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, 2015.
On November 25, 2015, the Company issued 6.6 million shares of 7.125% Preference Shares - Series C, par value $0.01, at a price of $25 per preference share. The Company received net proceeds of $159.6 million from the offering after deducting issuance costs of $5.4 million. Each share, which is redeemable by the Company beginning December 15, 2020, will be paid non-cumulative dividends at a rate of 7.125% per annum on the initial liquidation preference of $25 per share.
On November 4, 2015, Maiden US finalized the sale of its wholly owned subsidiary, Maiden Specialty, to Clear Blue. On the same date, Maiden US entered into a reinsurance agreement with Clear Blue whereby Maiden US reinsures all in-force policies transferred to Clear Blue as part of the sale. In addition, Maiden US entered into an agreement with Clear Blue whereby Maiden US assumes the responsibility for the administration and servicing of all aspects of the polices in-force at the date of sale.
Total investments and cash and cash equivalents includes both restricted and unrestricted.
In addition to the Consolidated Balance Sheets and Consolidated Statements of Income and Comprehensive Income, management uses certain key financial measures, some of which are non-GAAP measures, to evaluate its financial performance and the overall growth in value generated for the Company’s common shareholders. Management believes that these measures, which may be defined differently by other companies, better explain the Company’s results in a manner that allows for a more complete understanding of the underlying trends in the Company’s business. The non-GAAP measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. These key financial measures are:
Operating Earnings and Operating Earnings per Common Share: Management believes that the use of operating earnings and diluted operating earnings per share enables investors and other users of the Company’s financial information to analyze its performance in a manner similar to how Management analyzes performance. Management also believes that these measures follow industry practice and, therefore, allow the users of financial information to compare the Company’s performance with its industry peer group, and that the equity analysts and certain rating agencies which follow the Company, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. Operating earnings should not be viewed as a substitute for U.S. GAAP net income.
The "net loss and LAE ratio" is derived by dividing net loss and LAE by the sum of net premiums earned and other insurance revenue. The "commission and other acquisition expense ratio" is derived by dividing commission and other acquisition expenses by the sum of net premiums earned and other insurance revenue. The "general and administrative expense ratio" is derived by
(s). The delay varies by reinsurance market (country of cedant), type of treaty, whether losses are paid by the cedant and the size of the loss. The delay could vary from a few weeks to a year or sometimes longer.
The reserve for loss and LAE at December 31, 2015 and 2014 was as follows:
In the Diversified Reinsurance segment, the Company’s executive and technical management, including claims and underwriting, have significant experience with this book of business, which also has more than 30 years of loss experience associated with it. In general for the Diversified Reinsurance segment, we utilize the ELR approach at the onset of reserving an account, the BF method for business with less but maturing loss experience, and as the experience matures the LD Method.
The Company has underwritten the AmTrust Reinsurance segment since July 1, 2007. The majority of the exposure in the underlying book of business has significant seasoning, and allows for a significant amount of credibility in using parameters derived from historical experience to calculate reserve estimates. Some segments of the book are a result of recent acquisitions or newer markets for AmTrust. These segments require a greater level of assumptions and professional judgment in deriving reserve levels, which inherently implies a wider range of reasonable estimates. As a result, we have tended to rely on a weighted approach which primarily employs the LD method for aspects of the segment with ample historical data, while also considering the ELR or BF method for exposure resulting from recent acquisitions, or a relative business with a more limited level of experience.The FS method is also considered for segments of the AmTrust book for which claim count information is available.
The Company’s actuarial analysis of this book of business is more refined in that it utilizes a combination of quarterly and annual data instead of contract period data in totality. Additional data detailing items such as class of business, state, claim counts, frequency and severity is available, further enhancing the reserve analysis. Because of the refinement of the data, this allows for greater use of the loss development method earlier on in the maturity of the book than would ordinarily occur.
Significant Assumptions Employed in the Estimation of Reserve for Loss and Loss Adjustment Expenses: The most significant assumptions used at December 31, 2015 to estimate the reserve for loss and LAE within the Company’s segments are as follows:
no significant emergence of losses or types of losses that are not represented in the information supplied to the Company by its brokers, ceding companies and insureds will occur.
The inherent uncertainty of estimating the Company’s reserve for loss and LAE increases principally due to:
In order to verify the accuracy and completeness of the information provided to the Company by its ceding company counterparties, the Company’s underwriters, actuaries, accounting and claims personnel perform underwriting and claims reviews, and also accounting and financial audits, of the Company’s ceding companies. Any material findings are communicated to the ceding companies and utilized in the establishment or revision of the Company’s case reserves and related IBNR reserve. On occasion, these reviews reveal that the ceding company’s reported loss and LAE do not comport with the terms of the contract with the Company. In such events, the Company strives to resolve the outstanding differences in an amicable fashion. The large majority of such differences are resolved in this manner. In the infrequent instance where an amicable solution is not feasible, the Company’s policy is to vigorously defend its position in litigation or arbitration. At December 31, 2015, the Company was not involved in any material claims litigation or arbitration proceedings.
Due to the large volume of potential transactions that must be recorded in the insurance and reinsurance industry, backlogs in the recording of the Company’s business activities can also impair the accuracy of its loss and LAE reserve estimates. At December 31, 2015, there were no significant backlogs related to the processing of policy or contract information in the Company’s segments.
The Company provides proportional and non-proportional reinsurance coverage to cedants (insurance companies). In most cases, cedants seek protection for business that they have not yet written at the time they enter into reinsurance agreements and thus have to estimate the volume of premiums they will cede to the Company. Reporting delays are inherent in the reinsurance
industry and vary in length by type of treaty. As delays can vary from a few weeks to a year or sometimes longer, the Company produces accounting estimates to report premiums and commission and other acquisition expenses until it receives the cedants’ actual results. Under proportional treaties, which represented 91.0% of gross premiums written for the year December 31, 2015, the Company shares proportionally in both the premiums and losses of the cedant and pays the cedant a commission to cover the cedant’s acquisition expenses. Under this type of treaty, the Company’s ultimate premiums written and earned and acquisition expenses are not known at the inception of the treaty and must be estimated until the cedant reports its actual results to the Company. Under non-proportional treaties, which represented 9.0% of gross premiums written for the year December 31, 2015, the Company is typically exposed to loss events in excess of a predetermined dollar amount or loss ratio and receives a deposit or minimum premium, which is subject to adjustment depending on the premium volume written by the cedant.
Acquisition expenses represent the costs of writing business that vary with, and are primarily related to, the production of the business. Acquisition expenses that are related to successful contracts are deferred and recognized as expense over the same period in which the related premiums are earned.
Please refer to "Notes to Consolidated Financial Statements Note 5. Fair Value of Financial Instruments" included under Item 8 "Financial Statements and Supplementary Data" of this Form 10-K on page for a discussion on the fair value methodology and valuation techniques used by the Company to determine the fair value of the financial instruments held at December 31, 2015 and 2014.
The Company recognizes Goodwill and Intangible Assets in connection with certain acquisitions. Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired and is assigned to the applicable reporting unit(s) on the acquisition date, based upon the expected benefit to be received by the reporting unit. Intangible Assets consist of finite and indefinite life assets. Finite life intangible assets include customer and producer relationships and trademarks with useful life of 15 years. Insurance company licenses are considered indefinite life intangible assets.
On November 4, 2015, Maiden US finalized the sale of its wholly owned subsidiary, Maiden Specialty, to Clear Blue. On the same date, The goodwill and intangible assets disposed of, by way of this sale agreement, were $1.1 million and $3.2 million, respectively.
Annually, the Company makes an assessment as to whether the value of the Company’s goodwill and intangible assets are impaired. Impairment, which can be either partial or full, is based on a fair value analysis by individual reporting unit. Based upon the Company’s assessment at the reporting unit level, there was no impairment of its goodwill and intangible assets at December 31, 2015 of $81.9 million.
The following table sets forth our selected Consolidated Statement of Income data for each of the periods indicated.
Calculated by dividing general and administrative expenses by the sum of net premiums earned and other insurance revenue.
redemption of the Company's Junior Subordinated Debt in the first quarter of 2014 leading to a non-recurring, non-cash charge of $28.2 million, which represented the accelerated amortization of original issue discount and write off of issuance costs associated with the Junior Subordinated Debt. As shown in our Item 7 Key Financial Measures on page 52, excluding this non-recurring, non-cash charge in 2014, net income attributable to Maiden common shareholders for the year ended December 31, 2015, compared to the same period in 2014, would decrease by $5.2 million or 4.9%;
increase in investment income of $13.9 million, or 11.8%, for the year ended December 31, 2015 compared to the same period in 2014. This increase reflects the growth in average investable assets of 14.8%, however, this growth was partially offset by a slight reduction in yields.
decrease in underwriting income of $23.1 million, or 35.3%, for the year ended December 31, 2015 compared to the same period in 2014. This decrease arose in our Diversified Reinsurance segment and was driven primarily by 1) adverse development on Maiden US commercial auto business; 2) loss of a large customer and expiration of a fronting arrangement in the latter periods of 2014; and 3) foreign exchange impact on our non-U.S. underwriting portfolio due to the strengthening of the U.S. dollar during the year.
Net income attributable to Maiden common shareholders for the year ended December 31, 2014 was $77.1 million compared to $87.9 million for the same period in 2013. The factors that contributed to this net decrease were as follows:
growth in investment income of $25.8 million due primarily to a 19.0% increase in our average invested assets along with an improvement in our overall portfolio yields for the year ended December 31, 2014 compared to the same period in 2013; and
The following is a discussion on the results of our operations for the years ended December 31, 2015, 2014 and 2013:
The tables below compare net premiums written by our reportable segments, reconciled to the total net premiums written:
The increase in net premiums written in our AmTrust Reinsurance segment for the year ended December 31, 2015 compared to the same period in 2014 reflects AmTrust's continued expansion through a combination of acquisitions and ongoing organic growth partially offset by 1) the Company entering into an agreement with AmTrust to commute outstanding liabilities, loss reserves and unearned premiums, associated with certain classes and lines of business resulting in a reduction of net written premiums of approximately 3.5% for the year ended December 31, 2015; 2) an unfavorable impact from foreign exchange movements; and 3) the Company entering into a retrocessional quota share agreement with a highly rated global insurer entered into effective January 1, 2015. There was no such retrocessional quota share agreement in force during 2014. Please refer to the analysis of our AmTrust Reinsurance segment on page 71 for further details.
Net premiums written in our Diversified Reinsurance segment decreased by $115.2 million or 13.6% during the year ended December 31, 2015 compared to the same period in 2014. These reductions were due to 1) declines in both our U.S. and International business as discussed above; 2) adverse impact on our non-U.S. underwriting portfolio due to the strengthening of the U.S. dollar during the year; and 3) the Company entering into a retrocessional quota share agreement with a highly rated global insurer entered into effective January 1, 2015. There was no such retrocessional quota share agreement in force during 2014. Please refer to the analysis of our Diversified Reinsurance segment on page 67 for further details.
Net premiums earned increased by $177.4 million, or 7.9%, for the year ended December 31, 2015 compared to the same period in 2014. The increase in net premiums earned was primarily the result of strong growth in business written in the AmTrust Reinsurance segment offset by a reduction in the earned premiums in our Diversified Reinsurance segment and business included in our Other category.
The table below compares net premiums earned by our reportable segments, reconciled to the total net premiums earned:
Our Other category comprises business in run-off with all premiums written on the agreements being fully earned by December 31, 2014.
(1)The average of the Company's investments, cash and cash equivalents, restricted cash and loan to related party at each quarter-end during the year.
Net Realized Gains on Investment - Net realized gains on investment were $2.5 million for the year ended December 31, 2015, compared to $1.2 million for the same period in 2014.
Net Investment Income - Net investment income increased by $25.8 million, or 28.3%, for the year ended December 31, 2014 compared to the same period in 2013. The following table details the Company's average invested assets and average book yield for the year ended December 31, 2014 compared to the same period in 2013:
In addition to the aforementioned growth in invested assets, the improvement in investment income during the year ended December 31, 2014 compared to the same period in 2013 was also due to lower paydowns on the Company's U.S. government agency MBS portfolio, resulting in reduced amortization expense for those MBS securities purchased at a premium.
Net Impairment Losses Recognized in Earnings - The Company recognized $2.4 million of OTTI for the year ended December 31, 2014 compared to none in 2013. Following the review of its AFS investments to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary, at December 31, 2014, the Company determined that there was a credit impairment in respect of one corporate bond. The Company does not intend to sell this security, but we do not believe it is probable that we will recover the amortized cost basis of the security
Commission and other acquisition expenses increased by $64.9 million, or 9.8%, for the year ended December 31, 2015 compared to 2014. The commission and other acquisition expense ratio increased to 29.7% for the year ended December 31, 2015 compared to 29.1% for the same period in 2014. Please refer to the reasons for the changes in the combined ratio discussed in the Net Loss and Loss Adjustment Expenses section above.
Commission and other acquisition expenses increased by $102.7 million, or 18.5%, for the year ended December 31, 2014 compared to 2013. The commission and other acquisition expense ratio increased to 29.1% for the year ended December 31, 2014 compared to 27.6% for the same period in 2013. The change in the amount of expenses incurred reflects the continuing premium growth of the Company's business as discussed while the change in the ratio largely reflects: (1) strong growth and ongoing changes in the mix of the AmTrust Reinsurance segment compared to our Diversified Reinsurance segment; and (2) the impact of a higher mix of earned premium on pro-rata contracts, which incur a higher commission expense compared to excess of loss treaties.
The Company recorded income tax expense of $2.1 million, $2.2 million and $1.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts relate to income tax on the earnings of our international subsidiaries, non-cash U.S. deferred tax expense relating to timing differences and state taxes incurred by our U.S. subsidiaries. The effective rate of income tax was 1.6% for the year ended December 31, 2015 compared to 2.1% and 1.8% for the years ended December 31, 2014 and 2013, respectively.
The combined ratio increased to 103.3% for the year ended December 31, 2015 compared to 98.3% in 2014 primarily due to increased loss activity in our Maiden US commercial auto liability reinsurance contracts.
Premiums - Gross premiums written decreased by $120.8 million, or 13.5% for the year ended December 31, 2015 compared to the same period in 2014. The decrease was primarily due to a reduction in Maiden US premium following underwriting actions taken by the Company as well as the loss of a large customer and the expiration of a fronting arrangement in September 2014. In addition, there was a reduction in the International business written due to the strengthening of the U.S. dollar.
The decrease arises predominantly due to the same reasons outlined above in the discussion on gross premiums written for this segment. Furthermore, net premiums written decreased for the year ended December 31, 2015 compared to the same period in 2014, following the Company entering into a retrocessional quota share agreement with a highly rated global insurer effective January 1, 2015. There was no such retrocessional quota share agreement in force during 2014.
Net premiums earned decreased by $109.1 million, or 12.8%, during the year ended December 31, 2015 compared to the same period in 2014. The table below shows net premiums earned by line of business:
The combined ratio increased to 98.3% for the year ended December 31, 2014 compared to 97.5% in 2013 due to 1) elevated excess property loss activity from several clients of our US operations during the first half of 2014 and 2) due to a modest amount of reserve deterioration in commercial auto business during 2014.
Within the Diversified Reinsurance reportable segment, the business underwritten by our US operations experienced an increase in premiums earned for the year ended December 31, 2014 of $101.2 million, or 15.8%, compared to 2013. This increase arises due to a combination of growth in the US operations' net premiums written, following the addition of new accounts, and organic growth from certain existing accounts. Furthermore, the premiums earned from the business written by our non- U.S. entities, reflected within the Casualty and International components of this segment, experienced a net decrease of $0.4 million, or 0.3%, compared to the same period in 2013, following the non-renewal of certain accounts during 2013 and 2014.
The AmTrust Reinsurance segment reported strong growth and stable combined ratios in each of the comparative periods reported. The underwriting results and associated ratios for the AmTrust Reinsurance segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
The AmTrust Reinsurance segment continues to experience strong profitable growth during the year ended December 31, 2015 compared to 2014. The combined ratio decreased slightly to 95.3% for the year ended December 31, 2015 compared to 95.4% in 2014, generally reflecting this segment's overall stable combined loss ratios.
Net premiums earned increased by $305.9 million, or 22.2% for the year ended December 31, 2015, compared to the same period in 2014. This increase is due to the reasons outlined above in the Net Premiums Written section.
Premiums - Gross premiums written increased by $440.6 million, or 37.7%, for the year ended December 31, 2014 compared to the same period in 2013. This increase reflects the continued organic growth and improved rate levels, particularly in U.S. workers' compensation.
Commission and Other Acquisition Expenses - Commission and other acquisition expenses increased by $127.3 million, or 43.7%, for the year ended December 31, 2014 compared to 2013. The commission and other acquisition expense ratio increased to 30.4% for the year ended December 31, 2014 compared to 29.5% in 2013. The increase in the ratios reflects the higher proportion of net premiums earned from the Reinsurance Agreement, which has a higher commission rate than the European Hospital Liability Quota Share, compared to the same periods in 2013.
Maiden US is subject to regulatory restrictions limiting their ability to declare and pay dividends by the state of Missouri where it is domiciled. In addition, there are restrictions based on risk-based capital, a test which is the threshold that constitutes the authorized control level. If Maiden US's statutory capital and surplus falls below the authorized control level, the insurance
Maiden Holdings’ Swedish domiciled operating subsidiary, Maiden LF, is regulated by the Swedish FSA. At December 31, 2015, Maiden LF has statutory capital and surplus of $7.6 million, which exceeds the amount required to be maintained of $4.0 million at December 31, 2015. Maiden LF is subject to statutory and regulatory restrictions under the Swedish FSA that limit the maximum amount of annual dividends or distributions paid by Maiden LF to Maiden Holdings. At December 31, 2015, Maiden LF is allowed to pay dividends or distributions not exceeding $2.2 million. Maiden LF did not pay any dividends to Maiden Holdings during the year.
Maiden Holdings’ wholly owned U.K. subsidiary, Maiden Global, that operates as a reinsurance services and holding company, is subject to regulation by the U.K. Financial Conduct Authority (the "FCA") that limit the maximum amount of annual dividends or distributions paid by Maiden Global to the Company. At December 31, 2015, Maiden Global is allowed to pay dividends or distributions not exceeding $2.1 million. During the year, Maiden Global did not pay any dividend to Maiden Holdings.
Cash flows from operations for the year ended December 31, 2015 were $634.3 million compared to $651.6 million for the year ended December 31, 2014, a 2.7% decrease. The Company's assets grew by $549.5 million, or 10.6%, at December 31, 2015 compared to December 31, 2014. The increase in assets was largely due to the growth in premium written, in our AmTrust Reinsurance segment during 2015. Cash flows associated with the AmTrust Reinsurance segment's growth typically lag by at least one calendar quarter, and the Company anticipates seeing further cash flow benefits from that growth in the beginning of 2016.
Cash flows from operations for the year ended December 31, 2014 were $651.6 million compared to $366.2 million for the year ended December 31, 2013, a 77.9% increase. The Company's assets grew by $450.7 million, or 9.6%, at December 31, 2014 compared to December 31, 2013. The increase in assets was largely due to the growth in premium written, in our AmTrust Reinsurance and Diversified Reinsurance segments during 2014.
Cash flows provided by financing activities were $99.7 million for the year ended December 31, 2015 compared to cash flows used by financing activities of $208.3 million for the year ended December 31, 2014. This net cash inflow arises following the issuance of the Preference Shares - Series C, with net proceeds of $159.6 million, offset by the cash outflow from the payment of dividends to both common and preference shareholders of $62.5 million. In addition, the Company received net proceeds of $2.6 million following the issuance and repurchasing of common shares during the year.
The net cash inflow (outflow) from financing activities for the years ended December 31, 2015, 2014 and 2013 were as follows:
At December 31, 2015, total cash and cash equivalents and fixed maturity investments used as collateral were $3.7 billion compared to $3.1 billion at December 31, 2014. The increase was primarily attributable to the increase in assets provided as collateral for the AmTrust Reinsurance segment reflecting continued growth.
As part of the Reinsurance Agreement, Maiden Bermuda has also loaned funds to AmTrust totaling $168.0 million at December 31, 2015 and 2014, respectively, to partially satisfy collateral requirements with AII.
We do not currently anticipate that the restrictions on liquidity resulting from restrictions on the payments of dividends by our subsidiary companies or from assets committed in trust accounts or to collateralize the letter of credit facilities will have a material impact on our ability to carry out our normal business activities, including, our ability to make dividend payments on our common and preference shares.
The Company's AFS fixed maturity investments increased by $51.2 million or 1.5% at December 31, 2015 compared to 2014. The net increase in the fair value of our AFS fixed maturity investments is a combination of 1) net purchases of $1,334.4 million, comprising of primarily asset-backed securities and investment grade corporate bonds; offset by 2) maturities and calls totaling $541.1 million; 3) designation of $608.7 million of investment grade corporate bonds as HTM and 4) net unrealized losses and amortization of $133.4 million.
At December 31, 2015, we consider the levels of cash and cash equivalents we are holding to be within our targeted ranges. However, during periods when interest rates experience greater volatility, we have periodically maintained more cash and cash equivalents in order to better assess current market conditions and opportunities within our defined risk appetite, and may do so in future periods.
The following table summarizes the Company's fixed maturity investment portfolio holdings by contractual maturity at December 31, 2015 and 2014:
Our U.S. agency MBS portfolio is 35.9% of our fixed maturity investments at December 31, 2015. Given the relative size of this portfolio to our total investments, if faster prepayment patterns were to occur over an extended period of time, this could potentially limit the growth in our investment income in certain circumstances, or even potentially reducing the total amount of investment income we earn.
The security holdings by sector and financial strength rating of our corporate bond holdings at December 31, 2015 and 2014 were as follows:
The net decrease in non U.S. denominated fixed maturities is primarily due to the strengthening of the U.S. dollar versus the euro and British Pound. We do not have any non-U.S. government and government related obligations of Greece, Ireland, Italy, Portugal and Spain at December 31, 2015 and 2014. At December 31, 2015 and 2014, 100.0% of the Company's non-U.S. government and supranational issuers were rated A+ or higher by S&P.
At December 31, 2015 and 2014, the Company recorded gross reserves for unpaid loss and LAE of $2.5 billion and $2.3 billion, respectively, and net reserves for unpaid loss and LAE of $2.4 billion and $2.2 billion for December 31, 2015 and 2014, respectively.
The following table represents a reconciliation of our beginning and ending gross and net loss and LAE reserves for the years ended December 31, 2015, 2014 and 2013:
The reinsurance balances receivable, net decreased by $135.7 million, or 26.4%, primarily due to the impact of the commutation agreement with AmTrust combined with a reduction in gross premiums written on AmTrust Reinsurance segment during the fourth quarter of 2015 compared to the same period in 2014. The reserve for net loss and LAE increased following the continued growth in our AmTrust Reinsurance segment combined with adverse development experienced in both our reportable segments. The unearned premiums also increased following the continued growth in our AmTrust Reinsurance segment, however, this growth was partially offset by 1) underwriting actions taken by the Company; 2) the loss of a customer as previously noted; and 3) the expiration of a fronting arrangement in our Diversified Reinsurance segment.
Capital resources consist of funds deployed or available to be deployed in support of our operations. Our total capital resources were $1,707.8 million at December 31, 2015, a $107.1 million, or 6.7%, net increase from $1,600.7 million at December 31, 2014.
The major factors contributing to the net increase in capital resources were as follows:
Total Maiden shareholders' equity at December 31, 2015 increased by $107.1 million, or 8.6%, compared to December 31, 2014 primarily due to:
net increase resulting from share based transactions of $0.2 million after deduction of issuance cost related to Preference Shares - Series C; and
On July 24, 2014, the Company's Board of Directors has approved the repurchase of up to $75.0 million of the Company's common shares from time to time at market prices. No share repurchases have taken place to date under this plan.
The Company’s aggregate contractual obligations at December 31, 2015 are as follows:
We conduct business in a variety of foreign (non-U.S.) currencies, the principal exposures being the euro, the British pound, the Australian dollar, the Canadian dollar and the Swedish krona. Assets and liabilities denominated in foreign currencies are exposed to changes in currency exchange rates. Our reporting currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. Our principal exposure to foreign currency risk is our obligation to settle claims in foreign currencies. In addition, in order to minimize this risk, we maintain and expect to continue to maintain a portion of our investment portfolio in investments denominated in currencies other than the U.S. dollar. We may employ various strategies (including hedging) to manage our exposure to foreign currency exchange risk. To the extent that these exposures are not fully hedged or the hedges are ineffective, our results of operations or equity may be adversely effected. At December 31, 2015, no such hedges or hedging strategies were in force or had been entered into. We measure monetary assets and liabilities denominated in foreign currencies at year end exchange rates, with the resulting foreign exchange gains and losses recognized in the Consolidated Statements of Income. Revenues and expenses in foreign currencies are converted at average exchange rates during the year. The effect of the translation adjustments for foreign operations is included in AOCI.
At December 31, 2015, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.