The amount of written premiums ceded to (reinsured by) other insurers.
Net operating income is a non-GAAP measure. We define net operating income as net income excluding net realized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, severance costs associated with terminated employees, impairment charges on goodwill and intangible assets, gains on extinguishment of debt, expenses on a leased building we are deemed to own for accounting purposes, and professional services and other expenses associated with securities offerings and the payment of special dividends. We use net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Net operating income should not be viewed as a substitute for net income in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Reconciliation of Non-GAAP Measures” for a reconciliation of net operating income to net income in accordance with GAAP.
The following discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under the heading “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements. You should read this discussion and analysis together with our audited consolidated financial statements and related notes included elsewhere in this 10-K.
premiums and losses ceded under our internal quota share arrangement described below, which are captured in our Excess and Surplus Lines and Specialty Admitted Insurance segments, respectively. Typically, we structure our reinsurance contracts as quota share arrangements, with loss mitigating features, such as commissions that adjust based on underwriting results. We frequently include risk mitigating features in our excess working layer treaties, which allows the ceding company to capture a greater percentage of the profits should the business prove more profitable than expected, or alternatively provides us with additional premiums should the business incur higher than expected losses. We believe these structures allow us to participate in the risk side-by-side with the ceding company and best align our interests with the interests of our cedents. Treaties with loss mitigation features including sliding scale ceding commissions represented 86% of the gross premiums written by our Casualty Reinsurance segment during 2015. We typically do not assume large individual risks in our Casualty Reinsurance segment, nor do we write property catastrophe reinsurance. Two of the three largest unaffiliated accounts written by JRG Re in 2015 were ceded from E&S carriers. The Casualty Reinsurance segment distributes through traditional reinsurance brokers. The Casualty Reinsurance segment produced 30.1% of our gross written premiums for the year ended December 31, 2015.
Our Reserve Committee consists of our Chief Actuary, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Chief Accounting Officer. Additionally, the presidents and chief actuaries of each of our three operating segments assist in the evaluations of their respective segments. The Reserve Committee meets quarterly to review the actuarial recommendations made by each chief actuary and uses its best judgment to determine the best estimate to be recorded for the reserve for losses and loss adjustment expenses on our balance sheet. The Reserve Committee believes that using judgment to supplement the actuarial recommendations is necessary to arrive at a best estimate given the nature of the business that we write and the limited operating experience of the Casualty Reinsurance segment and the program and fronting business in the Specialty Admitted Insurance segment.
The table below quantifies the impact of extreme reserve deviations from our expected value at December 31, 2015. The total carried net reserve for losses and loss adjustment expenses is displayed alongside 5th, 50th and 95th percentiles of likely ultimate net reserve outcomes. The estimates of these percentiles are a result of a reserve variability analysis using a simulation approach.
Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate claims settlement values. In recording our best estimate of our reserve for losses and loss adjustment expenses, our Reserve Committee typically selects an amount above the actuarial recommendation due to the inherent variation associated with our reserve estimates and the likelihood that there are unforeseen or under-valued liabilities in the actuarial recommendations. We believe that the
insurance that we write is subject to above-average variation in reserve estimates. The Excess and Surplus Lines market is subject to high policyholder turnover and changes in underlying mix of exposures. This turnover and change in underlying mix of exposures can cause actuarial estimates based on prior experience to be less reliable than estimates for more stable, admitted books of business. As a casualty insurer, losses on our policies often take a number of years to develop, making it difficult to estimate the ultimate losses associated with this business. Judicial and regulatory bodies have frequently interpreted insurance contracts in a manner that expands coverage beyond that which was contemplated at the time that the policy was issued. In addition, many of our policies are issued on an occurrence basis, and plaintiff’s attorneys frequently seek coverage beyond the policies’ original intent. The difficulty in pinpointing actual ultimate losses and loss adjustment expenses (“LAE”) is illustrated by the fact that at December 31, 2015, 77.6% of our net reserve for losses and loss adjustment expenses in the Excess and Surplus Lines segment is for claims that have not been reported.
Historically, our reserve selections for the Excess and Surplus Lines segment gave more weight to industry indications due to our limited operating history. When we reviewed the Excess and Surplus Lines segment’s reserve parameters in 2013, we had ten years of accumulated historical data of the Company to analyze, and we felt that we had enough Company history to give more weight to our own experience. Our initial expected loss ratios and our paid loss development factors and incurred loss development factors were adjusted to more closely resemble our own internal indications. Method weights were also changed as management, in consultation with our actuaries, deemed appropriate. These changes had the cumulative effect of reducing our then best estimate for the reserve for losses and loss adjustment expenses.
Although we believe that our reserve estimates are reasonable, it is possible that our actual loss experience may not conform to our assumptions. Specifically, our actual ultimate loss ratio could differ from our initial expected loss ratio or our actual reporting and payment patterns could differ from our expected reporting and payment patterns, which are based on our own data and industry data. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimates included in our financial statements. We regularly review our estimates and adjust them as necessary as experience develops or as new information becomes known to us. Such adjustments are included in current operations.
initial expected ultimate loss ratios. The actuarial studies at December 31, 2015 also showed that the experience on our casualty business excluding our shorter-tailed general casualty business continued to be below our initial expected ultimate loss ratios driven by favorable 2015 calendar year emergence (45.4% calendar year loss ratio compared to our expected calendar year loss ratio of 48.1%). Favorable reserve development in the Specialty Admitted Insurance segment was $3.5 million, and primarily came from accident years 2011 through 2013, as losses on our workers’ compensation business written prior to 2013 continued to develop more favorably than we had anticipated. In addition, $12.6 million of adverse development occured in the Casualty Reinsurance segment, with the majority of this adverse development coming from three reinsurance relationships from the 2011, 2012, and 2013 underwriting years that experienced higher loss development in 2015 than expected.
We consider a number of factors in assessing whether an impairment is other-than-temporary, including (1) the amount and percentage that current fair value is below cost or amortized cost, (2) the length of time that the fair value has been below cost or amortized cost and (3) recent corporate developments or other factors that may impact an issuer’s near term prospects. In addition, for fixed maturity securities, we also consider the credit quality ratings for the securities, with a special emphasis on securities downgraded to below investment grade. We also consider our intent to sell available-for-sale fixed maturity securities in an unrealized loss position, and if it is “more likely than not” that we will be required to sell these securities before a recovery in fair value to their amortized cost or cost basis. For equity securities, we evaluate the near-term prospects of these investments in relation to the severity and duration of the impairment, and we consider our ability and intent to hold these investments until they recover their fair value. As a starting point for our evaluation, we compare the fair value of each available-for-sale security to its amortized cost or cost to identify any securities with a fair value less than cost or amortized cost. At December 31, 2014, the Company held two municipal bonds issued by the Commonwealth of Puerto Rico. These bonds are backed by future sales tax revenues in Puerto Rico. Puerto Rico’s weak economic conditions and heavy debt burden, combined with the passage of new legislation that allows public corporations to defer or reduce payments on outstanding debt, heightened the risk of default on the bonds. We concluded that the bonds, which have been downgraded to below investment grade, were other-than-temporarily impaired, and we recognized impairment losses of  $1.4 million on these bonds for the year ended December 31, 2014. We recognized an additional $660,000 impairment loss on these bonds in 2015 before selling them during the second quarter of 2015. We concluded that none of the other fixed maturity securities in an unrealized loss position at December 31, 2015 had experienced an other-than temporary impairment. At December 31, 2015, all but three of our fixed maturity securities (with an aggregate unpaid principal balance of  $12.0 million) had a fair value greater than 80.0% of their cost or amortized cost. We concluded that these three fixed maturity securities were not other-than-temporarily impaired at December 31, 2015 based in part on the fact that they had never missed a scheduled principal or interest payment, and that they were rated investment grade by a nationally recognized statistical rating organization.
current economic conditions and other relevant factors. The Company has recorded an allowance equal to the difference between the fair value and the amortized cost of bank loans that it has determined to be impaired as a practical expedient for an estimate of probable future cash flows to be collected on those bank loans. As a starting point for our evaluation, we compare the carrying value of each loan to its fair value to identify any loans that had a fair value less than its carrying value.
During 2014 and 2015, we had a number of our bank loans to oil and gas companies in the energy sector. The market value of these loans declined significantly in 2015 in response to declining energy prices. We determined that a credit allowance of  $3.9 million was needed at December 31, 2015 on two of our bank loans to companies in the energy sector with oil and gas exposure. At December 31, 2015, our exposure to bank loans of oil and gas companies consisted of eight loans with a carrying value of  $15.8 million and a market value of  $11.7 million.
Fair values are measured in accordance with ASC 820, Fair Value Measurements. The guidance establishes a framework for measuring fair value and a three-level hierarchy based upon the quality of inputs used to measure fair value. The three levels of the fair value hierarchy are: (1) Level 1: quoted price (unadjusted) in active markets for identical assets, (2) Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument and (3) Level 3: inputs to the valuation methodology are unobservable for the asset or liability.
models and inputs used by our investment managers and independent pricing services, and controls are in place to validate that prices provided represent fair values. Our control process includes, but is not limited to, initial and ongoing evaluation of the methodologies used, a review of specific securities and an assessment for proper classification within the fair value hierarchy, and obtaining and reviewing internal control reports for our investment manager that obtains fair values from independent pricing services.
The goodwill reported on the December 31, 2015 balance sheet is an asset of the Excess and Surplus Lines segment only. Goodwill is tested annually for impairment in the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the carrying amount of the Company’s reporting units, including goodwill, may exceed their fair values. The Company first assesses qualitative factors in determining whether it is necessary to perform the quantitative goodwill impairment test. Only if management determines that it is more likely than not that the fair value of a reporting unit is less than the carrying value based on qualitative factors would it be required to perform the quantitative goodwill impairment test. If management concludes that quantitative goodwill impairment testing is required, the fair value of the reporting units is determined using a combination of a market approach and an income approach which projects the future cash flows produced by the reporting units and discounts those cash flows to their present value. The projection of future cash flows is necessarily dependent upon assumptions about the future levels of income as well as business trends, prospects, market and economic conditions. The results of the two approaches are weighted to determine the fair value of each reporting unit. When the fair value is less than the carrying value of the net assets of the reporting unit, including goodwill, an impairment loss is charged to earnings. To determine the amount of any goodwill impairment, the implied fair value of reporting unit goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the fair value of a reporting unit is assigned to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The Company’s annual testing performed in the fourth quarters of 2015, 2014 and 2013 indicated that no impairment of goodwill had occurred.
Intangible assets are initially recognized and measured at fair value. Specifically identified intangible assets with indefinite lives include trademarks and state insurance licenses and authorities. Intangible assets with indefinite useful lives are reviewed for impairment at least annually. In evaluating whether there has been impairment to the intangible asset, management determines the fair value of the intangible asset and compares the resulting fair value to the carrying value of the intangible asset. If the carrying value exceeds the fair value, the intangible asset is written down to fair value, and the impairment is reported through earnings. During the fourth quarters of 2015, 2014 and 2013, the indefinite-lived intangible assets for trademarks and insurance licenses and authorities were tested for impairment. There were no impairments recognized in 2015, 2014 or 2013. The relief from royalty method which we utilized in our evaluation of the value of our trademarks requires a number of assumptions including the projected gross written premium base against which the royalty savings rate is applied, the size of the royalty rate to be applied, the discount rate and the terminal value (if any) of the trademarks at the end of the projection period.
In May 2015, the FASB issued ASU No. 2015-09, Insurance (Topic 944), Disclosures about Short-Duration Contracts. ASU No. 2015-09 requires additional disclosures about short-duration contracts. The disclosures will focus on the liability for the reserves for losses and loss adjustment expenses. ASU No. 2015-09 is effective for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact of the adoption of ASU No. 2015-09 on its consolidated financial statements.
We define net operating income as net income excluding certain non-operating expenses such as net realized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, professional service fees related to the filing of a registration statement for our initial public offering, severance costs associated with terminated employees, and interest expense on a leased building that we are deemed to own for accounting purposes. We use net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of net operating income may not be comparable to that of other companies.
Our combined ratio for the year ended December 31, 2014 was 93.3%. The combined ratio for the year ended December 31, 2014 included $27.4 million, or 6.9 percentage points, of net favorable reserve development on direct and assumed business underwritten by the Company on prior accident years, including $27.3 million of favorable reserve development from the Excess and Surplus Lines segment and $5.9 million of favorable reserve development from the Specialty Admitted Insurance segment offset by $5.7 million of adverse development from the Casualty Reinsurance segment.
For the Excess and Surplus Lines segment (which represents 54.0% of our gross written premiums for the year ended December 31, 2015), gross written premiums for the year ended December 31, 2015 increased 22.2% over the prior year. The average annual gross written premiums per policy decreased 21.8% over the prior year. However, policy submissions for new business were 3.1% higher for the year ended December 31, 2015 than the year ended December 31, 2014. The gross written premiums increase was most notable in the following divisions within the Excess and Surplus Lines segment:
It is our policy to audit payroll for each expired workers’ compensation insurance policy in the Specialty Admitted Insurance segment to determine the difference between the original estimated payroll at the time the policy was written and the final actual payroll of the insured after the policy is completed. Audit premiums increased both written and earned premiums for the year ended December 31, 2015 by $1.6 million (in the prior year, audit premiums increased both written and earned premiums by $1.0 million). Additionally, gross written premiums for the years ended December 31, 2015 and 2014 included $1.9 million and $1.7 million, respectively, of assumed premiums from our allocation of the North Carolina involuntary workers’ compensation pool.
The decrease in written premiums in 2015 from 2014 is primarily attributable to the very competitive environment for reinsurance. Despite the decrease in gross written and net written premiums for 2015, our net earned premiums (which tend to smooth out quarter-to-quarter variances) had a 3.6% increase over the prior year.
The net premium retention for the Company decreased from 86.8% to 82.3% for the years ended December 31, 2014 and 2015, respectively. The decrease in retention is due primarily to the Specialty Admitted Insurance segment, which saw a decline in its net premium retention from 61.0% for the year ended December 31, 2014 to 49.4% for the year ended December 31, 2015. The decrease is driven by the segment’s program and fronting business. Program and fronting business generally has a much lower net premium retention than our workers’ compensation business which we write on an admitted basis. For the year ended December 31, 2015, the net retention on the segment’s program and fronting business was 22.6%, while the net retention on the workers’ compensation business was 90.4%. This compares to net retention on the segment’s program and fronting of 30.7% and a retention of the workers’ compensation business of 90.5% for year ended December 31, 2014.
Combined Ratio. The combined ratio of the Excess and Surplus Lines segment for the year ended December 31, 2015 was 80.2%, comprised of a loss ratio of 54.5% and an expense ratio of 25.8%. The combined ratio for the year ended December 31, 2014 was 82.1%, comprised of a loss ratio of 55.2% and an expense ratio of 26.8%.
Loss Ratio. The loss ratio for the year ended December 31, 2015 of 60.7% included $3.5 million, or 8.4 percentage points of net favorable development on prior accident years. The loss ratio for the year ended December 31, 2014 of 53.4% included $5.9 million, or 20.6 percentage points, of net favorable development on prior accident years. The favorable development in both 2015 and 2014 reflects the fact that actual loss emergence of the workers’ compensation book for accident years 2012 and prior has been better than expected when we took actions to strengthen reserves for the book during the year ended December 31, 2012.
Expense Ratio. The expense ratio of 36.7% for the year ended December 31, 2015 decreased from 46.5% in the prior year. The higher expense ratio in the prior year for this segment relates to infrastructure and personnel costs associated with the ramp up of this segment’s program and fronting business. The gross written premiums on this program and fronting business were $55.0 million and $29.3 million for the years ended December 31, 2015 and 2014, respectively. Many of the infrastructure and personnel costs necessary to produce and administer this business (by necessity) precede the production and earning of these premiums. We believe the expense ratio for this segment will continue to decline as this segment increases premium volume in its new businesses and territories during 2016 and in future periods.
Combined Ratio. The combined ratio of the Casualty Reinsurance segment for the year ended December 31, 2015 was 101.4%, comprised of a loss ratio of 68.6% and an expense ratio of 32.8%. This compares to the combined ratio in the prior year of 99.6%, comprised of a loss ratio of 66.3% and an expense ratio of 33.3%.
Expense Ratio. The expense ratio of the Casualty Reinsurance segment decreased from 33.3% for the year ended December 31, 2014 to 32.8% for the year ended December 31, 2015, principally as a result of the higher loss ratios effect on our sliding scale commission expenses.
Underwriting Results. As a result of the items discussed above, the underwriting loss for the Casualty Reinsurance segment for the year ended December 31, 2015 was $2.6 million compared to an underwriting profit of  $667,000 for the year ended December 31, 2014.
The $191.7 million of bank loan participations are classified as held-for-investment and reported at amortized cost, net of an allowance for credit losses of  $4.3 million. The allowance for credit losses at December 31, 2015 was primarily related to two Puerto Rico loans and two energy sector loans (the
allowance for credit losses was $752,000 at December 31, 2014 and was related to two Puerto Rico loans). Changes in this credit allowance are included in realized gains or losses. These bank loan participations are primarily senior, secured floating-rate debt which are generally rated “BB,” “B,” or “CCC” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below investment grade. Bank loans include assignments of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and similar loans and investments. At December 31, 2015 and 2014, the fair market value of these securities was $180.1 million and $231.3 million, respectively.
At December 31, 2015, our available-for-sale investment portfolio of fixed maturity and equity securities had net unrealized gains of  $6.5 million representing 0.7% of the cost or amortized cost of the portfolio. Additionally, at December 31, 2015, 86.6% of our fixed maturity security portfolio was rated “A-” or better by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization. Fixed maturity securities with ratings below investment grade by Standard & Poor’s or another nationally recognized statistical rating organization at December 31, 2015 had an aggregate fair value of  $9.4 million and an aggregate net unrealized loss of  $5.2 million.
Underwriting profit for the year ended December 31, 2014 includes $1.8 million of fee income.
Other expenses for the year ended December 31, 2014 included $14.9 million of expenses associated with our initial public offering expenses including $2.8 million of legal fees, $2.0 million of audit and filing related fees, and $10.2 million associated with the conversion of awards under a previous equity incentive plan.
Our expense ratio was 33.4% and 35.0% for the years ended December 31, 2014 and 2013, respectively. The reduction in the expense ratio for 2014 from the prior year is primarily attributable to the 20.8% increase in our net earned premiums compared to the prior year without a proportional increase in other operating expenses.
For the Excess and Surplus Lines segment (which represents 48.7% of our gross written premiums for the year ended December 31, 2014), gross written premiums for the year ended December 31, 2014 increased 31.3% over the prior year. The average annual gross written premiums per policy increased 4.4% over the prior year. Additionally, policy submissions were 3.9% higher for the year ended December 31, 2014 than the year ended December 31, 2013. The gross written premiums increase was most notable in the following divisions within the Excess and Surplus Lines segment:
General Casualty division (representing 23.9% of this segment’s 2014 business) which increased $37.8 million (or 167.1%) over the prior year. Our TNC business was a component of this increase. Gross written premiums from our TNC business were $32.0 million for 2014 and $2.5 million in 2013.
Manufacturers and Contractors division (representing 28.5% of this segment’s 2014 business) which increased $13.6 million (or 23.2%) for the year ended December 31, 2014 over the prior year; and
Energy division (representing 11.5% of this segment’s 2014 business) which increased $7.6 million (or 35.4%) over the prior year.
For the Specialty Admitted Insurance segment (which represents 11.5% of our gross written premiums for the year ended December 31, 2014) during the year ended December 31, 2014, gross written premiums increased 188.3% compared to the prior year. Gross written premiums for 2014 included $29.3 million ($9.0 million on a net basis) from program and fronting business where there had been $566,000 of gross
Audit premiums increased both written and earned premiums for the year ended December 31, 2014 by $1.0 million (in the prior year, audit premiums increased both written and earned premiums by $517,000). Additionally, gross written premiums for the years ended December 31, 2014 and 2013 included $1.7 million and $1.4 million, respectively, of assumed premiums from our allocation of the North Carolina involuntary workers’ compensation pool.
The increase in written premiums in 2014 over 2013 is primarily attributable to $51.9 million of written premium increases on our three largest treaties that have produced favorable historical underwriting results. In addition, we received $26.2 million of written premiums from new treaties written during 2014. Despite the significant increase in gross written and net written premiums for 2014, our net earned premiums (which tend to smooth out quarter-to-quarter variances) were effectively flat, with a 2.2% increase over the prior year.
Loss Ratio. The loss ratio of 55.2% for the year ended December 31, 2014 includes $27.3 million, or 13.9 percentage points, of net favorable development in our loss estimates for prior accident years. The loss ratio of 40.4% for the year ended December 31, 2013 includes $40.7 million, or 28.7 percentage points, of net favorable development in our loss estimates for prior accident years. The significant favorable reserve development in this segment reflects benign loss activity and continuing positive loss trends.
Underwriting Profit. As a result of the items discussed above, underwriting profit of the Excess and Surplus Lines segment decreased 19.4%, from $43.5 million for the year ended December 31, 2013 to $35.1 million for the year ended December 31, 2014.
Loss Ratio. The loss ratio for the year ended December 31, 2014 of 53.4% included $5.9 million, or 20.6 percentage points of net favorable development on prior accident years. The loss ratio for the year ended December 31, 2013 of 67.4% included $1.4 million, or 7.9 percentage points, of net favorable development on prior accident years. The favorable development in both 2014 and 2013 reflects the fact that actual loss emergence of the workers’ compensation book for accident years 2012 and prior has been better than expected when we took actions to strengthen reserves for the book during the year ended December 31, 2012.
The Company’s gross reserve for losses and loss adjustment expenses at December 31, 2014 was $716.3 million. Of this amount, 71.5% relates to amounts that are incurred but not reported. The Company’s gross reserve for losses and loss adjustment expenses by segment are summarized as follows:
Included in our investment portfolio are $239.5 million of bank loan participations, which are classified as held-for-investment and reported at amortized cost, net of an allowance for credit losses of $752,000 related exclusively to Puerto Rico loans as detailed herein (the allowance for credit losses was $242,000 at December 31, 2013). Changes in this credit allowance are included in realized gains or losses. These bank loan participations are primarily senior, secured floating-rate debt which are rated “B” or “BB” by Standard & Poor’s or an equivalent rating from another nationally recognized statistical rating organization, and are therefore below investment grade. Bank loans include assignments of and participations in, performing and non-performing senior corporate debt generally acquired through primary bank syndications and in secondary markets. They consist of, but are not limited to, term loans, the funded and unfunded portions of revolving credit loans, and similar loans and investments. At December 31, 2014 and 2013, the fair market value of these securities was $231.3 million and $200.6 million, respectively.
At December 31, 2014, the Company holds participations in two loans issued by companies that produce and sell electricity subject to power purchase agreements with PREPA. PREPA is a public corporation and governmental agency of the Commonwealth of Puerto Rico. To date, the loans are current with respect to contractual payments of principal and interest. However, PREPA’s credit strength has been affected by the economic conditions in Puerto Rico, thus raising doubt about the Company’s continuing ability to collect amounts owed by PREPA in order to continue to make full and timely payments on the debt obligations held by the Company. PREPA has been downgraded by Moody’s to “Caa2” and by S&P to “B-.” PREPA’s debt has recently traded at a significant discount to par with very high yields. Additionally, Puerto Rico passed legislation that would allow PREPA to restructure and potentially default on its debt. It is unclear how the power contracts would be treated under a PREPA restructuring. Management concluded that the loans were impaired and recorded losses of  $607,000 to establish an allowance for credit losses on the loans. The impaired loans have a carrying value of  $7.1 million at December 31, 2014 and unpaid principal of  $8.4 million.
The following table sets forth the composition of the Company’s portfolio of fixed maturity securities (both available-for-sale and trading) by rating as of December 31, 2014:
Other expenses for the years ended December 31, 2014 and 2013 were $16.0 million and $677,000, respectively. In 2014, other expenses included $14.9 million of expenses associated with our initial public offering, $600,000 of employee severance costs, $183,000 of due diligence expenses related to an acquisition that was not consummated, and $299,000 of expenses associated with a minority interest in a real estate limited partnership pursuant to which we were deemed to be an owner for accounting purposes. In 2013, these expenses include $392,000 of due diligence expenses related to an acquisition that was not consummated and $285,000 of expenses associated with our minority interest in the real estate limited partnership.
The Company recorded $597,000 and $2.5 million of amortization of intangibles for the years ended December 31, 2014 and 2013, respectively. The significant decrease in amortization relates to certain intangible assets arising from an acquisition in December 2007 that had a six-year useful life and became fully amortized during the prior year.
At December 31, 2015, our Bermuda holding company had $2.0 million of cash and cash equivalent assets. At December 31, 2014, our Bermuda holding company had $623,000 of cash and invested assets. At December 31, 2015, our U.S. holding company had $66.0 million of cash and invested assets, comprised of cash and cash equivalents of  $7.1 million, fixed maturity securities of  $5.0 million, $8.4 million of equity securities, other invested assets of  $32.7 million, and short-term investments of  $12.8 million, which are not subject to regulatory restrictions. Additionally, our U.K. intermediate holding company had no invested assets at December 31, 2015 and cash of less than one thousand dollars. At December 31, 2014, our U.S. holding company had $73.2 million of cash and invested assets, comprised of cash and cash equivalents of $23.7 million, fixed maturity securities of  $7.4 million, $6.5 million of equity securities, $33.6 million of other invested assets, and short-term investments of  $1.9 million, all of which are not subject to regulatory restrictions. Payments of dividends from our U.S. holding company to the Company through our U.K. intermediate holding company are currently subject to a 5% withholding tax.
Our net written premiums to surplus ratio (defined as net written premiums to regulatory capital and surplus) is reviewed by management as well as our rating agency as a component of leverage and efficiency of deployed capital. Our net written premiums to surplus ratio was 0.8x, 0.8x, and 0.6x for the years ended December 31, 2015, 2014, and 2013, respectively.
On June 5, 2013, we closed on a three-year $125.0 million senior revolving credit facility which matures on June 5, 2016. The Company and JRG Re are the borrowers on the senior revolving credit facility. The senior revolving credit facility was initially comprised of:
A $62.5 million secured revolving facility used by JRG Re to issue letters of credit for the benefit of third-party reinsureds. This portion of our credit facility is secured by our investment securities.
We closed on a second amendment to the senior revolving credit facility that was effective December 15, 2015, which, among other things, accommodated our organization and capitalization of an intermediate holding company in the United Kingdom. Additionally, we closed on a third amendment to the senior revolving credit facility that was effective December 30, 2015, which adjusted certain financial covenants. In connection with the December 15, 2015 amendment, the intermediate holding company entered into a payment guaranty of our obligations under the senior revolving credit facility.
The senior revolving credit facility contains certain financial and other covenants (including risk-based capital, minimum shareholders’ equity levels, maximum ratios of total debt outstanding to total capitalization and minimum fixed charge coverage ratios) with which the Company was in compliance at December 31, 2015.
In 2015, we declared $47.8 million of dividends payable to our shareholders. These dividends (and the related $2.5 million of U.S. dividend withholding tax) were funded with a $47.5 million dividend received through our U.K. intermediate holding company and a $4.8 million dividend received from JRG Re.
The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding at December 31, 2015 (including the Company’s repurchase of a portion of these Trust Preferred Securities described herein):
At December 31, 2015 and December 31, 2014, the ratio of total debt outstanding to total capitalization (defined as total debt plus total shareholders’ equity) was 22.0% and 21.9%, respectively. Having debt as part of our capital structure allows us to generate a higher return on equity and greater book value per share results than we could by using equity capital alone.
Our insurance subsidiaries enter into reinsurance contracts to limit our exposure to potential losses arising from large risks and to provide additional capacity for growth. Our reinsurance is contracted under
excess of loss and quota share reinsurance contracts. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount. The premiums payable to the reinsurer are negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a corresponding percentage of premiums. For the years ended December 31, 2015, 2014 and 2013, our net retention was 82.3%, 86.8% and 88.2%, respectively.
Up to $1.0 million per occurrence, subject to a $1.0 million aggregate deductible
In our Excess and Surplus Lines segment, we purchased a surplus share reinsurance treaty that was effective July 1, 2015 and was specifically designed to cover property risks. The surplus share treaty along with facultative reinsurance helps ensure that our net retained limit per risk will be $5.0 million or below.
purchases individual risk workers’ compensation excess of loss coverage for $400,000 in excess of $600,000, $4.0 million in excess of  $1.0 million, $5.0 million in excess of  $5.0 million, $10.0 million in excess of  $10.0 million with a maximum on any one life of  $12.0 million, and $10.0 million in excess of  $20.0 million with a maximum on any one life of  $10.0 million;
purchases program specific quota share reinsurance between 50.0% and 100.0% of the primary risk layer and up to 100.0% of the excess layer.
In the aggregate, we believe our pre-tax group-wide PML from a 1000 year catastrophe event would not exceed $10.0 million, inclusive of reinstatement premiums payable.
Reinsurance contracts do not relieve us from our obligations to policyholders. The failure of a reinsurer to honor its obligations could result in losses to us, and therefore, we establish allowances for amounts considered uncollectible. At December 31, 2015 and 2014, there was no allowance for such uncollectible reinsurance recoverables. The Company generally seeks to purchase reinsurance from reinsurers with A.M. Best financial strength ratings of  “A-” (Excellent) or better.
The following table sets forth our most significant reinsurers by amount of reinsurance recoverables and the amount of reinsurance recoverables pertaining to each such reinsurer as well as its A.M. Best rating as of December 31, 2015:
Cash used in investing activities in 2015 reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities. Cash and cash equivalents comprised 7.9% of total cash and invested assets at December 31, 2015. Cash used in financing activities in 2015 is primarily due to the $47.4 million of dividends to shareholders in 2015. These dividends (and the related $2.5 million of U.S. dividend withholding taxes) were funded with a $47.5 million dividend received through our U.K. intermediate holding company and a $4.8 million dividend received from JRG Re.
Cash used in investing activities in 2014 reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities and bank loan participations. Cash and cash equivalents comprised 5.6% of total cash and invested assets at December 31, 2014. Net cash used in financing activities in 2014 is a result of the $70.0 million dividend to shareholders in 2014. A portion of this dividend was funded by additional borrowings on our unsecured revolving credit facility of  $20.0 million. In addition, we drew down an additional $10.0 million on our unsecured revolving credit facility in December 2014 to provide additional operating flexibility at the Bermuda holding company.
is not an evaluation directed towards the protection of investors. A.M. Best assigns ratings to both insurance and reinsurance companies, which generally range from “A++” (Superior) to “S” (Suspended). The rating for our operating companies of  “A-” (Excellent) is the fourth highest rating issued by A.M. Best and is assigned to insurers that have, in A.M. Best’s opinion, an excellent ability to meet their ongoing obligations to policyholders.
The amounts in the above table represent our gross estimates of known liabilities as of December 31, 2015 and do not include any allowance for claims for future events within the time period specified. Accordingly, it is highly likely that the total amounts paid out in the time periods shown will be greater than those indicated in the table.
The following table reconciles the underwriting profit (loss) by individual segment and of the Company as a whole to consolidated income before U.S. federal income taxes for the years ended December 31, 2015, 2014 and 2013.
Underwriting profit includes fee income of  $4.5 million, $1.8 million, and $0 for the years ended December 31, 2015, 2014, and 2013, respectively.
Our income before taxes and net income for the years ended December 31, 2015, 2014 and 2013 reconcile to our net operating income as follows:
One of our key financial measures that we use to assess our longer term financial performance is our percentage growth in tangible equity per share and return on tangible equity. For the twelve months ended December 31, 2015 our tangible equity decreased 1.3% from $466.0 million at December 31, 2014 to $459.7 million at December 31, 2015. Absent the $47.8 million in dividends to shareholders in 2015, our tangible book value grew 8.9% for the year. Using a five quarter average methodology to determine our average shareholders’ equity, our operating return on tangible shareholders’ equity was 13.0% for the year ended December 31, 2015 and 12.2% for the year ended December 31, 2014.