reserves until the occurrence of an actual loss event. Once such an event occurs, the Company establishes reserves based upon estimates of total losses incurred by the ceding companies or insureds as a result of the event, its estimate of the potential losses incurred, and its estimate of the portion of such loss the Company has insured or reinsured. As a result, only loss reserves applicable to losses incurred up to the financial
statement date may be recorded, with no allowance for the provision of a contingency reserve to account for expected future losses. See "Reserve for Losses and Loss Expenses" below for further discussion.
Factors Creating Uncertainty in the Estimation of the Reserve for Losses and Loss Expenses. While management does not at this time include an explicit or implicit provision for uncertainty in its reserve for losses and loss expenses, certain of the Company's business lines are by their nature subject to additional uncertainties, including the Company's casualty, property, professional lines, catastrophe, and specialty lines in the Reinsurance segment and the Company's casualty and other specialty, property, marine/energy and aviation and professional lines in the Insurance segment, which are discussed in detail below. In addition, the Company's Reinsurance segment is subject to additional factors that add to the uncertainty of estimating loss and loss expense reserves. Time lags in the reporting of losses can also introduce further ambiguity to the process of estimating loss and loss expense reserves.
the delay between the time claims are reported to the ceding company and the time they are reported through one or more reinsurance broker intermediaries to the Company;
the fact that reinsurance treaties typically cover a disproportionate amount of large and more complicated claims.
Investments. The Company currently classifies its fixed maturity investments, short-term investments and equity securities as trading or available for sale. Trading securities are carried at estimated fair value, with related net realized and unrealized gains or losses included in earnings.
Available for sale securities are carried at estimated fair value, with related net unrealized gains or losses excluded from earnings and included in shareholders' equity as a component of accumulated other comprehensive loss. The Company determines the fair value of its fixed maturity, short-term and equity investments in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The use of valuation techniques for any given investment requires a significant amount of judgment and consideration of factors specific to the underlying investment. Fair value measurements determined by the Company seek to maximize observable inputs and minimize the use of unobservable inputs. Current accounting guidance establishes three levels as follows:
The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. The Company uses quoted values and other data provided by nationally recognized third-party pricing sources as inputs into its process for determining fair values of its fixed maturity, short-term and equity portfolios. The Company obtains multiple prices for its securities where available. Pricing sources used in pricing the Company's fixed maturity, short-term and equity portfolios at December 31, 2016 were primarily pricing services and broker quotes.
Pricing Services and Index Providers. Pricing services, including index providers, provide pricing for less-complex, liquid securities based on market quotations in active markets. For securities that do not trade on a listed exchange, these pricing services may use a matrix pricing consisting of observable market inputs to estimate the fair value of a security. These observable market inputs include reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic factors. Additionally, pricing services may use a valuation model such as an option adjusted spread model commonly used for estimating fair values of mortgage-backed and asset-backed securities. At December 31, 2016, the Company has not adjusted any pricing provided by third-party pricing services and index providers and have classified all such securities as Level 2.
Broker/Dealers. Generally, the Company obtains quotes directly from broker/dealers who are active in the corresponding markets when prices are unavailable from third-party pricing services or index providers. Broker/dealer quotes may also be used if the pricing from pricing services or index providers is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker/dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities. Quotes from broker/dealers are all non-binding. At December 31, 2016, the Company has not adjusted any pricing provided by broker/dealers and has classified the majority of such securities as Level 2.
As described above, third-party pricing services, index providers and broker/dealers have their own method for determining the fair value of securities. As such, prices provided by pricing services, index providers and broker quotes can vary widely, even for the same security, and may have a material effect on the estimated fair values of the Company's securities. If the Company determines that there has been a significant decrease in the volume and level of trading activity for the securities in relation to the normal market activity for such security (or similar securities), then transactions or quoted prices may not accurately reflect fair value and, if there is evidence that the transaction for the security is not orderly, the Company may place less weight on the transaction price as an indicator of fair value. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to:
Other than Temporary Impairment ("OTTI"). Following a determination of fair value, the Company reviews its available for sale portfolios to determine whether any declines in the fair value below the amortized cost basis of these securities are other-than-temporary. If the Company determines that a decision to sell the available for sale security has been made or that it is more likely than not that the Company will be required to sell an available for sale security, the Company deems the security to be other-than-temporarily impaired and writes it down to fair value, thereby establishing a new cost basis. The amount of the write-down is recognized in earnings as net impairment losses recognized in earnings.
Other Investments. Other investments consist of alternative funds and are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. Alternative funds include investments in hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity. The carrying value of other investments are increased or decreased to reflect the Company's share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by certain of the fund managers, valuations of certain alternative funds are estimated based on the most recently available information, including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
In making an assessment of the value of its goodwill, the Company uses both market based and non-market based valuations. Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits in addition to an analysis of the Company's stock price relative to both its book value and its net income. Significant changes in the data underlying these assumptions could result in an assessment of impairment of the Company's goodwill asset. In addition, if the current economic environment and/or the Company's financial performance were to deteriorate significantly, this could lead to an impairment of goodwill, the write-off of which would be recorded against net income in the period such deterioration occurred. If a 5% decline in the fair value of the reporting units occurred, this would not result in an impairment of the goodwill asset at December 31, 2016.
Deferred Tax Assets. The Company provides for income taxes in accordance with the provisions of the relevant accounting guidance on "Accounting for Income Taxes" and "Accounting for Uncertain Tax Positions" for Endurance Assurance, Endurance American, Endurance American Specialty, Endurance Risk Solutions, ARMtech, Endurance U.K. and Endurance at Lloyd's, which are the Company's operating subsidiaries in income tax paying jurisdictions. The Company's deferred tax assets and liabilities primarily result from the net tax effect of temporary differences between the amounts recorded in our Audited Consolidated Financial Statements and the tax basis of our assets and liabilities. The Company determines deferred tax assets and liabilities separately for each tax-paying component in each tax jurisdiction.
At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax asset will not be realized. The valuation allowance is based on all available information from each tax-paying component in each tax jurisdiction and available tax planning strategies. Estimates of future taxable income incorporate several assumptions that may differ from actual experience. Differences in management's assumptions and resulting estimates could be material and have an adverse impact on the Company's financial results of operations and liquidity. Any such differences are recorded in the period in which they become known. As of December 31, 2016, the Company had a net deferred income tax asset of $58.7 million (2015 - $46.8 million), which includes a valuation allowance of $104.8 million (2015 - $131.1 million).
a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. Based on initial review, the Company has determined that this standard specifically excludes revenue from the following sources: Topic 944, Financial Services-Insurance and investment income; Topic 320, Investments-Debt and Equity Securities; Topic 323, Investments-Equity Methods and Joint Ventures; Topic 325, Investment-Others; and Topic 815, Derivatives and Hedging. As substantially all of the Company's revenues are subject to the topics above that are excluded from the standard, the Company has determined that this standard will not have a material impact on the Company's Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis". Under ASU 2015-02, all legal entities are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 set forth amendments: (1) modifying the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities; (2) eliminating the presumption that a general partner should consolidate a limited partnership; (3) affecting the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) providing a scope exception from consolidation guidance for certain reporting entities. ASU 2015-02 was effective for public business entities for annual and interim periods beginning after December 15, 2015. Early adoption was permitted. ASU 2015-02 may be applied retrospectively or by using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the year of adoption. The Company adopted this standard on January 1, 2016 and it did not have a material impact on the Company's Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in the consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, requires the separate presentation of financial assets and financial liabilities by measurement category and for form of years, beginning after December 15, 2015. Early adoption was permitted. The Company adopted ASU 2015-02 effective January 1, 2016 and it did not have material impact on the Company's consolidated statements of operations and financial position.
An increase in gross premiums written in the catastrophe and property lines of business in the Reinsurance segment compared to 2015 primarily due to new business resulting from the Company's acquisition of Montpelier, partially offset by targeted line size reductions;
An increase in gross premiums written in the casualty and other specialty and professional lines of business in the Insurance segment, including excess casualty and various professional liability coverages, due to the expansion of the Company's Insurance underwriting personnel over the last twenty four months, including new business resulting from the acquisition of Montpelier;
An increase in gross premiums written in the specialty line of business in the Reinsurance segment, primarily due to growth in international marine, aerospace, trade credit and surety and agriculture business written by new underwriting teams, partially offset by non-renewals due to increased ceding company retentions;
An increase in gross premiums written in the casualty and professional lines of business in the Reinsurance segment compared to 2015 and 2014 due to new business written and increased premiums on renewal business, partially offset by non-renewal of policies that no longer met profitability targets; and
The components of net investment income for the years ended December 31, 2016, 2015 and 2014 are as follows:
During 2016, the yield on the benchmark three year U.S. Treasury bond fluctuated within a 96 basis point range, with a high of 1.61% and a low of 0.65%. Trading activity in the Company's investment portfolio in 2016 included increased allocations to corporate debt securities, U.S. government and government agencies securities, agency residential mortgaged-backed securities and foreign government securities, and reductions in non-agency mortgage-backed securities, collateralized loan and debt obligations, U.S. government and agency guaranteed corporate securities, municipal securities, equity securities and other investments. The duration of the Company's fixed maturity portfolio was 3.04 years at December 31, 2016 and 2.74 years at December 31, 2015. The increase in duration from 2015 to 2016 was due to an increase in interest rates that impacted the Company's fixed income portfolio.
The Company's reported net losses and loss expenses are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. The following table shows the net losses and loss expenses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes for the years ended December 31, 2016, 2015 and 2014.
During 2016, 2015 and 2014, the Company's previously estimated ultimate losses for prior accident years were reduced by $221.6 million, $243.5 million and $233.8 million, respectively, as the loss emergence related to prior accident years was lower than expected. The overall net reduction in the Company's estimated losses for prior accident years experienced in 2016 emerged across all lines of the Company's Insurance and Reinsurance segments, except for Insurance professional lines. Favorable prior year loss reserve development in 2016 was lower than in 2015 in the Insurance segment as reported losses in the casualty and other specialty line of business were closer to expectations in the current year. Favorable prior year loss reserve development in 2016 was lower than in 2015 in the Reinsurance segment primarily due to reported losses in the casualty and property lines of business being closer to expectations in the current year.
The Company participates in lines of business where claims may not be reported for many years. Accordingly, management does not believe that reported claims are the only valid means for estimating ultimate obligations. Ultimate losses and loss expenses may differ materially from the amounts recorded in the Company's consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. As a result of the incorporation of the Company's own loss reporting patterns and loss history related to its short tail business, including catastrophe reinsurance and property insurance and reinsurance business lines, the Company would expect its prior year loss reserve development and adjustments for short tail business to be less than recorded in prior years. Reserve adjustments, if any, are recorded in earnings in the period in which they are determined. The overall loss reserves were established by the Company's actuaries and reflect management's best estimate of ultimate losses. See "Reserve for Losses and Loss Expenses" below for further discussion.
The Company's acquisition expense ratio in 2016 was higher than 2015 and 2014. The increase from 2015 and 2014 to 2016 was primarily due to the decrease in net premiums earned in the agriculture line of business in the Insurance segment, which incurs lower than average acquisition expenses, and the increase in premiums earned in other lines of business, including the specialty and casualty lines of business in the Reinsurance segment, which incur a higher than average net acquisition expense rate. This increase was partially offset by the addition of earned premiums from the Company's acquisition of Montpelier, which had no associated acquisition costs as these were written off upon the closing of the acquisition in accordance with applicable accounting guidance.
The Company's expenses related to the amortization of intangibles increased $54.0 million in 2016 compared to 2015 as a result of amortization expense recorded from finite lived intangibles acquired as part of the acquisition of Montpelier. The Company estimates additional amortization expenses will be incurred related to Montpelier of $57.5 million, $31.5 million, $21.2 million for the years ended 2017, 2018, and 2019 with $78.3 million to be recognized thereafter.
The Company incurred a tax benefit for the year ended December 31, 2016 of $0.2 million compared to a tax expense of $4.4 million and $0.4 million for the years ended December 31, 2015 and 2014. The tax benefit in 2016 resulted from reductions in the Company's deferred tax valuation allowance recorded at the Company's United States taxable jurisdictions.
The Company generated net income of $381.1 million in 2016 compared to net income of $355.1 million in 2015 and $348.5 million in 2014. The increase in 2016 net income compared to 2015 and 2014 was primarily due to an increase in net premiums earned, a reduction in corporate expenses, increased net investment income and increased net foreign exchange gains, partially offset by increased net losses and loss expenses, acquisition expenses and amortization expenses.
The Company's net income attributable to non-controlling interest was $24.1 million 2016 compared to $11.0 million in 2015 and nil in 2014. As part of the acquisition of Montpelier, the Company acquired ownership of BCRH common shares and BCGR's ordinary shares. At December 31, 2016, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH and Endurance Bermuda owned 25.2% of BCGR. Net income attributable to non-controlling interests relates to the share of the Company's net income attributable to the BCRH common shares and BCGR ordinary shares that are not owned by the Company.
not directly incurred by the segments are classified as corporate expenses and are not allocated to the individual business segments. Ceded reinsurance and recoveries are recorded within the segment to which they apply.
The following table summarizes the underwriting results and associated ratios for the Company's Insurance segment for the years ended December 31, 2016, 2015 and 2014:
Premiums. Gross premiums written in 2016 increased $484.6 million, or 23.2%, compared to 2015 and increased $854.4 million, or 49.8% compared to 2014. Net premiums written in the Insurance segment increased in 2016 by 20.0% compared to 2015 and 22.8% compared to 2014. Gross and net premiums written for each line of business in the Insurance segment for the years ended December 31, 2016, 2015 and 2014 were as follows:
An increase in gross premiums written in the property, marine/energy and aviation line of business, due primarily to business generated by new underwriting teams added over the last twelve months in the U.S. and the U.K., including new business resulting from the acquisition of Montpelier;
Net premiums written in the Insurance segment increased compared to 2015 and 2014 as a result of increased gross premiums written by the Company. Net premium growth was partially offset by an increase in ceded premiums written across all lines of business primarily due to a whole account quota share treaty providing protection for all of the Insurance segment's book of business. In addition, the Company purchased additional quota share, facultative and excess of loss reinsurance across most lines of business in the Insurance segment, as well as increased quota share coverage on the agriculture line of business during 2016 as compared to 2015 and 2014.
Acquisition Expenses. The Company's acquisition expense ratio in the Insurance segment for the year ended December 31, 2016 increased compared to 2015 and 2014 primarily due to more premiums being written in lines with higher acquisition costs and lower premiums in the agriculture line of business, which has lower acquisition costs.
Premiums. Gross premiums written in 2016 increased $396.7 million, or 32.1%, compared to 2015 and increased $453.7 million, or 38.5% compared to 2014. Net premiums written in the Reinsurance segment increased in 2016 by 22.8% over 2015 and 22.3% over 2014, respectively. Gross and net premiums written for each line of business in the Reinsurance segment for the years ended December 31, 2016, 2015 and 2014 were as follows:
Ceded premiums written increased in 2016 compared to 2015 and 2014 as the Company purchased increased levels of retrocessional protection, including additional proportional and excess of loss coverage within the catastrophe, casualty, professional and specialty lines of business.
Net Losses and Loss Expenses. The net loss ratio in the Company's Reinsurance segment for 2016 increased compared to 2015 and 2014 as a result of higher levels of catastrophe losses in 2016, decreased favorable prior year reserve development and an increase in the current accident year loss ratio in the specialty line of business.
In 2016, catastrophe related losses added 10.1 percentage points to the Reinsurance segment's net loss ratio after adjustment for reinstatement premiums and other loss sensitive accruals compared to 3.0 percentage points in 2015 and 5.1 percentage points in 2014. In 2016, the current accident year loss ratio increased as compared to 2015 and 2014 as a result of higher than expected attritional losses incurred in 2016 as compared to 2015 and 2014. The Company experienced lower favorable prior year loss reserve development in its Reinsurance segment in 2016 compared to 2015 and 2014. During 2016, 2015 and 2014, the Company's previously estimated ultimate losses for the Reinsurance segment for prior accident years were reduced by $144.4 million, $161.5 million and $153.2 million, respectively. The 2016 favorable prior year loss reserve development emerged across all lines of business in the Reinsurance segment. Favorable prior year loss reserve development resulted as claims have not materialized as originally estimated by the Company.
Corporate Securities. Corporate securities are comprised of bonds issued by corporations, primarily rated Baa3/BBB- or higher and are diversified across a wide range of issuers and industries. Corporate securities also include high yield securities comprised of bonds issued by corporations rated below BBB-. The principal risk of corporate securities is the potential loss of income and potential realized and unrealized principal losses due to insolvencies or deteriorating credit. The largest corporate security in the Company's portfolio represented approximately 1% of our fixed income investments at December 31, 2016.
Commercial Mortgage-Backed Securities. The Company's commercial mortgage-backed securities ("CMBS") portfolio is diversified both geographically and by the types of underlying properties. The portfolio is primarily collateralized by office, retail and other commercial properties. The Company has limited exposure to lodging and industrial properties. The majority of commercial mortgage-backed securities in the Company's portfolio are non-agency backed securities and are in the super senior tranche which typically have greater than 30% credit support. The principal risks inherent in holding agency commercial mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash flows are received. Non-agency CMBS also have credit risk should losses on the underlying collateral exceed the credit protection provided.
Collateralized Loan and Debt Obligations. Collateralized loan and debt obligations are diversified by both type of collateral and issuer. Our collateralized loan obligations are backed by floating-rate corporate bank loans of various vintages and sectors. The majority of our collateralized loan obligations are rated AAA and AA, in very senior parts of the capital structure. Our collateralized debt obligations are primarily backed by corporate bonds. The principal risks of holding both collateralized loan and debt obligations are structural and credit risks. Structural risks include the security's priority in the issuer's capital structure, and the adequacy of and ability to realize proceeds from the underlying collateral. Credit risks include performance of the underlying bank loans or corporate bonds, which act as collateral for these securities.
Equity securities in the Company's investment portfolio consist of publicly traded common stocks, preferred stocks, and mutual funds. The Company's equity exposure is diversified across both dividend growth oriented strategies and a global mix of index strategies. A portion of our equity securities are comprised of shares of institutional mutual funds, which are invested in emerging market debt, convertible bonds and other targeted strategies.
Includes agency mortgage-backed securities of $1,472.3 million and $1,335.7 million at December 31, 2016 and 2015, respectively.
During 2016, 2015 and 2014, the Company identified available for sale securities that were considered to be other-than-temporarily impaired. In identifying such securities, the Company initially considered whether it intended to sell or would be more likely than not required to sell the securities in an unrealized loss position at the end of the applicable period. To the extent that the Company did not identify securities meeting these criteria, the Company then performed various reviews to determine whether the investments in an unrealized loss position were other-than-temporarily impaired as a result of credit factors or non-credit related factors. As such, the Company recognized in earnings total other than temporary impairments of $10.8 million (2015 - $3.7 million; 2014 - $0.6 million) primarily as a result of declines in certain equity securities that have been at a loss for more than twelve months during 2016.
The Company's diversified portfolio of investments includes exposures to the debt of various European countries. The Company continuously monitors its exposures through review of its portfolio and has established investment guidelines that restrict the amount of investment exposure to any one issuer or country depending on specific ratings of such issuer or country as stated by credit rating agencies. The Company's aggregate direct exposure to the indebtedness and equity securities of those countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) was $763.7 million at December 31, 2016 (2015 - $820.1 million).
The following table shows the fair value of the Company's investments exposed to all countries whose currency is the Euro or whose sovereign debt rating is below AAA (except the U.S.) by any of the recognized rating agencies at December 31, 2016. The amortized cost basis of these investments was not significantly different from their fair value at December 31, 2016. The Company determined the underlying exposure of the investment by reference to the risk country or parent risk country as published by a third party pricing service.
Ability of Subsidiaries to Pay Dividends. The ability of Endurance Bermuda to pay dividends is dependent on its ability to meet the requirements of applicable Bermuda law and regulations. Under Bermuda law, Endurance Bermuda may not declare or pay a dividend if there are reasonable grounds for believing that Endurance Bermuda is, or would after the payment be, unable to pay its liabilities as they become due, or the realizable value of Endurance Bermuda's assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, Endurance Bermuda, as a regulated insurance company in Bermuda, is subject to additional regulatory restrictions on the payment of dividends or distributions. As of December 31, 2016, Endurance Bermuda could pay a dividend or return additional paid-in capital totaling
approximately $1,109.3 million without prior regulatory approval based upon the Bermuda insurance and corporate regulations. As of December 31, 2016, Endurance Holdings has loaned Endurance Bermuda $613.5 million, which remains outstanding and is callable on demand.
Endurance Assurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the State of Delaware Department of Insurance and American Agri-Business is subject to regulation by the Texas Department of Insurance. Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders' surplus or statutory net income, excluding realized capital gains. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2016, Endurance Assurance, Endurance American, Endurance Risk Solutions, and Endurance American Specialty did not have earned surplus; therefore, these companies are precluded from declaring or distributing dividends during 2017 without the prior approval of the applicable insurance regulator. At December 31, 2016, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.3 million without prior regulatory approval from the applicable regulators. In addition, any dividends paid by Endurance American, Endurance American Specialty and Endurance Risk Solutions would be subject to the dividend limitation of their respective parent insurance companies.
Under the jurisdiction of the United Kingdom's Prudential Regulatory Authority ("PRA") and the Financial Conduct Authority ("FCA"), Endurance U.K. must maintain a margin of solvency at all times, which is determined based on the type and amount of insurance business written. The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distributions. At December 31, 2016, Endurance U.K. did not have retained profits available for distributions.
Cash and Invested Assets. The Company's aggregate invested assets as of December 31, 2016 totaled $8.8 billion compared to aggregate invested assets of $8.9 billion as of December 31, 2015. The decrease in invested assets since December 31, 2015 resulted primarily from the retirement of the Company's Series B preferred shares and payment of dividends, which were largely offset by net operating cash flows generated during 2016.
As of December 31, 2016 and 2015, the Company had pledged cash and cash equivalents and fixed maturity investments of $106.8 million and $108.9 million, respectively, in favor of certain ceding companies to collateralize obligations. As of December 31, 2016 and 2015, the Company had also pledged $252.2 million and $383.3 million of its cash and fixed maturity investments to meet collateral obligations for $222.3 million and $341.6 million in secured letters of credit outstanding under its credit facilities, respectively. In addition, at December 31, 2016 and 2015, cash and fixed maturity investments with fair values of $207.8 million and $208.3 million were on deposit with U.S. state regulators, respectively.
During 2015, Endurance Bermuda established a multi-beneficiary reinsurance trust (the "Endurance Reinsurance Trust") domiciled in Delaware. The Endurance Reinsurance Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants. As of December 31, 2016, the fair value of the assets held in the Endurance Reinsurance Trust exceeded $783.9 million (2015- $94.1 million), the minimum value required on that date.
Endurance Bermuda is party to a second multi-beneficiary reinsurance trust (the "Reduced Collateral Trust") domiciled in Delaware. The Reduced Collateral Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states. As of December 31, 2016, the fair value of
The Company is required to pay a fee of 0.40% per annum on the daily stated amount of outstanding letters of credit issued under the Credit Facility. In addition, the Credit Facility requires the Company to pay to the lenders a commitment fee iof 0.125% per annum on the average daily amount of the unused commitments of the lenders. The Credit Facility permits a lender, if requested and in its discretion, to issue a letter of credit pursuant to which it fronts for the other lenders. For such letters of credit, such fronting lenders may receive certain fronting fees from the Company.
The Company is party to certain uncommitted letter of credit reimbursement agreements ("LOC Agreements") that allow for the issuance of letters of credit in a variety of currencies, including U.S. dollars. The fees paid under the LOC Agreements depend on the amount of the outstanding letters of credit and vary from 0.30% to 0.45% on the principal amount of letters of credit outstanding to a fee negotiated at the time of issuance of the individual letters of credit. The total amount of letters of credit outstanding under the LOC Agreements as of December 31, 2016 was $22.5 million (2015 - $11.7 million).
Senior Notes. On October 17, 2005, Endurance Holdings issued $200.0 million principal amount of 6.15% Senior Notes due October 15, 2015 (the "6.15% Senior Notes"). The 6.15% Senior Notes were offered by the underwriters at a price of 99.639% of their principal amount, providing an effective yield to investors of 6.199%. The 6.15% Senior Notes matured on October 15, 2015 and were repaid by the Company on that date.
On July 15, 2004, the Company issued $250.0 million principal amount of 7% Senior Notes due July 15, 2034. On March 23, 2010, the Company issued an additional $85.0 million principal amount of 7% Senior Notes. The additional 7% Senior Notes issued have terms identical to the previously issued notes in the series, other than the date of issue, the initial purchase price to the public and the first interest payment date. The additional 7% Senior Notes trade interchangeably with and vote together with, the previously issued 7% Senior Notes. The 7% Senior Notes were offered by the underwriters at a price of
99.108% (original issuance) and 94.976% (additional issuance) of their principal amount, providing an effective yield to investors of 7.072% (original issuance) and 7.449% (additional issuance).
The indentures governing the Senior Notes contain customary covenants and events of default for senior unsecured indebtedness, including events of default for non-payment of principal or interest, breaches of covenants, insolvency of the Company or a default by the Company under other outstanding indebtedness. The Company was in compliance with all covenants contained within the indentures governing the Senior Notes as of December 31, 2016.
LIBOR Swap. Upon closing of the acquisition of Montpelier, the Company became a party to the LIBOR Swap, which will result in the future net cash flows in connection with the Trust Preferred Securities for the 5-year period beginning March 30, 2012 being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the LIBOR Swap to its maturity. Net realized and unrealized gains and losses associated with the LIBOR Swap are reported within net realized and unrealized gains on the Company's Consolidated Statements of Income and Comprehensive Income, as opposed to interest expense.
Preferred Shares. On November 24, 2015, Endurance Holdings issued 9,200 shares of its 6.35% Non-Cumulative Preferred Shares, Series C (the "Series C Preferred Shares") (equivalent to 9,200,000 Depositary Shares), each of which represents a 1/1,000th interest in a Series C Preferred Share, $1.00 par value and $25,000.00 liquidation preference per share (equivalent to $25.00 per Depositary Share). The Series C Preferred Shares sold were registered under the Securities Act of 1933, as amended. The Series C Preferred Shares were issued at a price to the public of $25,000.00 per share (equivalent to $25.00 per Depositary Share). Endurance Holdings received net proceeds of $222.0 million from its offering of Series C Preferred Shares, after expenses and underwriting discounts. The proceeds of the offering of Series C Preferred Shares were used to redeem on December 24, 2015 all 8,000,000 of Endurance Holdings' outstanding 7.75% Non-Cumulative Preferred Shares, Series A, and for general corporate purposes.
On June 1, 2016, Endurance Holdings redeemed all 9,200,000 of its 7.5% Non-Cumulative Preferred Shares, Series B (the "Series B Preferred Shares"). The Series B Preferred shares were redeemed at a redemption price of $25.00 per share together with an amount equal to any dividends that were declared but not paid prior to June 1, 2016.
On an ongoing basis, the Company expects its internally generated funds, together with borrowings available under the Credit Facility, capital generated from the offering and sale of its Senior Notes, Series C Preferred Shares and ordinary shares, to be sufficient to operate its business. However, there can be no assurance that the Company will not incur additional indebtedness or issue additional equity or hybrid securities in order to implement its business strategy or pay claims.
Contractual Obligations. The Company's contractual obligations as of December 31, 2016 are summarized as follows:
The Company also has Credit Facility and LOC Agreements capacity of $295.5 million and $438.4 million as at December 31, 2016 and 2015, respectively.
The Company's functional currencies are U.S. dollars for its U.S. and Bermuda operations and British Sterling for its U.K. operations. The reporting currency for all entities is U.S. dollars. The Company maintains a portion of its investments and liabilities in currencies other than the U.S. dollar. The Company has made a significant investment in the capitalization of Endurance U.K. which was valued at £426.3 million as of December 31, 2016 ($526.7 million in U.S. dollars). Endurance U.K. is subject to the United Kingdom's Prudential Regulation Authority rules concerning the matching of the currency of its assets to the currency of its liabilities. Depending on the profile of Endurance U.K.'s liabilities, it may be required to hold some of its assets in currencies corresponding to the currencies of its liabilities. The Company may, from time to time, experience losses resulting from fluctuations in the values of foreign currencies, which could have a material adverse effect on the Company's results of operations. The Company's investment in Endurance at Lloyd's is primarily through Funds at Lloyd's, which is denominated in U.S. dollars.
For the year ended December 31, 2016, 16.9% of the Company's gross premiums were written in currencies other than the U.S. dollar. The portions of the Company's cash and cash equivalents, investments, net premium receivable and insurance and reinsurance balances receivable, and reserves for loss and loss expenses denominated in non-U.S. currencies at December 31, 2016 were approximately 24.3%, 3.8%, 11.8%, 6.0% and 16.4%, respectively. As of December 31, 2016, the Company's principal foreign currency exposures are denominated in British Sterling and Euros. The Company measures and manages its exposure in these currencies, among others, by monitoring its estimated gross and net asset positions. In order to estimate such exposures, the Company considers currency specific investments, cash and cash equivalents, premiums receivable, reserve for losses and loss expenses, and unearned premiums. As of December 31, 2016, the total estimated gross asset and net liability balances denominated in Euros were $233.8 million and $23.9 million, respectively. The total estimated gross and net asset balances denominated in British Sterling were $261.9 million and $8.1 million, respectively. Assuming all other variables are held constant and disregarding any tax effects, a 10% change in the U.S. dollar relative to these currencies could result in a $1.6 million increase or decrease in the net assets held by the Company at December 31, 2016.
The Company's reserving actuaries, who report separately from the Company's business units, review the Company's loss and loss expense reserves on a quarterly basis for both current and prior accident years using the most current claims data. These reserve reviews incorporate a variety of actuarial methods and judgments, including the three most common methods of
actuarial evaluation used within the insurance industry: the expected loss ratio method; the Bornhuetter-Ferguson method; and the loss development method. The expected loss ratio approach is based on expected results independent of current loss reporting activity. This approach is typically used for immature loss periods (i.e., the current accident year). The Bornhuetter-Ferguson method uses an initial loss estimate (expected loss technique) for each accident year by business line and type of contract. Under this method, IBNR is set equal to the initial loss estimate multiplied by the expected percent of loss yet to be reported at each valuation date. In a given quarter, if reported losses are less than expected, then the difference would result in a decrease in estimated ultimate losses. If losses for the quarter are greater than expected, then the difference would result in an increase in estimated ultimate losses. In contrast, the loss development method extrapolates the current value of reported losses to ultimate expected losses by using selected reporting patterns of losses over time. The selected reporting patterns are based on historical information (organized into loss development triangles) and are adjusted to reflect the changing characteristics of the book of business written by the Company. The Company uses these multiple methods, supplemented with its own actuarial and professional judgment, to establish its best estimate of loss and loss expense reserves.
Losses and loss expenses for the year ended December 31, 2016 include $221.6 million in favorable development of reserves relating to prior accident years. The favorable loss reserve development experienced during 2016 benefited the Company’s 2016 reported loss ratio by approximately 9.4 percentage points. The net reduction in estimated losses for prior accident years reflects lower than expected loss emergence in each of the Company's reserve categories within both the Insurance and Reinsurance segments.
For the year ended December 31, 2016, as part of the Company's periodic review of key inputs and parameters it uses to establish its reserve for losses and loss expenses and in order to recognize accumulated historical experience and other relevant industry information, the Company made minor adjustments to the loss reporting patterns used for a number of lines of business. For the year ended December 31, 2016, the Company did not materially alter initial expected loss ratios for business related to prior years for the insurance and reinsurance reserve categories as the variances in reported losses in 2016 for those reserve categories were within the range of possible results anticipated by the Company.
Casualty and other specialty. The favorable loss emergence within the casualty and other specialty insurance line of business during 2016 was primarily due to lower than expected claims activity within the Bermuda excess casualty and healthcare businesses, which more than offset unfavorable loss emergence within the United States contract binding general liability business. In 2015, the Company recorded favorable loss emergence within this line of business primarily due to lower than expected claims activity within the Bermuda excess casualty business and a reduction in claims made year 2010 and prior IBNR for the Bermuda healthcare liability business due to case incurred loss activity and open claim counts being less than expected.
Professional lines. Loss emergence within the professional liability line of business during 2016 and 2015 was largely in line with expectations resulting in modest amounts of development in prior year reserves.
Casualty. The Company recorded favorable prior period development within this line of business during 2016 due to lower than expected claims activity within the Company’s Bermuda casualty treaty businesses. The Company recorded favorable prior period development within this line of business during 2015 primarily due to lower than expected claims activity within the Company’s Bermuda and United States regional casualty treaty businesses.
Professional lines. The favorable loss emergence within this line of business during 2016 was primarily due to lower than expected claims emergence in accident years 2012 and 2013. The favorable loss emergence within this line of business during 2015 was primarily due to lower than expected claims emergence for accident years 2010-2013.
Case and IBNR reserves for losses and loss expenses by segment and line of business were as follows at December 31, 2016:
Two key inputs utilized in determining loss and loss expense reserves for the Company's two business segments are the initial expected loss ratio and the speed of the loss reporting pattern. The following tables illustrate the possible percentage effects on current estimates of the reserve for losses and loss expenses due to 10% changes in the initial expected loss ratio and the percent of loss yet to be reported at each valuation date as of December 31, 2016. The 10% changes in the initial expected loss ratio and the percent of loss yet to be reported were chosen to demonstrate the impact on the Company's loss and loss expense reserves of variation in key inputs and, as described below, may not be reflective of actual changes in loss and loss expense reserves.
Ceded premiums written were $1,832.2 million for the year ended December 31, 2016, $1,370.4 million for the year ended December 31, 2015 and $959.9 million for the year ended December 31, 2014. The increase in ceded premiums written was primarily due to decreased retentions across our entire Insurance segment as the Company increased the whole account quota share treaty providing protection across the Insurance segment's book of business for 2016. In addition, the Company purchased additional quota share, facultative and excess of loss reinsurance across most Insurance lines of business, and increased quota share coverage on the agriculture Insurance line of business. In the Reinsurance segment, ceded premium written increased as the Company purchased increased levels of protection, including additional proportional and excess of loss retrocessional coverage on the catastrophe line of business, and additional proportional coverage on the specialty line of business.
The Company's U.S., U.K. and Bermuda insurance operating subsidiaries use proportional and excess reinsurance to protect larger limits on certain business written by the Insurance segment. The Company's agriculture Insurance line of business participates in a crop reinsurance program sponsored by the U.S. federal government and utilizes third party reinsurance covers. Excess reinsurance coverage is often purchased in relation to the property Insurance line of business to protect against catastrophic events.
The Company's intangible assets and goodwill are tested at least annually for impairment and more often if a triggering event is deemed to have occurred. Impairment testing for indefinite-lived intangible assets is performed based upon estimates of the fair value of the asset. The Company uses internal and third party valuation appraisals to estimate the fair value of its indefinite-lived intangible assets. Impairment testing for goodwill is performed based upon estimates of the fair value of the "reporting unit" to which the goodwill relates. The reporting unit is the operating segment or a business one level below that operating segment if discrete financial information is prepared and regularly reviewed by management at that level. The Company's reporting units identified include the agriculture line of business in the Insurance segment, Syndicate 5151 in the Insurance segment, the remaining Insurance segment lines of business, and the Reinsurance segment. The fair value of the reporting unit is impacted by the performance of the business. The Company uses a combination of market and income approaches to estimate fair value of its reporting units. There have been no significant changes in the Company's methodologies from the prior year. If it is determined that goodwill or intangible assets with indefinite useful lives have been impaired, the Company must write down the goodwill or intangible asset by the amount of the impairment, with a corresponding charge to net income.
During the fourth quarter of 2016, the Company performed its annual impairment testing of goodwill.The Company has three primary sources of goodwill - goodwill obtained from a renewal rights transaction completed in 2003 with HartRe, goodwill obtained from the Company’s acquisition of ARMtech in 2007 and goodwill obtained from the Company's acquisition
of Montpelier in 2015. The Company determined that the appropriate reporting units for evaluation were the Reinsurance segment in relation to HartRe and part of the Montpelier acquisition, the agriculture line of business of the Insurance segment in relation to the ARMtech goodwill, and Syndicate 5151 in the Insurance segment in relation to the Montpelier acquisition. The Company qualitatively reviewed each of its reporting units given the recent proposed acquisition of the Company by Sompo. Based on the results of the qualitative review, the Company believed that it was more likely than not that the fair values of the Reinsurance and Syndicate 5151 reporting units were in excess of their carrying values. As a result, no additional analysis was completed. For the ARMtech reporting unit, the Company used a discounted cash flow approach to estimate the fair value of this reporting unit. The fair value determined was in excess of the carrying value including goodwill for ARMtech. As a result of the goodwill impairment testing, no write-downs of goodwill were deemed necessary during 2016 and 2015.
During the fourth quarter of 2016, the Company performed its annual impairment testing of its intangible assets with indefinite useful lives. The Company's intangible assets with indefinite lives are its insurance licenses and the Lloyd's syndicate capacity. For the years ended December 31, 2016 and 2015, no impairment was recognized for the Company's intangible assets with indefinite lives.
The Company's income tax expense was as follows for the years ended December 31, 2016, 2015 and 2014, respectively:
Of the 2016 current income tax expense, $1.8 million related to taxes incurred in the United States (2015 - $4.2 million; 2014 - $1.8 million), $4.2 million related to taxes incurred in the United Kingdom (2015 - $2.2 million; 2014 - nil) and $5.0 million related to taxes incurred in Switzerland (2015 - ($0.1 million); 2014 - nil). Of the deferred income tax benefit, $5.2 million related to deferred income tax benefit in the United States (2015 - $0.7 million; 2014 - $1.4 million), $1.7 million related to deferred income tax benefit in the United Kingdom (2015 - $0.2 million; 2014 - nil) and $4.2 million related to deferred income tax benefit in Bermuda including its branches (2015 - $1.0 million; 2014 - nil). The deferred income tax benefit in Bermuda related to amortization of intangible assets from the acquisition of Montpelier which the Company elected not to push down to Endurance at Lloyd's under current accounting guidance.
Gross premiums written and earned by our non-U.S. and U.S. operations generally do not bear a proportionate relationship to the respective pre-tax income of these operations. The disproportionate relationship between gross premium written and net income between our operations occurs as a result of various factors, including but not limited to the differences
The Company's balance sheet at December 31, 2016 contains a net deferred tax asset in the amount of $58.7 million (2015 - $46.8 million). The current year net deferred tax asset consists of gross deferred tax assets of $205.9 million, gross deferred tax liabilities of $42.3 million and a valuation allowance against certain operating loss carryforwards of $104.8 million (2015 - $131.1 million). Of the Company's gross deferred tax assets, $66.3 million (2015 - $92.8 million) relates to net operating loss carryforwards that are available to offset future taxable income generated by the Company’s United States subsidiaries, a United Kingdom subsidiary and Endurance Bermuda’s Singapore branch in 2016 and the Company's United States subsidiaries, a United Kingdom subsidiary and non-U.S. branches in 2015. The Company's net operating losses may be carried forward indefinitely in the United Kingdom and Singapore. In Switzerland and the United States the net operating loss carryforwards expire through 2016 and 2028, respectively.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Endurance Specialty Holdings Ltd. as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016 of Endurance Specialty Holdings Ltd. and our report dated March 1, 2017 expressed an unqualified opinion thereon.
Notes to the Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Endurance Specialty Holdings Ltd. ("Endurance Holdings", together with its subsidiaries, the "Company") was organized as a Bermuda holding company on June 27, 2002. On July 31, 2015, the Company acquired all of the outstanding common shares of Montpelier Re Holding Ltd. ("Montpelier"), a Bermuda based provider of global property and casualty reinsurance and insurance products. As part of the acquisition, the Company acquired Montpelier's Lloyd's of London ("Lloyd's") operations, including Syndicate 5151 ("Syndicate 5151") and its managing agent, Endurance at Lloyd's Limited ("Endurance at Lloyd's"). Also as part of the acquisition, the Company acquired Montpelier's collateralized reinsurance and third party asset management operations, operating under the name "Blue Capital", which includes Blue Capital Management Ltd. ("BCML"), a wholly-owned subsidiary that provides investment and insurance management services to the Blue Capital vehicles primarily through business written in Blue Water Re Ltd. ("Blue Water Re") and Blue Water Re II Ltd. ("Blue Water Re II"), wholly-owned special purpose insurers. See Note 4, Investments, for additional information with respect to the Blue Capital entities. The Company's Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2015 include the results of operations of Montpelier from August 1, 2015. For additional information on the acquisition of Montpelier, see Note 3, Acquisition of Montpelier.
Under the terms of the Merger Agreement, the aggregate consideration for the Merger will be approximately $6,304.0 million in cash. The purchase will be financed by SOMPO from existing sources of liquidity and supplementary facilities. If the Merger is terminated under certain circumstances, the Company is obligated to pay SOMPO a cash termination fee of $204.9 million together with SOMPO's expenses related to the Merger up to $15.8 million. The Company is contractually obligated to pay investment banking fees upon the closing of the Merger.
In addition, as part of the Blue Capital operations Endurance Holdings and Endurance Bermuda together own 33.3% of Blue Capital Reinsurance Holdings Ltd. ("BCRH") and Endurance Bermuda owns 25.2% of Blue Capital Global Reinsurance Fund Limited ("BCGR").
The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Endurance Holdings and its wholly-owned subsidiaries, and BCRH and the BCGR Cell. All intercompany transactions and balances have been eliminated in consolidation. The following are significant accounting and reporting policies adopted by the Company:
The Company's insurance premiums are earned pro rata over the term of the applicable risk period specified in the insurance policy. The Company's insurance policies cover losses occurring or claims made during the term of the policy. Generally, the Company receives a fixed premium which is identified in the policy and is recorded on the inception date of the contract or when premiums are determinable and earned evenly over the policy term. This premium will only adjust if the underlying insured values adjust. Accordingly, the Company monitors the underlying insured values and records additional or return premiums in the period in which amounts are reasonably determinable.
The Company's loss and loss expense reserves are reviewed regularly, and adjustments, if any, are reflected in earnings in the period in which they become known. The establishment of new loss and loss expense reserves or the adjustment of previously recorded loss and loss expense reserves could result in significant positive or negative changes to the Company's financial condition for any particular period. While management believes the Company's estimate of loss and loss expense reserves is reasonable, the ultimate loss experience may not be reliably predicted, and it is possible losses and loss expenses may be materially different than the total reserve for losses and loss expenses recorded by the Company.
Other investments within the Company's investment portfolio are comprised of hedge funds, private investment funds and other investment funds that generally invest in senior secured bank debt, high yield credit securities, distressed debt, macro strategies, multi-strategy, equity long/short strategies, distressed real estate, and energy sector private equity ("alternative funds"). Other investments are accounted for using the equity method of accounting whereby the initial investment is recorded at cost. The carrying values of these investments are increased or decreased to reflect the Company's share of income or loss, which is included in net investment income, and are decreased for dividends. Due to the timing of the delivery of the final valuations reported by the managers of certain of our alternative funds, our investments in those funds are estimated based on the most recently available information including period end valuation statements, period end estimates, or, in some cases, prior month or quarter valuation statements.
Assumptions underlying these valuations include forecasts of discounted future cash flows and future profits and comparable transactions observed in the market, in addition to an analysis of the Company’s stock price relative to both its book value and its net income.
Current accounting guidance requires the recognition of all derivative financial instruments including embedded derivative instruments, as either assets or liabilities in the Consolidated Balance Sheets at fair value.
Where the Company has entered into master netting agreements with counterparties, or the Company has the legal and contractual right to offset positions, the derivative positions may be netted by the counterparty.
Diluted earnings per common share are based on the weighted average number of common shares and assumes the exercise of all dilutive stock options and the vesting or conversion of all convertible securities such as unvested restricted shares using the two-class method described above.
The Company accounts for non-controlling interests in the shareholders' equity section of the Company's Consolidated Balance Sheets in accordance with current accounting guidance regarding consolidation. Net income attributable to non-controlling interest is presented separately in the Company's Consolidated Statements of Income and Comprehensive Income.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. ASU 2014-09 also provides guidance on accounting for certain contract costs and will also require new disclosures. ASU 2014-09 was to be effective for public business entities in annual and interim periods beginning after December 15, 2016, however, in July 2015, the FASB decided to defer by one year the effective dates of ASU 2014-09, and as a result, ASU 2014-09 will be effective for public business entities in annual and interim period beginning after December 15, 2017. Early adoption is permitted. Based on initial review, the Company has determined that this standard specifically excludes revenue from the following sources: insurance contracts, Topic 944, Financial Services-Insurance and investment income; Topic 320, Investments-Debt and Equity Securities; Topic 323, Investments-Equity Methods and Joint Ventures; Topic 325, Investment-Others; and Topic 815, Derivatives and Hedging. As substantially all of the Company's revenues are subject to the topics above that are excluded from the standard, the Company has determined that this standard will not have a material impact on the Company's Consolidated Financial Statements.
On March 31, 2015, the Company announced the signing of a definitive agreement and plan of merger (the "Merger Agreement") with Montpelier and Millhill Holdings Ltd., a direct, wholly-owned subsidiary of the Company ("Merger Sub"), under which Endurance Holdings, through Merger Sub, acquired all of the outstanding common shares of Montpelier. The acquisition of Montpelier was completed on July 31, 2015 (the "Closing Date").
Other assets - To eliminate deferred debt issuance costs related to Montpelier's existing senior notes and to write off Montpelier's fixed assets and goodwill;
Reserve for losses and loss expenses - To reflect a decrease in net losses and loss expenses due to the addition of a market based risk margin, which represents the cost of capital required by a market participant to assume the net losses and loss expenses of Montpelier, offset by a deduction that represents the discount due to the present value calculation of the unpaid losses and loss expenses based on the expected payout of the net unpaid losses and loss expenses;
Non-compete agreements - represent non-compete agreements with key employees of Montpelier;
(1) Includes $52.7 million of compensation-related costs associated with terminating employees of Montpelier.
Among other adjustments, and in addition to the fair value adjustments and recognition of goodwill and identifiable intangible assets noted above, other material nonrecurring pro forma adjustments directly attributable to the acquisition of Montpelier principally included certain adjustments to recognize transaction related costs, align accounting policies, amortize fair value adjustments, amortize identifiable indefinite lived intangible assets and recognize related tax impacts.
Contractual maturities of the Company's fixed maturity and short-term investments are shown below as of December 31, 2016 and 2015. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The following table summarizes the composition and redemption restrictions of other investments as of December 31, 2016 and 2015:
Hedge funds - The redemption frequency of the hedge funds range from monthly to biennially with notice periods from 30 to 90 days. Over one year, it is estimated that the Company can liquidate approximately 82.2% of the hedge fund portfolio, with the remainder over the following two years.
The Company classifies some of its investments in fixed maturity investments, short-term investments and equities as available for sale. The amortized cost, fair value and related gross unrealized gains and losses on the Company's securities classified as available for sale at December 31, 2016 and 2015 are as follows:
The following tables summarize, for all available for sale securities in an unrealized loss position at December 31, 2016 and 2015, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at December 31, 2016.
As of December 31, 2016, 1,090 available for sale securities were in an unrealized loss position aggregating $37.4 million. Of those, 218 securities with aggregated unrealized losses of $9.4 million at December 31, 2016 had been in a continuous unrealized loss position for twelve months or greater.
Gross unrealized losses include unrealized losses on non-OTTI and non-credit OTTI securities recognized in accumulated other comprehensive loss at December 31, 2015.
The Company is involved in the normal course of business with VIEs primarily as a passive investor in residential and commercial mortgage-backed securities and through its interests in various other investments that are structured as limited partnerships considered to be third party VIEs. The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE. The Company determined that it was not the primary beneficiary for any of these investments as of December 31, 2016 and 2015. The Company believes its exposure to loss with respect to these investments is generally limited to the investment carrying amounts reported in the Company's Consolidated Balance Sheets and any unfunded investment commitments.
The following table summarizes the movements in the non-redeemable non-controlling interests balance for the year ended December 31, 2016 and from the acquisition date, July 31, 2015 to December 31, 2015:
(1) The redemption from the BCGR Cell was required to fund expenses, repay debt and fund dividends by BCGR.
The Company determines the fair value of its fixed maturity investments, short-term investments, equity securities, debt, and other assets and liabilities in accordance with current accounting guidance, which defines fair value and establishes a fair value hierarchy based on inputs to the various valuation techniques used for each fair value measurement. The Company determines the estimated fair value of each individual security utilizing the highest level inputs available. Valuation inputs by security type may include the following:
The carrying values of cash and cash equivalents, accrued investment income, other investments, net receivable on sales of investments, net payable on purchases of investments, the amount outstanding under the BCRH Credit Agreement and other financial instruments not described above approximated their fair values at December 31, 2016 and 2015.
Other assets and other liabilities measured at fair value included assets of $41.1 million (2015 - $41.5 million) and liabilities of $26.2 million (2015 - $42.0 million) related to proprietary, non-exchange traded derivative-based risk management products used in the Company's weather risk management business, and hedging and trading activities related to these risks. In instances where market prices are not available, the Company may use industry or internally developed valuation techniques such as historical analysis and simulation modeling to determine fair value and are considered Level 3.
The Company's weather curves are determined by taking the average payouts for each transaction within its portfolio utilizing detrended historical weather measurements. The Company's commodity curves are determined using historical market data scaled to currently observed market prices. The range of each unobservable input could vary based on the specific commodity, including, but not limited to natural gas, electricity, crude, liquids, temperature or precipitation. Due to the diversity of the portfolio, the range of unobservable inputs could be wide-spread as reflected in the below table on quantitative information. The unobservable inputs are validated at each reporting period and are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data.
Below is a summary of quantitative information regarding the significant observable and unobservable inputs used in determining the fair value of the net weather and energy related derivative assets and liabilities classified in Level 3 that are measured at fair value on a recurring basis at December 31, 2016 and 2015:
The following tables present a reconciliation of the beginning and ending balances for all assets and liabilities measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2016 and 2015.
The Company monitors the performance of its underwriting operations through review of discrete information related to its two reportable segments, Insurance and Reinsurance. Within each of these segments, the Company writes a variety of different types of insurance and reinsurance. For reporting purposes, management has combined its many business units, including within the Insurance segment - agriculture, casualty and other specialty, professional lines and property, marine/energy and aviation; and within the Reinsurance segment- catastrophe, property, casualty, professional lines and specialty. Management believes that the businesses combined within these business lines have similarities that make it appropriate to evaluate each as a group.
The Company counts an insurance claim when either an indemnity or allocated adjustment expense amount has been paid, or at any quarter end, the Company recorded a case reserve.
For Reinsurance contracts written on an excess of loss basis, the Company has developed claims frequency information. The Company determines claims frequency for excess of loss contracts when either a loss has been paid or at any quarter-end, the Company recorded a case reserve. Claims are counted by contract.
The following tables show, by segment by line of business, the incurred losses and loss expenses and cumulative paid losses and loss expenses, net of reinsurance, as of December 31, 2016. The following also includes the amount of IBNR reserves recorded as well as the cumulative number of reported claims for the Insurance segment lines of business and only excess of loss reinsurance contracts for the Reinsurance segment lines of business.
During the year ended December 31, 2016, the Company recorded ceded losses of $824.3 million (2015 - $833.7 million; 2014 - $575.7 million). The balance of reinsurance recoverable on paid and unpaid losses at December 31, 2016 and 2015 was distributed as follows based on the ratings of the reinsurers:
The Company is required to pay a fee of 0.40% per annum on the daily stated amount of outstanding letters of credit issued under the Credit Facility. In addition, the Credit Facility requires the Company to pay to the lenders a commitment fee of 0.125% per annum on the average daily amount of the unused commitments of the lenders. The Credit Facility permits a lender, if requested and in its discretion, to issue a letter of credit pursuant to which it fronts for the other lenders. For such letters of credit, such fronting lenders may receive certain fronting fees from the Company.
The Company issued $335.0 million principal amount of 7% Senior Notes due July 15, 2034 (the "7% Senior Notes"). The 7% Senior Notes are senior unsecured obligations of Endurance Holdings and rank equally with all of Endurance Holdings' existing and future unsecured and unsubordinated debt. The 7% Senior Notes are also effectively junior to claims of creditors of Endurance Holdings' subsidiaries, including policyholders, trade creditors, debt holders, and taxing authorities.
On May 16, 2016, the Company, through a wholly-owned subsidiary, entered into a credit facility agreement with BCGR (the "BCGR Credit Facility"). The BCGR Credit Facility provides BCGR with an unsecured $20.0 million revolving credit facility for working capital and general corporate purposes and expires on September 30, 2018. Borrowings under the BCGR Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. The BCGR Credit Facility contains covenants that limit BCGR's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, or incur debt. If BCGR fails to comply with any of these covenants, the Company could terminate the BCGR Credit Facility and exercise remedies against BCGR. In addition, in the event of a default in the performance of any of the agreements or covenants under certain management agreements with BCML by BCGR, the Company has the right to terminate the BCGR Credit Facility. As of December 31, 2016, BCGR had no outstanding borrowings under the BCGR Credit Facility.
In 2004, prior to the issuance of the 7% Senior Notes, the Company entered into an interest rate lock on a notional amount of $125.0 million to protect against interest rate increases before the anticipated issuance of the Senior Notes. The objective of the interest rate lock was to protect 50% of the forecasted receipt of proceeds from the issuance of the 7% Senior Notes offering, which was subject to change prior to issuance due to fluctuations in the benchmark 30 year U. S. Treasury rate. Upon issuance of the 7% Senior Notes, the interest rate lock was settled through payment by the Company of $2.7 million. The interest rate lock agreement was designated as a "cash flow hedge" under current accounting guidance and accordingly, the fair value of the derivative was recorded in other comprehensive (loss) income and is being recognized as a component of interest expense in the Consolidated Statements of Income and Comprehensive Income as the interest expense related to the 7% Senior Notes affects earnings. The net income effect of the interest rate lock was not material.
At December 31, 2016, the Company held no reverse repurchase agreements (December 31, 2015 - $30.0 million). These loans are fully collateralized, are generally outstanding for a short period of time and are presented as part of cash and cash equivalents in the Consolidated Balance Sheets. The required collateral for these loans is either cash or U.S. treasury securities at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income.
The gains and losses on the Consolidated Statements of Income and Comprehensive Income for derivatives for the years ended December 31, 2016, 2015 and 2014 were as follows:
The following table provides a summary of the segment revenues and results for the year ended December 31, 2014, reserve for losses and loss expenses as of December 31, 2014 and the carrying value of goodwill as of December 31, 2014:
The following table provides gross premiums written by line of business for the years ended December 31, 2016, 2015 and 2014:
The following table provides the geographic distribution of gross premiums written for the years ended December 31, 2016, 2015 and 2014:
The following table shows an analysis of goodwill and intangible assets for the years ended December 31, 2016 and 2015:
For the years ended December 31, 2016 and 2015, a valuation analysis was performed to determine the fair value of the Company's intangible assets with indefinite lives which showed that none of the Company's intangible assets were impaired.
Concentrations of credit risk. The areas where significant concentrations of credit risk may exist include reinsurance recoverables, investments and cash and cash equivalents. The Company's reinsurance recoverables on paid and unpaid losses at December 31, 2016 and 2015 amounted to $1,486.9 million and $1,196.0 million, respectively, and resulted from reinsurance arrangements entered into in the normal course of operations. A credit exposure exists with respect to reinsurance recoverables as they may become uncollectible. The Company manages its credit risk in its reinsurance relationships by transacting with reinsurers that it considers financially sound and, if necessary, the Company may hold collateral in the form of cash, trust accounts and/or irrevocable letters of credit. This collateral can be drawn on for amounts that remain unpaid beyond specified time periods on an individual reinsurer basis. As of December 31, 2016, $1,293.3 million of reinsurance recoverable on paid and unpaid losses (2015 - $941.5 million) was due from reinsurers rated A- or better by A.M. Best or S&P. An additional $141.4 million (2015 - $234.6 million) of reinsurance recoverable on paid and unpaid losses was due from a U.S. government sponsored reinsurance program as of December 31, 2016. At December 31, 2016 and 2015, the Company held collateral of $493.3 million and $321.5 million, respectively, related to its ceded reinsurance agreements.
As of December 31, 2016, substantially all the Company's cash and investments were held by six custodians.
Major production sources. The following table shows the percentage of gross premiums written generated through the Company's largest brokers for the years ended December 31, 2016, 2015 and 2014:
Letters of credit. As of December 31, 2016, the Company had issued letters of credit of $222.3 million (2015 - $341.6 million) under its credit facilities and letter of credit reimbursement agreements in favor of certain ceding companies to collateralize obligations.
Investment assets held in trust. Blue Water Re and Blue Water Re II do not operate with a financial strength rating and, instead, fully collateralizes their reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Water Re and Blue Water Re II (the "Blue Water Trusts") for the benefit of ceding companies. As of December 31, 2016, the fair value of assets held in the Blue Water Trusts was $427.8 million (2015 - $438.9 million), which met the minimum values required on that date.
As of December 31, 2016, Blue Capital Re had pledged $191.4 million (2015- $195.3 million) of its cash and cash equivalents to trust accounts established for the benefit of Blue Water Re.
Blue Capital Re ILS fully collateralizes its insurance-linked security obligations through cash and cash equivalents held in trust funds established by Blue Capital Re ILS (the "Blue Capital Re ILS Trusts") for the benefit of third parties. As of December 31, 2016, the fair value of assets held in the Blue Capital Re ILS Trusts was $3.3 million (2015 - $5.2 million), which met the minimum value required on that date.
During 2015, Endurance Bermuda also established a second multi-beneficiary reinsurance trust (the "Reduced Collateral Trust") domiciled in Delaware. The Reduced Collateral Trust was established as a means of providing statutory credit to Endurance Bermuda's U.S. cedants in connection with a reduction in collateral requirements in certain states. As of December 31, 2016, the fair value of the assets held in the Reduced Collateral Trust exceeded $16.4 million (2015 - $10.8 million), the minimum value required on that date.
Endurance Bermuda is party to a reinsurance trust (the "MUSIC Trust"). The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the business retained in connection with the 2011 sale by Montpelier of MUSIC to Selective. As of December 31, 2016, the fair value of the assets held in the MUSIC Trust was $24.6 million (2015 - $21.3 million), the minimum value required on that date.
Endurance Bermuda is party to a multi-beneficiary Reinsurance Trust originally established by Montpelier Re (the "Montpelier Reinsurance Trust") domiciled in New York. The Montpelier Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re's U.S. cedants. Endurance Bermuda is also party to a multi-beneficiary reinsurance trust originally established by Montpelier Re (the "FL Trust") in connection with a reduction in its Florida collateral requirements. With the consent of the New York Department of Financial Services, all assets in excess of the statutory minimum required amounts in the Montpelier Reinsurance Trust and the FL Trust were transferred to the Endurance Reinsurance Trust and the Reduced Collateral Trust, respectively, upon the merger of Montpelier Re with and into Endurance Bermuda, with Endurance Bermuda as the surviving entity, on December 29, 2015.
The Company is party to a Lloyd's Deposit Trust Deed (the "Lloyd's Capital Trust") in order to meet Endurance Corporate Capital Limited ("ECCL")'s ongoing funds at Lloyd's ("FAL") requirements. The minimum value of cash and investments held by the Lloyd’s Capital Trust is determined on the basis of ECCL's Individual Capital Assessment, which is used to determine the required amount of FAL. As of December 31, 2016, the fair value of assets held in the Lloyd's Capital Trust was $323.6 million (2015- $276.8 million), which met the minimum value required on that date.
Lloyd's New Central Fund. The Lloyd's New Central Fund is available to satisfy claims if a member of Lloyd's is unable to meet its obligations to policyholders. The Lloyd's New Central Fund is funded by an annual levy imposed on members, which is determined annually by Lloyd's as a percentage of each member's gross written premiums (0.35% with respect to 2016 and 0.50% for 2015). In addition, the Council of Lloyd's has power to call on members to make an additional contribution to the Lloyd's New Central Fund of up to 3% of their underwriting capacity each year should it decide that such additional contributions are necessary. The Company currently estimates that its 2016 obligation to the Lloyd's New Central Fund will be approximately $1.1 million (2015- $1.0 million) and accrues for this obligation ratably throughout the year on a quarterly basis.
Lloyd's also imposes other charges on its members and the syndicates on which they participate, including an annual subscription charge (0.45% of gross written premiums with respect to 2016 and 0.50% for 2015) and an overseas business charge, levied as a percentage of gross international premiums (defined as business outside the U.K. and the Channel Islands), with the percentage depending on the type of business written. Lloyd's also has power to impose additional charges under Lloyd's Powers of Charging Byelaw. The Company currently estimates that its 2016 obligation to Lloyd's for such charges will be approximately $1.4 million (2015- $1.0 million) and accrues for this obligation ratably throughout the year on a quarterly basis.
During 2016, the Company issued restricted shares under its equity compensation plans (Note 16, Stock-based employee compensation and other stock plans). The common shares issued, outstanding and fully paid for at December 31, 2016 includes 1,396,538 restricted shares.
On November 24, 2015, Endurance Holdings issued 9,200 shares of its 6.35% Non-Cumulative Preferred Shares, Series C (the "Series C Preferred Shares") (equivalent to 9,200,000 Depositary Shares), each of which represents a 1/1,000th interest in a Series C Preferred Share, $1.00 par value and $25,000.00 liquidation preference per share (equivalent to $25.00 per Depositary Share). The Series C Preferred Shares sold were registered under the Securities Act of 1933, as amended. The Series C Preferred Shares were issued at a price to the public of $25,000.00 per share (equivalent to $25.00 per Depositary Share). Endurance Holdings received net proceeds of $222.0 million from its offering of Series C Preferred Shares, after expenses and underwriting discounts. The proceeds of the offering of Series C Preferred Shares were used to redeem on December 24, 2015 all 8,000,000 of Endurance Holdings' outstanding 7.75% Non-Cumulative Preferred Shares, Series A and for general corporate purposes.
On June 1, 2016, Endurance Holdings redeemed all 9,200,000 of its Series B Preferred Shares. The Series B Preferred shares were redeemed at a redemption price of $25.00 per share together with an amount equal to any dividends that were declared but not paid prior to June 1, 2016.
The Series C Preferred shares are traded on the New York Stock Exchange. The Series C Preferred Shares have no stated maturity date and are redeemable in whole or in part at the option of Endurance Holdings any time after December 15, 2020 at a redemption price of $25,000.00 per Series C Preferred Share (equivalent to $25.00 per Depositary Share), plus any declared and unpaid dividends, without accumulation of any undeclared dividends. Endurance Holdings may redeem all but not less than all of the Series C Preferred Shares before the redemption date at a redemption price of $26,000.00 per Series C Preferred Share (equivalent to $26.00 per Depositary Share), plus any declared and unpaid dividends to the date of redemption, if Endurance Holdings is required to submit a proposal to the holders of the Series C Preferred Shares concerning an amalgamation, consolidation, merger, similar corporate transaction, change in Bermuda law or other matter that requires the vote of the holders of the Series C Preferred Shares voting separately as a single class.
Holders of the Series C Preferred Shares have no voting rights, except with respect to certain dividend non-payments or as otherwise required by Bermuda law or Endurance Holdings' bye-laws. On February 25, 2016, the Company's Board of Directors authorized the repurchase of up to 5.0 million ordinary shares and share equivalents through February 28, 2018. This authorization superseded previous authorizations. No common shares were repurchased by the Company during 2016 or 2015. Common shares repurchased by the Company are not canceled and are classified as treasury shares. The Company's treasury shares are recorded at cost as a reduction in common shares and additional paid-in capital within shareholders' equity. There were 5.0 million shares authorized for repurchase remaining at December 31, 2016 (2015 - 5.0 million).
The following table presents the changes in accumulated other comprehensive (loss) income balances by component for the years ended December 31, 2016 and 2015:
The following table sets forth dividends declared in the years ended December 31, 2016, 2015 and 2014, respectively:
Since 2002, subsidiaries of BlackRock Inc. ("BlackRock") have provided the Company and certain of its subsidiaries with various investment management, investment accounting and risk analysis services. BlackRock owned approximately 4.9 million or 7.3% of Endurance Holdings' ordinary shares outstanding at December 31, 2016 and were therefore considered a related party. The Company incurred expenses totaling $4.6 million (2015: $3.6 million; 2014: $3.2 million) for the year ended December 31, 2016 in relation to investment services rendered by BlackRock, of which $2.8 million was accrued at December 31, 2016 (December 31, 2015: $1.6 million).
The 2007 Plan allows the Company to grant to employees and non-employee directors restricted shares, restricted share units, stock appreciation rights, share bonuses, options to purchase the Company's ordinary shares and other forms of equity incentive awards, as determined by the Compensation Committee of the Company's Board of Directors.
Each Montpelier Variable RSU that was outstanding immediately prior to the completion of the acquisition of Montpelier (including any Montpelier Variable RSUs that were held by an executive officer) was converted into a service-based restricted share unit under the 2007 Plan, as amended, on the same terms and conditions as were applicable to such Montpelier Variable RSU immediately prior to the completion of the acquisition of Montpelier. The number of service based restricted share units granted was equal to the product of (x) 0.472, the exchange ratio in the Merger Agreement and (y) the number of Montpelier common shares that were subject to such Montpelier Variable RSU immediately prior to the completion of the acquisition.
After the approval of the additional shares, a total of 5,763,104 ordinary shares were reserved for issuance. The Company issues new ordinary shares upon the issuance of share based equity incentives, such as restricted shares, or the exercise or settlement of outstanding derivative equity incentives, such as options or restricted share units. As of December 31, 2016, 2,071,035 (2015 - 2,463,798) ordinary shares remained available for issuance under the 2007 and prior Plans.
employment and other events. Mr. Charman is party to a shareholders' agreement that restricts the sale of any vested restricted shares until 2018.
A summary of the restricted share and restricted share unit activity during the year ended December 31, 2016, is presented below:
During the years ended December 31, 2016, 2015 and 2014, the Company granted an aggregate of 638,217, 1,388,179 and 505,997 restricted shares and restricted share units under the 2007 Plan. As mentioned above, during the year ended December 31, 2015, the Company also assumed 841,926, the converted outstanding Montpelier restricted share units, adjusted to represent the right to receive 0.472 of the Company's ordinary shares for each outstanding Montpelier restricted share unit rounded down to the next whole number of ordinary shares. The restricted shares and restricted share units granted had weighted average grant date fair values of $38.5 million, $91.2 million and $26.7 million in the years ended December 31, 2016, 2015 and 2014, respectively. During the years ended December 31, 2016, 2015 and 2014, the aggregate fair value of restricted shares and restricted share units that vested was $44.3 million, $60.0 million and $18.7 million, respectively.
Total expenses related to this plan for the year ended December 31, 2016 was approximately $425,000 (2015 - $298,000; 2014 - $234,000).
The Company provides pension benefits to eligible employees through various defined contribution plans sponsored by the Company. Under the Company's defined contribution plans, the Company makes contributions to its employees' accounts in amounts ranging from 4% to 12% of its employees’ eligible earnings. In addition, under certain defined contribution plans, employee contributions may be supplemented by matching contributions made by the Company based on the level of employee contribution. Lastly, the Company may provide additional contributions, depending on its annual financial performance. The employee and Company contributions in the defined contribution plans are invested at the election of each employee in one or more of several investment portfolios offered by third party investment advisors. Company contributions for the year ended December 31, 2016 resulted in an expense of $15.8 million being recorded in earnings (2015 - $13.8 million; 2014 - $12.6 million).
As a Bermuda holding company, Endurance Holdings is subject to the Bermuda Companies Act 1981, which limits the Company's ability to pay dividends and make distributions to its shareholders. The Company's retained earnings are unrestricted; however, the Company is not permitted to declare or pay a dividend, or make a distribution out of contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they come due, or if the realizable value of its assets would be less than its liabilities. Endurance Holdings had, as of December 31, 2016, $2.9 billion in retained earnings and an additional $2.0 billion in contributed surplus available to declare or pay a dividend, or make a distribution out of contributed surplus, so long as Endurance Holdings remained in compliance with the Bermuda Companies Act 1981 following such dividend or distribution. Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders.
Endurance Bermuda's ability to pay dividends and make capital distributions is subject to certain regulatory restrictions based on the Enhanced Capital Requirement, limits on the amount of Endurance Bermuda's premiums written and net reserves for losses and loss expenses and a minimum general capital and surplus requirement of $100.0 million. At December 31, 2016, Endurance Bermuda can pay dividends of $1,109.3 million (2015 - $1,034.4 million) to Endurance Holdings without prior approval under Bermuda law.
Endurance Assurance, Endurance American, Endurance American Specialty and Endurance Risk Solutions are subject to regulation by the Delaware Department of Insurance. American Agri-Business is subject to regulation by the Texas Department of Insurance. Endurance Holdings' Delaware and Texas domiciled entities must maintain a minimum level of statutory capital as established by such jurisdictions. The amount of required capital is determined through the use of the Risk Based Capital model established by the National Association of Insurance Commissioners and adopted by Delaware and Texas. The required capital noted in the table above has been based on the Risk Based Capital model and represents the authorized control level risk based capital for these entities.
Dividends for each U.S. operating subsidiary are limited to the greater of 10% of policyholders' surplus or statutory net income, excluding realized capital gains for Endurance Holdings' Delaware domiciled entities. In addition, dividends may only be declared or distributed out of earned surplus. At December 31, 2016, Endurance Assurance, Endurance American, Endurance Risk Solutions and Endurance American Specialty did not have earned surplus and thus were precluded from declaring or distributing dividends during 2016 without the prior approval of the applicable insurance regulator. If the parent company is also an insurer, as is the case with Endurance American, Endurance American Specialty and Endurance Risk Solutions, the parent company or companies must also meet their own dividend eligibility requirements in order to pass along any dividends received from subsidiary insurance companies. At December 31, 2016, American Agri-Business (with notice to the Texas Department of Insurance) could pay dividends of $3.3 million (2015 - $3.5 million) without prior regulatory approval.
The PRA regulatory requirements impose no explicit restrictions on Endurance U.K.'s ability to pay a dividend, but Endurance U.K. would have to notify the PRA 28 days prior to any proposed dividend payment. Dividends may only be distributed from profits available for distribution. At December 31, 2016 Endurance U.K did not have retained profits available for distribution.
The Company participates in the Lloyd's market through Syndicate 5151, which is managed by Endurance at Lloyd's and is capitalized through ECCL. As a corporate member of Lloyd's, ECCL is subject to the oversight of the Council of Lloyd's.
Endurance Bermuda's Singapore branch ("Singapore Branch") is subject to Fund Solvency and Capital Adequacy requirements by the Monetary Authority of Singapore as a foreign company in Singapore and is regulated by the Monetary Authority of Singapore pursuant to the Insurance Act in Singapore. At December 31, 2016 and 2015, the Singapore Branch complied with the capital requirements promulgated by the Monetary Authority of Singapore.
The Company has operating subsidiaries and branch operations in the United States, United Kingdom, Switzerland and Singapore, which are subject to the relevant taxes in those jurisdictions. During 2014, the United States Internal Revenue Service ("IRS") completed its audit of the income tax returns of of the Company's U.S. subsidiaries for 2009, 2010 and 2011. The audit results were immaterial to the operations of the Company. During 2015, the IRS commenced an examination of the 2012 income tax return of Endurance Bermuda. Although the timing and ultimate resolution of the IRS examinations is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations or cash flows. In January 2017, the Switzerland tax authority issued a tax assessment for the Swiss branch of Endurance Bermuda for years 2013 and 2014. The Company disagrees with the assessment and is appealing the assessment. Although the timing and ultimate resolution of the Swiss assessment is uncertain, the Company does not expect the resolution of the examinations to result in a material change to the Company's financial position, results of operations or cash flows. As of December 31, 2016, none of the Company's other operating subsidiaries or branch operations were under examination in any of the jurisdictions in which they operate. The Company remains subject to examination for tax years 2008 through 2016.
In 2016 a full valuation allowance has been recorded against the net deferred asset position of Endurance Bermuda's branches in Singapore and Switzerland. In 2015 a full valuation allowance had been recorded against the net asset position of Endurance Bermuda's branches in Singapore and Switzerland and a United Kingdom subsidiary.
The actual income tax benefit (expense) attributable to income for the years ended December 31, 2016, 2015 and 2014 differed from the amount computed by applying the combined effective rate of 0% under Bermuda law to income before income taxes, as a result of the following:
Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities. Net deferred income tax assets and liabilities consisted of the following as of December 31, 2016 and 2015:
As of December 31, 2016 and 2015, the Company had no material uncertain tax positions.