The following tables set forth our selected consolidated financial data and other financial information at the end of and for each of the years in the five-year period ended December 31, 2016. The results of Platinum are included in our consolidated financial data from March 2, 2015. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto and “Part II,
The following is a discussion and analysis of our results of operations for 2016, compared to 2015, and 2015, compared to 2014, respectively. The following also includes a discussion of our liquidity and capital resources at December 31, 2016. The results of Platinum are included in our results of operations from March 2, 2015. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto included in this filing. This filing contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by these forward-looking statements. See “Note on Forward-Looking Statements.”
To best serve our clients in the places they do business, we have operating subsidiaries, joint ventures and underwriting platforms around the world, including DaVinci, Renaissance Reinsurance, Top Layer Re, Fibonacci Re and Upsilon RFO in Bermuda, Renaissance Reinsurance U.S. in the U.S., and Syndicate 1458 in the U.K. In addition, we have a presence in Ireland and Singapore and from time to time explore opportunities in other jurisdictions. We write property and casualty and specialty reinsurance through our wholly owned operating subsidiaries, joint ventures and Syndicate 1458 and certain insurance products primarily through Syndicate 1458. Although each underwriting platform may write any or all of our classes of business, our Bermuda platform has traditionally written, and continues to write, the preponderance of our property business and our U.S. platform and Syndicate 1458 write a significant portion of our casualty and specialty business. Syndicate 1458 provides us with access to Lloyd’s extensive distribution network and worldwide licenses and also writes business through delegated authority arrangements. The underwriting results of our operating subsidiaries and underwriting platforms are included in our Property and Casualty and Specialty segment results as appropriate.
Since a meaningful portion of the reinsurance and insurance we write provides protection from damages relating to natural and man-made catastrophes, our results depend to a large extent on the frequency and severity of such catastrophic events, and the coverages we offer to customers affected by these events. We are exposed to significant losses from these catastrophic events and other exposures we cover. Accordingly, we expect a significant degree of volatility in our financial results and our financial results may vary significantly from quarter-to-quarter and from year-to-year, based on the level of insured catastrophic
losses occurring around the world. We view our increased exposure to casualty and specialty lines of business as an efficient use of capital given these risks are generally less correlated with our property lines of business. This has allowed us to bring additional capacity to our clients, across a wider range of product offerings, while continuing to be good stewards of our shareholders’ capital. In the future, our casualty and specialty lines of business may represent a greater proportion of our premiums and claims and claim expenses.
We continually explore appropriate and efficient ways to address the risk needs of our clients. We have created and managed, and continue to manage, multiple capital vehicles and may create additional risk bearing vehicles in the future. As our product and geographical diversity increases, we may be exposed to new risks, uncertainties and sources of volatility.
Our expenses primarily consist of: (1) net claims and claim expenses incurred on the policies of reinsurance and insurance we sell; (2) acquisition costs which typically represent a percentage of the premiums we write; (3) operating expenses which primarily consist of personnel expenses, rent and other operating expenses; (4) corporate expenses which include certain executive, legal and consulting expenses, costs for research and development, transaction and integration-related expenses, and other miscellaneous costs, including those associated with operating as a publicly traded company; (5) redeemable noncontrolling interests, which represent the interests of third parties with respect to the net income of DaVinciRe and Medici; and (6) interest and dividend costs related to our debt and preference shares. We are also subject to taxes in certain jurisdictions in which we operate. Since the majority of our income is currently earned in Bermuda, which does not have a corporate income tax, the tax impact to our operations has historically been minimal, however, in the future, our net tax exposure may increase as our operations expand geographically, or as a result of adverse tax developments.
Our reserving methodology for each line of business uses a loss reserving process that calculates a point estimate for our ultimate settlement and administration costs for claims and claim expenses. We do not calculate a range of estimates and do not discount any of our reserves for claims and claim expenses. We use this point estimate, along with paid claims and case reserves, to record our best estimate of additional case reserves and IBNR in our consolidated financial statements. Under GAAP, we are not permitted to establish estimates for catastrophe claims and claim expense reserves until an event occurs that gives rise to a loss.
Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable net development on prior accident years net claims and claim expenses in the last several years. However, there is no assurance that this favorable development on prior accident years net claims and claim expenses will occur in future periods.
Our initial and subsequent estimates of incurred claims and claim expenses are impacted by available information derived from claims information from certain customers and brokers, industry assessments of losses from the events, proprietary models, and the terms and conditions of our contracts. As described above, given the complexity in reserving for claims and claims expenses associated with property losses, and catastrophe excess of loss reinsurance contracts in particular, which make up a significant proportion of our Property segment, we have experienced development, both favorable and unfavorable, in any given accident year. For example, incurred claims and claim expenses associated with our 2007 accident year have developed favorably by $188.5 million, which is 48.6% better than our initial estimates of incurred claims and claim expenses for the 2007 accident year estimated as of December 31, 2007. This was driven
in part by reductions in estimated ultimate claims and claim expenses associated with large catastrophe events including Windstorm Kyrill, flooding in the UK and U.S. PCS 21 Wildland Fire. In comparison, while net claims and claim expenses associated with the 2010 accident year initially developed favorably, it has experienced adverse development in the outer years. The adverse development in the outer years was driven by a deterioration in expected net claims and claim expenses associated with the 2010 New Zealand Earthquake as new and additional claims information was received. The 2010 New Zealand Earthquake has complex issues associated with establishing estimates of incurred claims and claim expenses, including the magnitude and relative infrequency of the event, the expected duration of the respective claims development period and inadequacies in the data provided by industry participants on the relevant date.
The following table details our Casualty and Specialty segment incurred claims and claim expenses, net of reinsurance, as of December 31, 2016.
paid net claims and claim expenses associated with the 2007 accident year coming in less than expected, which has resulted in a reduction in our expected ultimate claims and claim expense ratio for this accident year. In comparison, the 2015 accident year has developed adversely compared to our initial estimates of incurred claims and claim expenses and our current estimates are higher than our initial estimates. The increase in incurred claims and claim expenses for the 2015 accident year is due to the deterioration of a number of large losses in our general liability line of business.
Included in the Other category are the remnants of our former Bermuda-based insurance operations. These operations are in run-off and no new business is being underwritten. Our outstanding claims and claim expense reserves for these operations include insurance policies and proportional reinsurance with respect to risks including: 1) commercial property, which principally included catastrophe-exposed commercial property products; 2) commercial multi-line, which included commercial property and liability coverage, such as general liability, automobile liability and physical damage, building and contents, professional liability and various specialty products; and 3) personal lines property, which principally included homeowners personal lines property coverage and catastrophe exposed personal lines property coverage and totaled $25.4 million at December 31, 2016 (2015 - $27.7 million).
recoverable will not be collected for some time, economic conditions as well as the financial and operational performance of a particular reinsurer may change, and these changes may affect the reinsurer’s willingness and ability to meet their contractual obligations to us. To reflect these uncertainties, we estimate and record a valuation allowance for potential uncollectible reinsurance recoverables which reduces reinsurance recoverables and net income.
We estimate our valuation allowance by applying specific percentages against each reinsurance recoverable based on our counterparty’s credit rating. The percentages applied are based on historical industry default statistics developed by major rating agencies and are then adjusted by us based on industry knowledge and our judgment and estimates. We also apply case-specific valuation allowances against certain recoveries we deem unlikely to be collected in full. We then evaluate the overall adequacy of the valuation allowance based on other qualitative and judgmental factors. The valuation allowance recorded against reinsurance recoverable was $4.2 million at December 31, 2016 (2015 - $1.6 million). The reinsurers with the three largest balances accounted for 27.1%, 19.9% and 7.7%, respectively, of our reinsurance recoverable balance at December 31, 2016 (2015 - 21.5%, 13.8% and 13.1%, respectively). The three largest company-specific components of the valuation allowance represented 27.1%, 17.9% and 5.6%, respectively, of our total valuation allowance at December 31, 2016 (2015 - 22.7%, 8.3% and 3.2%, respectively).
FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3).
At December 31, 2016, we classified $4.4 million and $17.4 million of our other assets and liabilities, respectively, at fair value on a recurring basis using Level 3 inputs. This represented 0.0% and 0.3% of our total assets and liabilities, respectively. Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. These measurements are made under circumstances in which there is little, if any, market activity for the asset or liability. We use valuation models or other pricing techniques that require a variety of inputs including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs, some of which may be unobservable, to value these Level 3 assets and liabilities. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we considered factors specific to the asset or liability. In certain cases, the inputs used to measure fair value of an asset or a liability may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified
Investments in which we have significant influence over the operating and financial policies of the investee are classified as investments in other ventures, under equity method, and are accounted for under the equity method of accounting. Under this method, we record our proportionate share of income or loss from such investments in our results for the period. Any decline in the value of investments in other ventures, under equity method, including goodwill and other intangible assets arising upon acquisition of the investee, considered by management to be other-than-temporary, is reflected in our consolidated statements of operations in the period in which it is determined. As of December 31, 2016, we had $124.2 million (2015 - $132.4 million) in investments in other ventures, under equity method on our consolidated balance sheets, including $7.8 million of goodwill and $11.9 million of other intangible assets (2015 - $7.8 million and $15.3 million). The carrying value of our investments in other ventures, under equity method, individually or in the aggregate, may, and likely will, differ from the realized value we may ultimately attain, perhaps significantly so.
quarterly basis and commencing with our reassessment effective December 31, 2011, we determined that it is more likely than not that we would not be able to recover our U.S. net deferred tax asset and as a result, recognized a full valuation allowance in the fourth quarter of 2011. We concluded that a valuation allowance was required from 2011 through the period ended December 31, 2014 based on the relevant evidence during that time period, primarily that we remained in a cumulative GAAP taxable loss position for this period, among other facts. At December 31, 2014, the U.S. valuation allowance was $48.4 million. In the first quarter of 2015, as a result of expected profits in our U.S.-based operations due principally to the acquisition of Platinum, we determined it was more likely than not we would be able to recover a substantial portion of the U.S. net deferred tax asset and thus reduced the U.S. valuation allowance from $48.4 million to $1.0 million. Factors that led to this determination included the combined cumulative GAAP taxable income position of our U.S.-based operations (including the entities acquired) along with the long term expected profits of the combined operations. A valuation allowance continues to be provided against deferred tax assets in the majority of our Ireland, U.K., and Singapore operations as these operations have produced historical GAAP taxable losses, among other facts.
Lower Underwriting Income - we generated underwriting income of $385.5 million and a combined ratio of 72.5% in 2016, compared to $494.6 million and 64.7%, respectively, in 2015, a decrease of $109.1 million and an increase of 7.8 percentage points, respectively. The increase in the combined ratio in 2016, compared to 2015, was primarily driven by higher net claims and claim expenses and an increase in underwriting expenses adding 5.8 and 2.0 percentage points, respectively, to the combined ratio. Included in net claims and claim expenses in 2016 was an aggregate of $122.6 million associated with a wildfire originating near Fort McMurray, Alberta (the “Fort McMurray Wildfire”), a number of weather-related events in Texas (the “2016 Texas Events”) and Hurricane Matthew. The net negative impact of these events on our consolidated underwriting result was $102.9 million, and these events added 7.9 percentage points to our consolidated combined ratio. See below for additional information related to the Fort McMurray Wildfire, the 2016 Texas Events and Hurricane Matthew;
The supplemental financial data below provides additional information detailing the net negative impact of the Fort McMurray Wildfire, the 2016 Texas Events and Hurricane Matthew on our consolidated financial statements for the year ended December 31, 2016.
We acquired Platinum on March 2, 2015. Therefore, our results of operations for 2016 included the results of the legacy business acquired from Platinum for the period January 1, 2016 through December 31, 2016, while for 2015, the results of operations of Platinum were included for the period March 2, 2015 (the date of acquisition) through December 31, 2015.
Lower Total Investment Result - our total investment result, which includes the sum of net investment income, net realized and unrealized gains (losses) on investments, and the change in net unrealized gains on fixed maturity investments available for sale, was $82.4 million in 2015 compared to $164.9 million in 2014, a decrease of $82.5 million. The decrease in the total investment result was primarily due to net unrealized losses in our portfolio of fixed maturity investments trading, principally as a result of an upward shift in the yield curve driven by the rising interest rate environment, combined with unrealized losses in our portfolio of equity investments trading and lower net investment income from private equity investments. Offsetting these items was an increase in net investment income in our portfolio of fixed maturity investments primarily driven by an increase in average invested assets, which was principally due to the acquisition of Platinum, and net realized and unrealized gains on investments-related derivatives due to the increasing interest rate environment;
Lower Net Income Attributable to Redeemable Noncontrolling Interests - net income attributable to redeemable noncontrolling interests of $111.1 million in 2015, compared to $153.5 million in 2014, a decrease of $42.5 million, principally due to a decrease in the profitability of DaVinciRe. Our ownership in DaVinciRe was 26.3% at December 31, 2015, compared to 23.4% at December 31, 2014.
Property Gross Premiums Written - In 2016, our Property segment gross premiums written increased by $39.1 million, or 3.6%, to $1,111.3 million, compared to $1,072.2 million in 2015. Market conditions remained challenging during 2016, resulting in decreased gross premiums written on certain programs and transactions. However, we were able to increase our participation on a select number of transactions we believe have comparably attractive risk-return attributes, while continuing to exercise underwriting discipline given prevailing market terms and conditions. Included in gross premiums written in the Property segment in 2016 was $21.4 million of reinstatement premiums associated with the Fort McMurray Wildfire, the 2016 Texas Events and Hurricane Matthew.
In 2015, our Property segment gross premiums written decreased by $2.7 million, or 0.3%, to $1,072.2 million, compared to $1,074.9 million million in 2014. Market conditions were challenging during 2015, and we exercised underwriting discipline given prevailing terms and conditions, resulting in decreased gross premiums written on certain programs and transactions, offset in part by increased demand and growth in certain areas, including some new programs which provided opportunities we believed to be attractive. These new programs included the FHCF risk transfer program which we were a substantial participant in, and market opportunities arising as a result of the assumption of risk by domestic Florida private insurance companies from Citizens, which in general increases the amount of ultimate private reinsurance protection purchased in connection with the underlying individual risk.
Property Ceded Premiums Written - Ceded premiums written in our Property segment increased $39.9 million to $385.9 million in 2016, compared to $346.0 million in 2015, primarily reflecting increased purchases of retrocessional reinsurance as part of our management of our risk portfolio.
Ceded premiums written in our Property segment decreased $66.3 million, to $346.0 million in 2015, compared to $412.3 million in 2014, primarily reflecting a reduction in purchases of retrocessional reinsurance driven by a reduction in premiums ceded to company-sponsored third party capital vehicles to $32.9 million in 2015, compared to $65.5 million 2014, and lower premiums paid for retrocessional reinsurance purchases.
Due to the potential volatility of the reinsurance contracts which we sell, we purchase reinsurance to reduce our exposure to large losses and to help manage our risk portfolio. To the extent that appropriately priced coverage is available, we anticipate continued use of retrocessional reinsurance to reduce the impact of large losses on our financial results and to manage our portfolio of risk; however, the buying of ceded reinsurance in our Property segment is based on market opportunities and is not based on placing a specific reinsurance program each year. In addition, in future periods we may utilize the growing market for insurance-linked securities to expand our ceded reinsurance buying if we find the pricing and terms of such coverages attractive.
Included in net claims and claim expenses in the Property segment in 2016 was an aggregate of $120.1 million associated with the Fort McMurray Wildfire, the 2016 Texas Events and Hurricane Matthew. The net negative impact of these events on the the Property segment underwriting result was $101.0 million, and these events added 17.9 percentage points to the Property segment combined ratio.
During 2016, we experienced $104.9 million of favorable development on prior accident year net claims and claim expenses within our Property segment, compared to $93.8 million in 2015. The favorable development on prior accident years net claims and claim expenses in 2016 included $15.1 million from the 2011 Thailand Floods, $10.8 million from Storm Sandy in 2012, $7.3 million from the 2011 Tohoku Earthquake and Tsunami and $5.7 million from the 2015 Tianjin Explosion, each primarily the result of changes in our estimated ultimate loss for each respective event, with the remainder due to a number of relatively smaller events.
The $32.8 million decrease in underwriting income in our Property segment in 2015, compared to 2014, was primarily driven by a $111.6 million increase in net claims and claim expenses, including a $118.2 million increase in current accident year net claims and claim expenses, due to higher event-driven catastrophe losses and higher attritional losses, and a $28.0 million increase in acquisition expenses, with each of the higher attritional losses and increase in acquisition expenses driven by the increase in other property gross premiums written. Partially offsetting these items was a $107.6 million increase in net premiums earned, which was driven by lower ceded premiums earned due to the reduction in ceded premiums written, noted above. Included in current accident year net claims and claim expenses is $27.9
million related to a number of U.S. winter storms, $27.3 million related to the Tianjin Explosion and $23.0 million related to a U.S. wind and thunderstorm event, with the remainder due to a number of other smaller catastrophe events. During the fourth quarter of 2015, we recognized a recovery and corresponding reduction to acquisition expenses in our Property segment of $7.7 million associated with the December 2015 decision by the IRS to revoke its position that the excise tax applies on foreign to foreign retrocessions.
Profit Commissions and Fees - We have entered into joint ventures and specialized quota share cessions of our property book of business. In accordance with the joint venture and quota share agreements, we are entitled to certain profit commissions and fee income. We record these profit commissions and fees as a reduction in acquisition and operating expenses, respectively, and, accordingly, these profit commissions and fees have reduced our underwriting expense ratios.
In addition, we are entitled to certain fee income and profit commissions from DaVinci. Since the results of DaVinci and its parent, DaVinciRe, are consolidated in our results of operations, these fees and profit commissions are eliminated in our consolidated financial statements and are principally reflected in redeemable noncontrolling interest - DaVinciRe. The net impact of all fees and profit commissions related to these joint ventures and specialized quota share cessions within our Property segment was $112.2 million, $106.7 million and $139.0 million in 2016, 2015 and 2014, respectively.
Casualty and Specialty Gross Premiums Written - In 2016, our Casualty and Specialty segment gross premiums written increased $324.1 million, or 34.5%, to $1,263.3 million, compared to $939.2 million in 2015, principally driven by select organic growth, primarily related to mortgage reinsurance opportunities reflected in our financial lines of business. In addition, our casualty and specialty lines of business were impacted in 2016 by business acquired in connection with our acquisition of Platinum for the period from January 1, 2016 through December 31, 2016, compared to 2015, which included gross premiums written from Platinum for the period from March 2, 2015 (the date of acquisition) through December 31, 2015.
During 2016 and 2015, we experienced growth in a number of our casualty and specialty lines of business and will continue to seek to expand our casualty and specialty operations through our underwriting platforms, including Bermuda, the U.S. and Syndicate 1458, although we cannot assure you we will do so.
Our Casualty and Specialty segment gross premiums written during 2016 reflected a relatively larger percentage of proportional reinsurance compared to excess of loss reinsurance than in many of our comparative periods. Our relative mix of business between proportional business and excess of loss business has fluctuated in the past and will likely vary in the future. Proportional business typically has relatively higher premiums per unit of expected underwriting income, together with a higher combined ratio, than traditional excess of loss reinsurance. In addition, proportional coverage tends to be exposed to relatively more attritional, and frequent, losses while subject to less expected severity. Moreover, market conditions for our Casualty and Specialty segment have been impacted by a trend towards increased ceding commissions on our assumed proportional reinsurance.
Ceded premiums written in our Casualty and Specialty segment increased $179.1 million to $249.2 million in 2015, compared to $70.0 million in 2014, primarily reflecting an increase in the purchase of retrocessional reinsurance driven by the increased gross premiums written, as noted above.
Impacting our Casualty and Specialty segment combined ratio was a 1.7 percentage point increase in the net claims and claim expense ratio in 2016, compared to 2015, principally driven by a decrease in favorable development on prior accident years net claims and claim expenses of $9.7 million. The favorable development on prior accident years net claims and claim expenses of $58.1 million in 2016 was principally driven by actual reported losses coming in better than expected and $5.5 million of favorable development associated with actuarial assumption changes.
The $10.5 million increase in underwriting income in our Casualty and Specialty segment for 2015, compared to 2014, was principally driven by a $17.4 million increase in favorable development on prior accident years net claims and claim expenses. In addition, our Casualty and Specialty segment experienced a $231.0 million increase in net premiums earned, principally as a result of having a full year of net premiums earned in connection with the acquisition of Platinum, compared to 2015, which included net premiums earned from Platinum for the period from March 2, 2015 (the date of acquisition) through December 31, 2015. Partially offsetting the increase in net premiums earned was a $150.8 million increase in current accident year net claims and claim expenses and a $87.1 million increase in underwriting expenses. The increase in current accident year net claims and claim expenses was principally due to a higher level of attritional losses primarily as a result of the increase in net premiums earned.
Profit Commissions and Fees - We have entered into specialized quota share cessions of our casualty and specialty book of business. In accordance with these quota share agreements, we are entitled to certain profit commissions and fee income. We record these profit commissions and fees as a reduction in acquisition and operating expenses, respectively, and, accordingly, these profit commissions and fees have reduced our underwriting expense ratios.
Included in our Other category are the remnants of our former Bermuda-based insurance operations. Included in our Other category was underwriting income of $1.1 million in 2016, driven by favorable development on prior accident years net claims and claim expense.
Low interest rates in recent years have lowered the yields at which we invest our assets relative to historical levels, and combined with the current composition of our investment portfolio and other factors, we expect these developments to constrain investment income growth for the near term. Our private equity and other investment portfolios are accounted for at fair value with the change in fair value recorded in net investment income, which included net unrealized gains of $11.5 million, $10.4 million and $17.7 million in 2016, 2015 and 2014, respectively.
net realized and unrealized gains on our fixed maturity investments trading of $61.4 million in 2016, compared to losses of $68.1 million in 2015, which was positively impacted by a significant credit spread tightening during 2016, partially offset by $15.4 million net realized and unrealized losses on certain investments-related derivatives primarily driven by changes in the yield curve that occurred during 2016; and
net realized and unrealized gains on equity investments trading of $95.4 million in 2016, compared to net realized and unrealized losses of $6.3 million in 2015, an improvement of $101.7 million, principally driven by the strong performance of a number of our equity positions in 2016, including Essent and Trupanion.
net unrealized losses on equity investments trading of $22.7 million in 2015, compared to net unrealized gains of $11.1 million in 2014, primarily driven by unrealized losses associated with our
investment in Essent, combined with weaker returns in the broader equity markets during 2015, partially offset by an increase in net realized gains on equity investments trading of $5.4 million to gains of $16.3 million in 2015, compared to 2014, principally driven by exiting a number of profitable positions during the year.