Consolidated Results of Operations - for the Years Ended December 31, 2015, 2014, and 2013
We are a Bermuda-based holding company with a core focus of acquiring and managing insurance and reinsurance companies in run-off and portfolios of insurance and reinsurance business in run-off, and providing management, consulting and other services to the insurance and reinsurance industry. We operate our business internationally through our insurance and reinsurance subsidiaries and our consulting subsidiaries in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations.
During the year ended December 31, 2015, we increased our book value per share on a fully diluted basis by 8.7% to $129.65 per share. The increase was primarily attributable to net earnings of $220.3 million, partially offset by other comprehensive loss of $22.5 million attributable to Enstar Group Limited. See "Item 6. Selected Financial Data" herein for the computation of fully diluted book value per share.
We expect to maintain our investment strategy, which emphasizes the preservation of our assets, credit quality, and diversification. We will continue to seek superior risk-adjusted returns, by allocating a portion of our portfolio to non-investment grade securities or alternative investments in accordance with our investment guidelines. In the near-term, we expect to maintain a relatively short average effective duration, except in our Life and Annuities segment where we maintain a longer duration than our other segments.
Net investment income is a significant component of our earnings. We are in a period of considerable market uncertainty in which we see fully priced asset valuations across many asset classes compared to historical averages and deteriorating underlying company fundamentals in certain classes. If investment conditions or general economic conditions worsen during 2016, we may experience further pressure on our investment yields and realized or unrealized losses on investments could materialize. For further discussion of our investments, see "Investments" below.
In presenting our results for the Atrium and StarStone segments, we discuss the loss ratio, acquisition cost ratio, other operating expense ratio, and the combined ratio of our active underwriting operations within these segments. While we consider these measures to be non-GAAP, management believes that these ratios provide the most meaningful measure for understanding our underwriting profitability. These non-GAAP measures may be defined or calculated differently by other companies. There are no comparable GAAP measures to our insurance ratios.
In StarStone’s other operating expense ratio for 2015, the excluded general and administrative expenses relate to the amortization of the definite-lived intangible assets, and acquisition-related expenses, in each case recorded at the holding company level. In StarStone’s other operating expense ratio for 2014, the excluded general and administrative expenses relate to management fee expenses charged by our Non-life Run-off segment primarily related to our costs incurred in managing StarStone, the amortization of the definite-lived intangible assets, and acquisition-related expenses, in each case recorded at the holding company level.
Consolidated Results of Operations - For the Years Ended December 31, 2015, 2014 and 2013
Consolidated Results of Operations for the Year Ended December 31, 2015
Consolidated net earnings of $220.3 million and basic and diluted earnings per share of $11.44 and $11.35, respectively
Shareholder's equity of $2,516.9 million and redeemable noncontrolling interest of $417.7 million.
Higher Net Investment Income - Total net investment income increased by $56.2 million for the year ended December 31, 2015 compared to 2014. The increase was attributable to an increase of $1.3 billion in our average invested assets (due to our 2015 acquisitions and significant new business transactions) and an average increase of 44 basis points in the book yield we obtained on those assets, due to our asset allocation and a broad increase in treasury yields;
Life Settlements Business - The life settlements business we acquired from Wilton Re on May 5, 2015 contributed $16.5 million to earnings; partially offset by
Noncontrolling Interest - Noncontrolling interest in losses (earnings) is directly attributable to the results from those subsidiary companies in which there are either noncontolling interests or redeemable noncontrolling interests. For the year ended December 31, 2015, the noncontrolling interest in losses was $10.0 million as compared to the noncontrolling interest in earnings of $13.5 million in 2014.
2014 versus 2013: We reported consolidated net earnings attributable to Enstar Group Limited shareholders of $213.7 million for the year ended December 31, 2014, an increase of $5.1 million from $208.6 million for the year ended December 31, 2014. Our comparative results for most line items in 2014, including net premiums earned, fees and commission income, net investment income, acquisition costs, salaries and benefits and general and administrative expenses, were materially impacted by our acquisitions of StarStone in April 2014 and owning companies acquired in 2013 (i.e., Atrium, Arden, Pavonia, and SeaBright) for a full year in 2014. The most significant drivers of the change in our financial performance during 2014 as compared to 2013 included:
Net Incurred Losses and LAE in our Non-life Run-off Segment - Net reduction in the liability for net incurred losses and LAE within our Non-life Run-off segment continued to be the predominant driver of our consolidated earnings for the years ended December 31, 2014 and 2013, improving by $81.7 million from 2013, with segment earnings increasing by $3.4 million;
Net investment income and Net Realized and Unrealized Gains - Net investment income increased by $11.5 million for the year ended December 31, 2014 compared to 2013, partially offset by a decrease in net realized and unrealized gains of $8.0 million;
Life and Annuities - Net earnings attributable to the Life and Annuities segment increased by $5.6 million for the year ended December 31, 2014 compared to 2013, primarily due to the results for 2014 reflecting a full year of Pavonia whereas the 2013 period included only nine months from the acquisition of Pavonia on March 31, 2013;
Atrium - Net earnings attributable to the Atrium segment increased by $5.2 million for the year ended December 31, 2014 compared to three months in 2013, as we acquired Atrium late in 2013; and
Lower Income Tax Expense - The decrease in income taxes was due principally to a lower effective tax rate due to the geographical distribution of where our pre-tax net earnings arose between our taxable and non-taxable jurisdictions; partially offset by
Results of Operations by Segment - For the Years Ended December 31, 2015, 2014 and 2013
2015 versus 2014: The decrease in net earnings for the year ended December 31, 2015 as compared with the year ended December 31, 2014 was primarily attributable to the change in net realized and unrealized losses and the increases in salaries and benefits and general and administrative expenses, partially offset by an increase in net investment income and a change in net loss (earnings) attributable to noncontrolling interest.
2014 versus 2013: Net earnings for the years ended December 31, 2014 and 2013 were relatively consistent. The increase in net earnings for the year ended December 31, 2014 as compared with the year ended December 31, 2013 was primarily attributable to a decrease in net incurred losses and LAE and a decrease in income taxes, partially offset by a reduction in net premiums earned and a reduction in net realized and unrealized gains.
Because business in this segment is in run-off, our general expectation is for premiums associated with legacy reserves to decline in future periods. However, the actual amount in any particular year will be impacted by new acquisitions during the year, and the run-off of premiums from acquisitions completed in recent years.
The following table shows the components of net incurred losses and LAE for the Non-life-Run-off segment for the years ended December 31, 2015, 2014 and 2013:
(1) Net change in case and LAE reserves comprises the movement during the year in specific case reserve liabilities as a result of claims settlements or changes advised to us by our policyholders and attorneys, less changes in case reserves recoverable advised by us to our reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the gross change in our actuarial estimates of IBNR, less amounts recoverable.
The reduction in estimates of net ultimate losses relating to prior periods of $242.7 million comprised reductions in IBNR reserves of $377.7 million partially offset by net incurred loss development of $135.0 million. The decrease in the estimate of net IBNR reserves of $377.7 million (compared to $262.4 million during the year ended December 31, 2014), was comprised of $32.0 million relating to asbestos liabilities (compared to $59.4 million in 2014), $1.6 million relating to environmental liabilities (compared to $6.2 million in 2014), $3.0 million relating to general casualty liabilities (compared to $62.5 million in 2014), $243.4 million relating to workers' compensation liabilities (compared to $63.6 million in 2014) and $97.7 million relating to all other remaining liabilities (compared to $70.7 million in 2014).
provisions for insolvent reinsurers as a result of dividends received, partially offset by additional provisions being made for contractual disputes with reinsurers.
2014 versus 2013: The net reduction in incurred losses and LAE for the year ended December 31, 2014 of $264.7 million included current period net incurred losses and LAE of $24.2 million related to current period net earned premium of $31.2 million (primarily for the portion of the run-off business acquired with StarStone). Excluding current period net incurred losses and LAE of $24.2 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $288.9 million, which was attributable to a reduction in estimates of net ultimate losses of $235.8 million, reduction in provisions for bad debts of $7.7 million and a reduction in provision for unallocated LAE of $49.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the payout period relating to companies acquired amounting to $4.0 million.
The reduction in net IBNR reserves of $262.4 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 98 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2014, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $285.8 million for net paid losses of $312.4 million, related to the settlement of non-commuted losses in the year and 98 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of two of our top ten assumed exposures and two of our top ten ceded recoverables as at January 1, 2014). Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2014 amounted to $29.1 million (comprising $99.5 million of assumed case reserves and LAE reserves partially offset by $70.4 million of ceded incurred reinsurance recoverable case reserves).
2015 versus 2014: Salaries and benefits for the Non-life Run-off segment, which include expenses relating to our discretionary bonus and employee share plans, were $148.6 million and $127.8 million for the years ended December 31, 2015 and 2014, respectively. The principal changes in salaries and benefits were:
an increase of $4.4 million in our 2014 bonus accrual primarily relating to a bonus accrual rate of 14.6% of pre-bonus net after tax profits under our annual incentive compensation program, as compared to 13.3% for 2013.
an increase of $21.2 million related principally to an increase in professional fees of $12.1 million (primarily due to acquisitions and projects), information technology costs of $6.8 million (due to our growth), and an increase in office expenses and travel costs of $2.3 million; partially offset by
an increase of $6.0 million related principally to an increase in: (a) professional fees of $1.9 million, (b) information technology costs of $1.6 million (due to increased project-related costs), and (c) $2.5 million of other costs related largely to amortization of fair value adjustments for assets and liabilities previously acquired;
an increase in rent and related expenses of $2.5 million due largely to an increase in office space and fees associated with the termination of various U.K. lease agreements as we consolidate staff into one office location; partially offset by
2014 versus 2013: Interest expense was $7.5 million and $12.1 million for the years ended December 31, 2014 and 2013, respectively. The decrease in interest expense was a result of a decrease in the total amount of loans outstanding as a result of the repayment of both the Clarendon and SeaBright loan facilities during 2014.
2014 versus 2013: We recorded net foreign exchange losses of $8.0 million for the non-life run-off segment for the year ended December 31, 2014 as compared to net foreign exchange gains of $5.9 million for the year ended
December 31, 2013. The net foreign exchange losses for the year ended December 31, 2014 arose primarily as a result of holding surplus Euro and British pound assets at a time when the U.S. dollar appreciated against these currencies.
In evaluating the underwriting performance of the Atrium segment, we consider the insurance ratios of Atrium 5, which is the active underwriting component of the segment and excludes AUL and the Holding Company. Atrium 5's insurance ratios are shown below.
The lower combined ratio for Atrium 5 in 2015 is reflected in the increased net earnings of Atrium 5, which were achieved despite challenging underwriting conditions. The results include a relatively consistent level of current year losses and higher net favorable prior year loss reserve development in 2015 as compared with 2014.
The following table provides gross premiums written by line of business for the Atrium segment for the years ended December 31, 2015 and 2014:
The following table provides net premiums earned by line of business for the Atrium segment for the years ended December 31, 2015, and 2014:
2014 versus 2013: Net premiums earned for the Atrium segment were $135.9 million and $32.2 million for the years ended December 31, 2014 and 2013, respectively. The increase was attributable to us only owning Atrium for approximately one month in 2013 as compared to a full year for 2014.
2015 versus 2014: Fees and commission income were $28.4 million and $26.2 million for the years ended December 31, 2015 and 2014, respectively. The fees represent management and profit commission fees earned by us in relation to AUL’s management of Syndicate 609 and other underwriting consortiums. The increase was due primarily to profit commission on higher syndicate profits in 2015 as compared with 2014.
2014 versus 2013: The increase in 2014 as compared to 2013 was due to us owning Atrium for a full year in 2014.
2014 versus 2013: For the year ended December 31, 2014, net incurred losses were $55.4 million, including net favorable prior year development of $18.7 million due to claims improvement and reserve releases largely related to our non-marine direct and facultative and upstream energy lines of business following reserve reviews. Current period net incurred losses and LAE were $74.1 million reflecting the combination of expected loss ratios on current period earned premium, as well as incurred losses during the year including from the war and terrorism and aviation lines of business. The increase in 2014 as compared to 2013 was due to us owning Atrium for a full year in 2014.
2015 versus 2014: Acquisition costs were $45.5 million and $43.4 million for the years ended December 31, 2015 and 2014, respectively. The Atrium 5 acquisition cost ratios for the years ended December 31, 2015 and 2014 were 34.4% and 31.9%, an increase of 2.5%. The increase was due to higher profit commissions on underlying business, which was more profitable in 2015 than in 2014.
2015 versus 2014: Salaries and benefits for the Atrium segment were $16.7 million and $20.1 million for the years ended December 31, 2015 and 2014, respectively. The decrease of $3.4 million was primarily due to more compensation costs being retained in Syndicate 609 versus in AUL. For the year ended December 31, 2015, the total of $16.7 million was comprised of salaries and benefits of $7.4 million, total current and prior year related share grant costs of $2.9 million and discretionary bonus of approximately $6.4 million. The total current and prior year share grant costs relate to Northshore incentive plan awards to Atrium employees. Expenses relating to the discretionary bonus and share grant costs will be variable and dependent on Atrium’s overall profitability.
2015 versus 2014: General and administrative expenses for the Atrium segment were $14.9 million and $14.8 million for the years ended December 31, 2015 and 2014, respectively. Expenses for the year ended December 31, 2015 were comprised of $12.5 million related to AUL’s direct expenses and Atrium’s share of syndicate expenses. In addition, expenses of $2.4 million for the year ended December 31, 2015 related to the amortization of the definite-lived intangible assets in the Holding Company.
2014 versus 2013: Interest expense was $5.4 million and $0.3 million for the years ended December 31, 2014 and 2013, respectively. The interest expense was in respect of borrowings under the Enstar revolving credit facility. The increase in 2014 as compared to 2013 was due to us owning Atrium for a full year in 2014.
2015 versus 2014: Noncontrolling interest in earnings of the Atrium segment was $14.2 million and $11.0 million for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, Trident and Dowling had a combined 40.39% noncontrolling interest in the Atrium segment, although their share of net earnings was higher due primarily to the interest expense recorded in the segment, which is an Enstar Specific Expense.
2014 versus 2013: Noncontrolling interest in earnings of the Atrium segment was $11.0 million and $4.2 million for the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, Trident and Dowling had a combined 41.02% noncontrolling interest in the Atrium segment, although their share of net earnings was higher due primarily to the interest expense recorded in the segment.
Refer to "Non-GAAP Financial Measures" for a description of how these ratios are calculated. The ratios are based upon the following amounts for StarStone, which exclude Holding Company amounts, for the year and nine months ended December 31, 2015 and 2014, respectively: net premiums earned of $577,071 and $380,259, net incurred losses and LAE of $331,219 and $221,290, acquisition costs of $109,347 and $65,734, and other operating expenses of $128,544 and $96,349.
2015 versus 2014: Premiums written in our property line increased during 2015 largely due to business underwritten by a new team of construction underwriters. The workers' compensation line of business continued to grow, as we expanded our geographic reach and range of products. Premiums written in our aerospace business decreased on an annualized basis following our decision to discontinue our space product and certain airlines business that no longer met our pricing standards. Gross premiums written for the 2014 comparative period only include the nine months beginning April 1, 2014.
2015 versus 2014: Acquisition costs of the StarStone segment increased to $109.3 million for the year ended December 31, 2015 from $65.7 million for the nine-month period ended December 31, 2014, primarily due to owning StarStone for a full year in 2015 and an increase in net premiums earned. The acquisition cost ratios for the year and nine-month period ended December 31, 2015 and 2014 were 18.9% and 17.3%, respectively. The ratio increased by 1.6% in the year ended December 31, 2015 as compared with the nine months ended December 31, 2014 primarily due to higher gross premium written in property and marine, which has higher acquisition cost ratios, partially offset by writing less aerospace, which has lower acquisition cost ratios.
2015 versus 2014: Salaries and benefits costs for the year and nine-month period ended December 31, 2015 and 2014 were $68.4 million and $55.8 million, respectively. The increase was due to the 2014 period only including nine months compared with a full year in 2015, partially offset by a reduction in annualized salaries and benefits due to an overall reduction in headcount primarily attributable to our ongoing expense management initiatives.
The following is a discussion and analysis of our results of operations for our Life and Annuities segment for the years ended December 31, 2015, 2014 and 2013, which are summarized below.
Net earnings were $10.6 million and $5.0 million for the years ended December 31, 2014 and 2013, respectively, an increase of $5.6 million. The 2014 period included a full year of results for Pavonia whereas the 2013 period included only nine months from the acquisition of Pavonia on March 31, 2013. The 2013 year also included non-recurring costs of $4.0 million in general and administrative expenses relating to the Pavonia acquisition. In addition, our investment results improved in 2014 compared to 2013.
A summary of our net premiums earned by type of major product is below.
2015 versus 2014: Substantially all of our premiums are earned in the United States and Canada. Net premiums earned were $86.9 million and $105.7 million for the years ended December 31, 2015 and 2014, respectively. Net premiums earned are expected to reduce at approximately 15 to 20% per annum. In the third quarter of 2015, we made the strategic decision to utilize the cancellation option on certain credit products, which decreased premium by approximately $2.0 million.
2014 versus 2013: Net premiums earned were $105.7 million and $95.0 million for the years ended December 31, 2014 and 2013, respectively. Substantially all net premiums earned in 2014 relate to the business of Pavonia. The 2014 period included a full year whereas the 2013 period included nine months from the Pavonia acquisition.
Annuity policy benefits during the year ended December 31, 2015 were $30.0 million, comprised of benefits paid of $46.4 million, partially offset by a reduction in reserves of $16.5 million. Annuity policy benefits during the year ended December 31, 2014 were $27.5 million, comprised of benefits paid of $52.7 million, partially offset by a reduction in reserves of $25.2 million. The increase in annuity policy benefits of $2.5 million from 2014 to 2015 was primarily due to a higher decrease in benefit reserves related to terminated annuitants in 2014 compared to 2015, partially offset by lower lump sum distributions paid during 2015.
2014 versus 2013: Life and annuity policy benefits were $108.0 million and $78.4 million for the years ended December 31, 2014 and 2013, respectively.
Annuity policy benefits during the year ended December 31, 2013 were $18.2 million, comprised of benefits paid of $37.5 million, partially offset by a reduction in reserves of $19.3 million. The increase in annuity policy benefits of $9.3 million from 2013 to 2014 was primarily due to the Pavonia business, which was owned for nine months in 2013 as compared to a full year in 2014.
Life and disability policy benefits during the year ended December 31, 2013 were $48.9 million, comprised of benefits paid of $64.3 million, partially offset by a reduction in reserves of $15.4 million. The increase in life and disability policy benefits of $18.9 million from 2013 to 2014 was primarily due to the Pavonia business, which was owned for nine months in 2013 as compared to a full year in 2014, and higher lump sum distributions to annuitants in 2014.
2015 versus 2014: General and administrative expenses were relatively consistent at $11.9 million and $11.2 million for the years ended December 31, 2015 and 2014, respectively. For the year ended December 31, 2015, there was a decrease in expenses related to Pavonia, which was offset by expenses relating to the life settlements business that we acquired.
2014 versus 2013: General and administrative expenses were $11.2 million and $16.0 million for the years ended December 31, 2014 and 2013, respectively. The decrease in expenses primarily related to non-recurring costs associated with the acquisition of Pavonia of approximately $4.0 million in 2013.
To follow an investment strategy designed to emphasize the preservation of our invested assets that also meet our credit quality and diversification objectives.
In the Life and Annuities segment we have limited ability to shorten the duration of the liabilities, and therefore we maintain a longer duration investment portfolio of highly rated fixed maturity investments, primarily corporate bonds, that attempts to match the cash flows and duration of our liability profile. As at December 31, 2015, the duration of our fixed maturity investment portfolio associated with our PPA business (classified as held-to-maturity) was shorter than the liabilities, as a significant amount of the liabilities extend beyond 30 years and it is difficult, due to limited investment options, to match duration and cash flows beyond that period. Our non-PPA life business has a shorter duration liability profile. As at December 31, 2015, the duration of the associated investments was shorter than the non-PPA liabilities, although we have the discretion to change this in the future. Our non-PPA investments are primarily corporate bonds classified as trading, which allows us to sell existing securities to buy higher yielding securities and funds in the future.
We utilize and pay fees to various companies to provide investment advisory and/or management services. These fees, which are predominantly based upon the amount of assets under management, are included in net investment income. The total fees we paid to our investment managers for the year ended December 31, 2015 were approximately $8.0 million, including approximately $1.0 million to our largest single investment manager.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Enstar Group Limited’s internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Enstar Group Limited ("Enstar") is a multi-faceted insurance group that offers innovative capital release solutions and specialty underwriting capabilities through its network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Our ordinary shares are listed on the NASDAQ Global Select Market under the ticker symbol "ESGR". Unless the context indicates otherwise, the terms "Enstar," "we," "us" or "our" mean Enstar Group Limited and its consolidated subsidiaries and the term "Parent Company" means Enstar Group Limited and not any of its consolidated subsidiaries.
StarStone - StarStone, formerly known as Torus, is a global specialty insurer that underwrites a diverse range of property, casualty and specialty insurance through its operations in Bermuda, the United States, the United Kingdom, and Continental Europe. Certain run-off business of StarStone is recorded in our Non-life Run-off segment.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The consolidated financial statements include our assets, liabilities and results of operations as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013. Results of operations for acquired subsidiaries are included from the date of acquisition. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ materially from our estimates. Accounting policies that we believe are most dependent on assumptions and estimates are considered to be our critical accounting policies and are related to the determination of:
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees incurred at the time a contract or policy is issued and that vary with and are directly related to our reinsurance and insurance business, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income.
Policy benefits for life and annuity contracts (“policy benefits”) are calculated using standard actuarial techniques and cash flow models. Policy benefits are established and maintained at a level that we estimate will, when taken together with future premium payments and investment income expected to be earned on associated premiums, be sufficient to support all future cash flow benefit obligations and third-party servicing obligations as they become payable. We review policy benefits regularly and perform loss recognition testing based upon cash flow projections.
Since the development of the policy benefits is based upon cash flow projection models, we make estimates and assumptions based on experience and industry mortality tables, longevity and morbidity rates, lapse rates, expenses and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefits are determined at the inception of the contracts, reviewed and adjusted at the point of acquisition, as required, and are locked-in throughout the life of the contract unless a premium deficiency develops. The assumptions are reviewed no less than annually and are unlocked if they would result in a material adverse reserve change. These estimates are established based upon transaction-specific historical experience, information provided by the ceding company for the assumed business and industry experience. Actual results could differ from these estimates. As the experience on the contracts emerges, the assumptions are reviewed by management. We determine whether actual and anticipated experience indicates that existing policy benefits, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If such a review indicates that policy benefits should be greater than those currently held, then the locked-in assumptions are revised and a charge for policy benefits is recognized at that time.
Amounts billed to, and due from, reinsurers resulting from paid movements in the underlying business are calculated in accordance with the terms of the individual reinsurance contracts. Similarly, reinsurance balances recoverable related to our case reserves are calculated by applying the terms of any applicable reinsurance coverage to movements in the underlying case reserves. Our estimate of reinsurance balances recoverable related to IBNR reserves is recognized on a basis consistent with the underlying IBNR reserves.
Short-term and fixed maturity investments classified as available-for-sale are carried at fair value, with unrealized gains and losses excluded from net earnings and reported as a separate component of accumulated other comprehensive income. Realized gains and losses on sales of investments classified as available-for-sale are recognized in the consolidated statements of earnings.
In assessing whether it is more likely than not that we will be required to sell a fixed maturity investment before its anticipated recovery, we consider various factors including our future cash flow requirements, legal and regulatory requirements, the level of our cash, cash equivalents, short-term investments and fixed maturity investments available-for-sale in an unrealized gain position, and other relevant factors.
If we conclude an investment is other-than-temporarily impaired ("OTTI"), then the difference between the fair value and the amortized cost of the investment is presented as an OTTI charge in the consolidated statements of earnings, with an offset for any non-credit related loss component of the OTTI charge to be recognized in other comprehensive income. Accordingly, only the credit loss component of the OTTI amount would have an impact on our earnings.
Our reporting currency is the U.S. dollar. Assets and liabilities of entities whose functional currency is not the U.S. dollar are translated at period end exchange rates. Revenues and expenses of such foreign entities are translated at average exchange rates during the year. The effect of the currency translation adjustments for these foreign entities is included in accumulated other comprehensive income.
Other foreign currency assets and liabilities that are considered monetary items are translated at exchange rates in effect at the balance sheet date. Foreign currency revenues and expenses are translated at transaction date exchange rates. These exchange gains and losses are recognized in net earnings.
We recognize all derivatives as either assets or liabilities in the consolidated balance sheets and carry them at the fair value of the instrument. We utilize derivative instruments in our foreign currency risk management strategy. Changes in fair value and realized gains or losses on derivative instruments are recognized in net earnings.
We recognize a tax benefit relating to uncertain tax positions only where the position is more likely than not to be sustained assuming examination by tax authorities. A liability is recognized for any tax benefit (along with any interest and penalty, if applicable) claimed in a tax return in excess of the amount allowed to be recognized in the financial statements under U.S. GAAP. Any changes in amounts recognized are recorded in the period in which they are determined.
The purchase method is used to account for acquisitions. This method requires that we record the acquired assets and liabilities at their estimated fair value. The fair values of each of the acquired reinsurance assets and liabilities are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Our run-off strategy, as well as that of other run-off market participants, is expected to be different from the sellers as generally sellers are not specialized in running off insurance and reinsurance liabilities whereas we and other market participants do specialize in such run-offs.
The key assumptions used by us and, we believe, by other run-off market participants in the fair valuation of acquired companies are (i) the projected payout, timing and amount of claims liabilities; (ii) the related projected timing and amount of reinsurance collections; (iii) a risk-free discount rate, which is applied to determine the present value of the future cash flows; (iv) the estimated unallocated LAE to be incurred over the life of the run-off; (v) the impact of any accelerated run-off strategy; and (vi) an appropriate risk margin.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, which amends the guidance on the classification, measurement and disclosure of leases for both lessors and lessees. The ASU requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet and to disclose qualitative and quantitative information about leasing arrangements. The ASU is effective for interim and annual reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
In May 2015, the FASB issued ASU No. 2015-07, which will eliminate the requirement to categorize investments in the fair value hierarchy if their fair value is measured at the net asset value ("NAV") per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. In addition, the scope of current disclosure requirements for investments eligible to be measured at NAV is limited to investments for which the practical expedient is applied. Reporting entities are required to adopt the ASU retrospectively. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. We expect this guidance to have an impact on our disclosures, but we do not expect it will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-9, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC including ASC 944 - Insurance. However, while contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts should be accounted for under the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets and include guidance on recognition and measurement. The ASU is effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
The following table summarizes the provisional fair values of the assets acquired and liabilities assumed in the Alpha transaction at the acquisition date, allocated by segment.
From the date of acquisition to December 31, 2015, we earned premiums of nil, recorded net incurred losses and LAE of nil on those earned premiums, and recorded $0.1 million in net losses attributable to Enstar Group Limited related to Alpha’s business.
On May 5, 2015, we completed the acquisition of certain subsidiaries from Wilton Re Limited ("Wilton Re"), which hold interests in life insurance policies. These interests were acquired by Wilton Re in the secondary and tertiary markets and through collateralized lending transactions.
The net unearned premiums acquired included a decrease of $34.6 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. As at December 31, 2015, $16.1 million has been amortized to acquisition costs and $13.4 million has been amortized to net premiums earned in the consolidated statements of earnings and comprehensive income. As at December 31, 2015, the remaining balance of the fair value adjustment was $5.1 million, which will be amortized to net premiums earned over the remaining terms of the underlying policies.
On April 1, 2014, we, together with Trident V, L.P., Trident V Parallel Fund, L.P. and Trident V Professionals Fund, L.P., which are managed by Stone Point Capital LLC (collectively, "Trident"), completed the acquisition of Torus Insurance Holdings Limited, which we later renamed as StarStone Insurance Bermuda Limited ("StarStone"). StarStone is an A- rated global specialty insurer with six wholly-owned insurance vehicles, including Lloyd’s Syndicate 1301. At closing, StarStone became directly owned by Bayshore Holdings Ltd. ("Bayshore"), which was 60% owned by Kenmare Holdings Ltd., our wholly-owned subsidiary, and 40% owned by Trident. We subsequently renamed Bayshore as StarStone Specialty Holdings Limited ("StarStone Holdings").
The purchase price was allocated to the acquired assets and liabilities of StarStone based on estimated fair values at the acquisition date. We recognized goodwill of $13.0 million, primarily attributable to StarStone’s assembled workforce. We also recognized indefinite lived intangible assets of $23.9 million and other definite lived intangible assets of $20.0 million.
The following table summarizes the fair values of the assets acquired and liabilities assumed in the StarStone transaction at the acquisition date, allocated by segment.
Summary of the Pro Forma Adjustments to the Pro Forma Condensed Consolidated Statement of Earnings for the Twelve Months Ended December 31, 2013 (Unaudited):
On December 23, 2015, we completed a corporate reorganization of certain of our subsidiary holding companies. Following the reorganization, StarStone Holdings and Northshore are owned by a common parent, North Bay Holdings Limited ("North Bay"), as described in Note 14 - "Noncontrolling Interests".
The shareholders’ agreements governing North Bay, StarStone Holdings and Northshore, among other things, provide that Kenmare has the right to appoint three members to the StarStone Holdings board of directors and Trident has the right to appoint two members. The shareholders’ agreements also include redemption rights and obligations which are described in Note 21 - "Commitments and Contingencies."
The purchase price was allocated to the acquired assets and liabilities of Atrium based on estimated fair values at the acquisition date. We recognized goodwill of $38.8 million, all of which was recorded within the Atrium segment and is attributable primarily to Atrium’s assembled workforce. We also recognized indefinite-lived intangible assets of $63.0 million and other definite lived intangible assets of $27.0 million.
The net unearned premiums acquired included a decrease of $16.7 million to adjust net unearned premiums to fair value. This fair value adjustment is included within unearned premiums on the consolidated balance sheet. For the years ended December 31, 2015 and 2014, $0.7 million and $16.0 million, respectively, was amortized to acquisition costs in the consolidated statements of earnings and comprehensive income. As at December 31, 2015, there was no remaining fair value adjustment for net unearned premiums.
The fair value of the Lloyd’s syndicate capacity was estimated using the multi-period excess-earnings method. Lloyd’s syndicate capacity represents Atrium’s authorized premium income limit to write insurance business in the Lloyd’s market. Atrium’s proportionate share of Syndicate 609 (the syndicate through which it conducts its Lloyd’s operations) is approximately 25%. The capacity is renewed annually at no cost to us but may be freely purchased or sold, subject to Lloyd’s approval. The ability to write insurance business within the syndicate capacity is indefinite with the premium income limit being set annually by Atrium, subject to Lloyd’s approval.
Distribution channels represent broker relationships and the network of insurance companies through which Atrium conducts its operations. The fair value of Atrium’s distribution channel was estimated using the income approach. Critical inputs into the valuation model for customer relationships and broker relationships include estimates of expected premium and attrition rates, and discounting at a weighted average cost of capital.
On September 9, 2013, Kenmare and Trident, completed the acquisition of Arden through Northshore.
The purchase price for Arden was $79.6 million. Kenmare’s portion of the purchase price was $47.8 million, and was financed by borrowings under our revolving credit facility.
The following summarizes the estimated fair values of the assets acquired and the liabilities assumed as of the date of acquisition, allocated by segment:
The purchase price and fair value of the assets acquired in the Pavonia acquisition were as follows:
The purchase price and fair value of the assets acquired in the SeaBright acquisition were as follows:
On February 17, 2016, we entered into a reinsurance agreement with Allianz SE ("Allianz") to reinsure portfolios of Allianz's run-off business. Pursuant to the reinsurance agreement, our subsidiary will reinsure 50% of certain portfolios of workers' compensation, construction defect, and asbestos, pollution, and toxic tort business originally held by Fireman's Fund Insurance Company, and in the process will assume net reinsurance reserves of approximately $1.1 billion. Affiliates of Allianz will retain approximately $1.1 billion of reinsurance premium as funds withheld collateral for the obligations of our subsidiary under the reinsurance agreement and we will transfer approximately $110.0 million to a reinsurance trust to further support our subsidiary's obligations. We have also provided a limited parental guarantee, which is subject to a maximum cap. The combined monetary total of the support offered by us through the trust and parental guarantee will initially be capped at $270.0 million. Consummation of the transaction is subject to final regulatory approval.
On November 30, 2015, we completed the assignment and assumption of a portfolio of primarily workers' compensation business from The Doctors Company and its affiliates. Total assets and liabilities assumed were approximately $29.5 million.
On January 1, 2014, we entered into a reinsurance-to-close contract ("RITC") of the 2011 and prior underwriting years of account of a Lloyd’s syndicate, under which we assumed total net insurance reserves of approximately £17.0 million (approximately $28.1 million) for cash consideration of an equal amount.
On April 26, 2013, we completed the assignment and assumption of a portfolio of workers’ compensation business from American Physicians Assurance Corporation and APSpecialty Insurance Company (collectively "APS"). Total assets and liabilities assumed were approximately $35.3 million.
We hold: (i) trading portfolios of fixed maturity investments, short-term investments and equities, carried at fair value; (ii) a held-to-maturity portfolio of fixed maturity investments carried at amortized cost; (iii) available-for-sale portfolios of short-term and fixed maturity investments carried at fair value; and (iv) other investments carried at either fair value or cost.
We hold a portfolio of held-to-maturity securities to support our annuity business. The amortized cost and fair values of our fixed maturity investments classified as held-to-maturity were as follows:
The amortized cost and fair values of our short-term and fixed maturity investments classified as available-for-sale were as follows:
The following tables summarize our fixed maturity and short-term investments in a gross unrealized loss position:
As at December 31, 2015 and December 31, 2014, the number of securities classified as available-for-sale in an unrealized loss position was 332 and 212, respectively. Of these securities, the number of securities that had been in an unrealized loss position for twelve months or longer was 124 and 120, respectively.
As at December 31, 2015 and December 31, 2014, the number of securities classified as held-to-maturity in an unrealized loss position was 109 and 61, respectively. Of these securities, the number of securities that had been in unrealized loss position for twelve months or longer was 53 and 57, respectively.
The following table summarizes our other investments carried at fair value:
Multi-strategy hedge fund comprises an investment in a hedge fund that invests in a variety of asset classes including funds, fixed income, equity securities and other investments. The fund is eligible for redemption after July 1, 2016.
Real estate debt fund invests primarily in U.S. commercial real estate loans and securities. A redemption request for this fund can be made 10 days after the date of any monthly valuation; the fund states that it will make commercially reasonable efforts to redeem the investment within the next monthly period.
CLO equity funds comprise two funds that invest primarily in the equity tranches of term-financed securitizations of diversified pools of corporate bank loans. One of the funds has a fair value of $4.4 million, part of a self-liquidating structure which is expected to pay out over two to six years. The other fund has a fair value of $9.5 million and is eligible for redemption in 2018.
Investments of $1.1 million in fixed income hedge funds were subject to gates or side-pockets, where redemptions are subject to sale of underlying investments. A gate is the ability to deny or delay a redemption request, whereby a side-pocket is a designated account for which the investor loses it redemption rights. As at December 31, 2015, we had unfunded commitments to private equity funds of $140.2 million.
At December 31, 2015, our best estimate of the life insurance premiums required to keep the policies in force, payable in the 12 months ending December 31, 2016 and the four succeeding years ending December 31, 2020 is $17.9 million, $17.9 million, $17.9 million, $18.1 million, and $17.0 million, respectively.
Components of net realized and unrealized gains (losses) for the years ended December 31, 2015, 2014 and 2013 were as follows:
The gross realized gains and losses on available-for-sale securities included in the table above resulted from sales of $95.1 million, $90.7 million and $20.5 million for the years ended December 31, 2015, 2014 and 2013, respectively.
We are required to maintain investments and cash and cash equivalents on deposit to support our insurance and reinsurance operations. The investments and cash and cash equivalents on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust accounts to collateralize business with our insurance and reinsurance counterparties. These trust accounts generally take the place of letter of credit requirements. The assets in trusts as collateral are primarily highly rated fixed maturity securities. The carrying value of our restricted assets, including restricted cash of $511.3 million, as of December 31, 2015 was as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
Level 3 - Valuations based on unobservable inputs where there is little or no market activity. Unadjusted third party pricing sources or management's assumptions and internal valuation models may be used to determine the fair values.
The fair values for all securities in the fixed maturity investments portfolio are independently provided by the investment accounting service providers, investment managers and investment custodians, each of which utilize internationally recognized independent pricing services. We record the unadjusted price provided by the investment accounting service providers, investment managers or investment custodians and validate this price through a process that includes, but is not limited to: (i) comparison of prices against alternative pricing sources; (ii) quantitative analysis (e.g. comparing the quarterly return for each managed portfolio to its target benchmark); (iii) evaluation of methodologies used by external parties to estimate fair value, including a review of the inputs used for pricing; and (iv) comparing the price to our knowledge of the current investment market. Our internal price validation procedures and review of fair value methodology documentation provided by independent pricing services have not historically resulted in adjustment in the prices obtained from the pricing service.
Corporate securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are determined using the spread above the risk-free yield curve, reported trades, broker-dealer quotes, benchmark yields, and industry and market indicators. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2.
Asset-backed securities consist primarily of investment-grade bonds backed by pools of loans with a variety of underlying collateral. Residential and commercial mortgage-backed securities include both agency and non-agency originated securities. The significant inputs used to determine the fair value of these securities include the spread above the risk-free yield curve, reported trades, benchmark yields, broker-dealer quotes, prepayment speeds and default rates. These are considered observable market inputs and, therefore, the fair values of these securities are classified within Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. Broker-dealer quotes for which significant observable inputs are unable to be corroborated with market observable information are classified within Level 3.
We have categorized all of our investments in equities other than preferred stock as Level 1 investments because the fair values of these investments are based on quoted prices in active markets for identical assets or liabilities. The fair value estimates of our investments in preferred stock are based on observable market data and, as a result, have been categorized as Level 2.
We have ongoing due diligence processes with respect to the other investments carried at fair value in which we invest and their managers. These processes are designed to assist us in assessing the quality of information provided by, or on behalf of, each fund and in determining whether such information continues to be reliable or whether further review is warranted. Certain funds do not provide full transparency of their underlying holdings; however, we obtain the audited financial statements for funds annually, and regularly review and discuss the fund performance with the fund managers to corroborate the reasonableness of the reported net asset values. The use of net asset value as an estimate of the fair value for investments in certain entities that calculate net asset value is a permitted practical expedient. While reported net asset value is the primary input to the review, when the net asset value is deemed not to be indicative of fair value, we may incorporate adjustments to the reported net asset value based upon information from the fund manager (and not use the permitted practical expedient) on an investment by investment basis. These adjustments may involve significant management judgment.
The fixed income funds and equity funds in which we invest have been classified as Level 2 investments because their fair value is estimated using the published net asset value and because the fixed income funds and equity funds are highly liquid.
The real estate debt fund in which we invest has been valued based on the most recent published net asset value. This investment has been classified as Level 3.
In providing valuations, the CLO equity manager and brokers use observable and unobservable inputs. Of the significant unobservable market inputs used, the default and loss severity rates involve the most judgment and create the most sensitivity. A significant increase (or decrease) in either of these significant inputs in isolation would result in lower (or higher) fair value estimates for direct investments in CLO equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs because they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (or decrease) in either of these significant inputs in isolation would result in higher (or lower) fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, we receive the valuation from the external CLO manager and brokers and then review the underlying cash flows and key assumptions used by the manager/broker. We review and update the significant unobservable inputs based on information obtained from secondary markets. These inputs are our responsibility and we assess the reasonableness of the inputs (and if necessary, update the inputs) through communicating with industry participants, monitoring of the transactions in which we participate (for example, to evaluate default and loss severity rate trends), and reviewing market conditions, historical results, and emerging trends that may impact future cash flows.
Our remaining other investments carried at fair value have been valued based on the latest available capital statements, and have all been classified as Level 3.
During 2015, we transferred $184.8 million of asset-backed securities and $29.4 million of commercial mortgage-backed securities from Level 2 to Level 3 and $22.6 million of other investments from Level 3 to Level 2. During 2015, there were no transfers between Levels 1 and 2. Transfers into or out of Level 3 are recorded at their fair values as of the end of the reporting period, consistent with the date of determination of fair value. The transfers from Level 2 to Level 3 relate to securities valued using single unadjusted broker-dealer quotes. We were unable to obtain sufficient information to determine if the broker quotes used significant observable inputs. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The transfer from Level 3 to Level 2 was based upon a liquidity event which provided us with market observable information on significant inputs.
The following table presents a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the years ended December 31, 2015 and 2014:
Net realized and unrealized gains related to Level 3 assets in the table above are included in net realized and unrealized (losses) gains in our consolidated statements of earnings.
The following tables present our fair value hierarchy for those assets carried at cost or amortized cost in the consolidated balance sheet but for which disclosure of the fair value is required as of December 31, 2015 and 2014:
Disclosure of fair value of amounts relating to insurance contracts is not required. Our remaining assets and liabilities were generally carried at cost or amortized cost, which due to their short-term nature approximates fair value as of December 31, 2015 and 2014.
We had no derivative instruments as at December 31, 2015 and 2014 or during the year ended December 31, 2015. The following table sets forth the estimated fair value of derivative instruments recorded within other assets on the condensed consolidated balance sheet as at December 31, 2013, and realized gains (losses) on derivative instruments recorded in net earnings for the years ended December 31, 2014 and 2013:
The following table provides the total reinsurance balances recoverable as at December 31, 2015 and, 2014:
Our insurance and reinsurance run-off subsidiaries, prior to acquisition, used retrocessional agreements to reduce their exposure to the risk of insurance and reinsurance assumed. On an annual basis, both Atrium and StarStone purchase a tailored outwards reinsurance program designed to manage their risk profiles. The majority of Atrium’s and StarStone's third-party reinsurance cover is with highly rated reinsurers or is collateralized by letters of credit.
The fair value adjustments, determined on acquisition of insurance and reinsurance subsidiaries, are based on the estimated timing of loss and LAE recoveries and an assumed interest rate equivalent to a risk free rate for securities with similar duration to the reinsurance recoverables acquired plus a spread to reflect credit risk, and are amortized over the estimated recovery period, as adjusted for accelerations in timing of payments as a result of commutation settlements.
As of December 31, 2015 and 2014, we had reinsurance balances recoverable of approximately $1.5 billion and $1.3 billion, respectively. The increase of $141.4 million in reinsurance balances recoverable was primarily a result of the Sussex acquisition, partially offset by commutations and cash collections made during the year ended December 31, 2015 in our Non-life Run-off and StarStone segments.
The reserves for unpaid reported losses and LAE are established by management based on reports from brokers, ceding companies and insureds and represents the estimated ultimate cost of events or conditions that have been reported to, or specifically identified by us. IBNR reserves are established by management based on actuarially determined estimates of ultimate losses and loss expenses. Inherent in the estimate of ultimate losses and LAE are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled. Accordingly, ultimate losses and LAE may differ materially from the amounts recorded in the consolidated financial statements. These estimates are reviewed regularly and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments, if any, will be recorded in earnings in the period in which they become known. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years.
The following table summarizes the liability for losses and LAE by segment as at December 31, 2015 and 2014:
The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended December 31, 2015, 2014 and 2013:
The table below provides a reconciliation of the beginning and ending reserves for losses and LAE for the years ended December 31, 2015, 2014 and 2013 for the Non-life Run-off segment:
Net incurred losses and LAE in the Non-life Run-off segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
for the portion of the run-off business acquired with Sussex). Excluding current period net incurred losses and LAE of $39.9 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $310.8 million, which was attributable to a reduction in estimates of net ultimate losses of $242.7 million, a reduction in provisions for bad debt of $25.3 million and a reduction in provisions for unallocated LAE of $62.7 million, relating to 2015 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $19.9 million.
The reduction in net IBNR reserves of $377.7 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of the our actuarial methodologies to revised historical loss development data, following 79 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2015, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $366.3 million for net paid losses of $501.2 million, related to the settlement of non-commuted losses in the year and 79 commutations and policy buy-backs of assumed and ceded exposures (including the partial commutation of one of our top ten ceded recoverables as at January 1, 2015). Net advised case and LAE reserves settled by way of commutation and policy buyback during the year ended December 31, 2015 amounted to $56.6 million (comprising $140.3 million of ceded incurred reinsurance recoverable case reserves partially offset by $83.7 million of assumed case reserves and LAE reserves).
The net reduction in incurred losses and LAE for the year ended December 31, 2014 of $264.7 million included current period net incurred losses and LAE of $24.2 million related to current period net earned premium of $31.2 million (primarily for the portion of the run-off business acquired with StarStone). Excluding current period net losses and LAE of $24.2 million, net incurred losses and LAE liabilities relating to prior periods were reduced by $288.9 million, which was attributable to a reduction in estimates of net ultimate losses of $235.8 million, reduction in provisions for bad debts of $7.7 million and a reduction in provision for unallocated LAE of $49.5 million, relating to 2014 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $4.0 million.
The net reduction in incurred losses and LAE for the year ended December 31, 2013 of $183.0 million included current period incurred losses of $74.1 million related to SeaBright. Excluding SeaBright's current period net incurred losses and LAE of $74.1 million, net incurred losses and LAE relating to prior periods were reduced by $257.1 million, which was attributable to a reduction in estimates of net ultimate losses of $215.5 million and a reduction in provisions for unallocated LAE of $49.6 million, relating to 2013 run-off activity, partially offset by an increase in provisions for bad debt of $2.0 million and the amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $5.9 million.
The reduction in net IBNR reserves of $265.2 million relating to prior periods was a result of the application, on a basis consistent with the assumptions applied in the prior period, of our actuarial methodologies to revised historical loss development data, following 108 commutations and policy buy-backs, to estimate loss reserves required to cover liabilities for unpaid losses and LAE relating to non-commuted exposures. The prior period estimate of net IBNR reserves was reduced as a result of the combined impact on all classes of business of loss development activity during 2013, including commutations and the favorable trend of loss development related to non-commuted policies compared to prior forecasts. The net incurred loss development resulting from settlement of net advised case and LAE reserves of $310.5 million for net paid losses of $360.2 million related to the settlement of non-commuted losses in the year and 108 commutations and policy buy-backs of assumed and ceded exposures (including the commutation of one of our top ten assumed exposures and one of our top ten ceded recoverables as at January 1, 2013). Net advised case and LAE reserves settled by way of commutation and policy buy-back during the year ended December 31, 2013 amounted to $29.8 million (comprising $97.3 million of assumed case reserves and LAE reserves partially offset by $67.5 million of ceded incurred reinsurance recoverable case reserves).
Atrium was acquired in the fourth quarter of 2013. The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended December 31, 2015, 2014 and 2013:
Net incurred losses and LAE for the years ended December 31, 2015 and 2014 were as follows:
Policy benefits for life and annuity contracts as at December 31, 2015 and 2014 were as follows:
Intangible assets with a definite life - fair value adjustments ("FVA") relates to outstanding losses and LAE, policy benefits for life and annuity contracts, unearned premiums and reinsurance recoverables. These are included as a component of each balance sheet item. FVA are amortized in proportion to future premiums for policy benefits for life and annuity contracts over the estimated payout or recovery period for outstanding losses and LAE and reinsurance recoverables and as the unearned premiums expire for business in-force as of the acquisition date.
Other assets - deferred charge relates to retroactive reinsurance policies providing indemnification of losses and LAE with respect to past loss events. At the inception of a contract, a deferred charge asset is recorded for the excess, if any, of the estimated ultimate losses payable over the premiums received. These amounts relate to the transactions with Voya Financial and Sun Life, described in Note 4 - "Significant New Business".
We utilize debt facilities primarily for acquisitions and, from time to time, for general corporate purposes. Under these facilities, loans payable and accrued interest as of December 31, 2015 and 2014 were as follows:
For the years ended December 31, 2015, 2014 and 2013, we incurred interest expense of $19.4 million, $12.9 million and $12.4 million, respectively, on our loan facilities.
Financial and business covenants imposed on us include certain limitations on mergers and consolidations, acquisitions, indebtedness and guarantees, restrictions as to dispositions of stock and assets, and limitations on liens. Generally, the financial covenants require us to maintain a gearing ratio of consolidated indebtedness to total capitalization of not greater than 0.35 to 1.0 and to maintain a consolidated tangible net worth of not less than the aggregate of (i) $1.5 billion, (ii) 50% of positive net income since June 30, 2014, and (iii) 75% of the proceeds of any common stock issuance. In addition, the weighted-average credit rating of our cash and fixed maturity investments must be "BBB" or greater at all times. We are in compliance with the covenants of the EGL Revolving Credit Facility.
On December 24, 2014, we entered into a four-year term loan (the "Sussex Facility", formerly called the Companion Facility) with two financial institutions. This facility was fully utilized to borrow $109.0 million to fund 50% of the consideration payable for the acquisition of Sussex, which was completed on January 27, 2015. During 2015, we repaid $15.0 million of the outstanding principal under this facility. Subsequent to December 31, 2015, we repaid $20.5 million of the outstanding principal on the facility, bringing the outstanding principal to $73.5 million.
Interest is payable at least every 6 months at a rate of LIBOR plus 2.75%. In the event of default, the interest rate increases by an additional 1% and early repayment may be demanded, or the lender could proceed against the security. This facility is secured by a first priority interest in all of the assets and stock of Sussex.
We previously had term credit facilities relating to our 2011 acquisition of Clarendon National Insurance Company and our 2013 acquisition of SeaBright. During the year ended December 31, 2014 we repaid $79.0 million and $111.0 million, respectively, in full satisfaction of the outstanding balances.
On May 8, 2014, Trident's RNCI was reduced by $6.2 million when Dowling purchased common shares of Northshore and StarStone Holdings from Kenmare and Trident (on a pro rata basis in accordance with their
respective interests) for an aggregate amount of $15.4 million. The impact on Trident of the Dowling transaction was to reduce its RNCI in both StarStone Holdings and Northshore from 40% to 39.32%.
The transfer from noncontrolling interest in 2015 related to Dowling's interest. It was transferred to RNCI on December 31, 2015 following the corporate reorganization.
Refer to Note 2 - "Significant Accounting Policies," Note 3 - "Acquisitions," Note 19 - "Related Party Transactions" and Note 21 - "Commitments and Contingencies" for additional information regarding RNCI.
As of December 31, 2015, we had $3.9 million of noncontrolling interest ("NCI") primarily related to an external interest in one of our non-life run-off subsidiaries. A reconciliation of the beginning and ending carrying amount of the equity attributable to NCI is included in the Consolidated Statement of Changes in Shareholders Equity.
On June 30, 2015, we entered into a Sale and Purchase Agreement with J.C. Flowers II L.P., J.C. Flowers II-A L.P., J.C. Flowers II-B, L.P. and Financial Service Opportunities L.P. (collectively, the "JCF II Funds"), pursuant to which we purchased all of the non-voting preference shares of Cumberland Holdings Ltd. and Courtenay Holdings Ltd., which represent all of the NCI owned directly by the JCF II Funds in our subsidiaries, for an aggregate price of $140.0 million. Immediately prior to the repurchase, the book value of the JCF II Funds’ NCI was $182.8 million. The transaction closed on September 30, 2015.
The difference between the price we paid and the book value of the NCI immediately prior to repurchase has been reflected as an increase to additional paid in capital.
The Series C shares were originally issued in connection with investment transactions in April and December of 2011 and remain outstanding. The Series C shares: (i) have all of the economic rights (including dividend rights) attaching to Voting Ordinary Shares but are non-voting except in certain limited circumstances; (ii) will automatically convert at a one-for-one exchange ratio (subject to adjustment for share splits, dividends, recapitalizations, consolidations or similar transactions) into Voting Ordinary Shares if the registered holder transfers them in a widely dispersed offering; (iii) may only vote on certain limited matters that would constitute
There were 404,771 Series E shares issued and outstanding. There were 714,015 Series E shares originally issued and outstanding in connection with the acquisition of StarStone. During 2015, 309,244 of the previously issued and outstanding Series E shares were converted into Voting Ordinary Shares upon market sales constituting a widely dispersed offering. The Series E shares have substantially the same rights as the Series C shares, except that (i) they are convertible only into Voting Ordinary Shares and (ii) they may only vote as required under Bermuda law. The Series E shares include all other Non-Voting Ordinary Shares authorized under our bye-laws but not classified as Series A, B, C or D Non-Voting Ordinary Shares.
The following table sets forth the comparison of basic and diluted earnings per share for the years ended December 31, 2015, 2014 and 2013:
Compensation costs of $6.1 million, $3.9 million and $2.9 million relating to these share awards were recognized in our statement of earnings for the years ended December 31, 2015, 2014 and 2013, respectively. The unrecognized compensation cost related to our non-vested share awards as at December 31, 2015 was $5.5 million. This cost is expected to be recognized over the next 1.7 years, which is the weighted average contractual life of the awards.
The aggregate intrinsic value is calculated as the pre-tax difference between the exercise price of the underlying share awards and the closing price per share of our ordinary shares of $150.04 on December 31, 2015.
Compensation expense for SARs is based on the estimated fair value on the date of grant using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, expected term, expected dividend yield and risk-free interest rate. SARs are liability-classified awards for which compensation expense and the liability are re-measured using the then-current Black Scholes assumptions at each interim reporting date based upon the portion of the requisite service period rendered. Compensation costs of $8.9 million and $7.0 million relating to these share awards were recognized in our statement of earnings for the years ended December 31, 2015 and 2014, respectively. We did not grant any SARs during the year ended December 31, 2013. The unrecognized compensation cost related to our SARs as at December 31, 2015 was $13.6 million. This cost is expected to be recognized over the next 1.53 years, which is the weighted-average contractual life of the awards.
The following table sets forth the assumptions used to estimate the fair value of the SARs using the Black-Scholes option valuation model as at December 31, 2015 and 2014:
Pension expense relating to defined contribution plans for the years ended December 31, 2015, 2014 and 2013 was $10.3 million, $9.2 million and $6.0 million, respectively. The increase for 2015 over the same periods in 2014 and 2013 was attributable to the increase in employee headcount as a result of our acquisitions described in Note 3 - "Acquisitions."
Our effective tax rate is driven by the geographical distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions. Under current Bermuda law, we are exempted from paying any taxes in Bermuda on income or capital gains until March 2035. The local expected rates for foreign taxes, in the table above, were computed as the sum of the calculations of pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable weighted-average statutory tax rate.
Deferred tax assets and liabilities reflect the tax effect of the differences between the financial reporting and income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities were as follows:
As of December 31, 2015 and 2014, we had deferred tax asset valuation allowances of $368.0 million and $408.4 million respectively related to foreign subsidiaries. The valuation allowances are maintained primarily due to the inability to demonstrate that it was more likely than not that the related deferred tax assets would be realized. The change in the valuation allowance is due primarily to the reduction in gross deferred tax assets partially offset by the change in net operating loss carryforwards.
Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. Tax authorities may propose adjustments to our income taxes. Listed below are the tax years that remain subject to examination by major tax jurisdiction as of December 31, 2015:
In addition, we have entered into certain agreements with Trident with respect to Trident’s co-investments in the Atrium, Arden, and StarStone acquisitions. These include investors’ agreements and shareholders’ agreements, which provide for, among other things: (i) our right to redeem Trident’s equity interest in the Atrium/Arden and StarStone transactions in cash at fair market value within the 90 days following the fifth anniversary of the Arden and StarStone closings, respectively, and at any time following the seventh anniversary of the Arden and StarStone closings, respectively; and (ii) Trident’s right to have its equity co-investment interests in the Atrium/Arden and StarStone transactions redeemed by us at fair market value (which we may satisfy in either cash or our ordinary shares) following the seventh anniversaries of the Arden closing and StarStone closing, respectively. As of December 31, 2015, we have included $417.7 million (December 31, 2014: $374.6 million) as RNCI on our balance sheet relating to these Trident co-investment transactions. Pursuant to the terms of the shareholders’ agreements, Mr. Carey serves as a Trident representative on the boards of the holding companies established in connection with the Atrium/Arden and StarStone co-investment transactions. Trident also has a second representative on these boards who is a Stone Point employee.
We also have separate accounts, with a balance of $157.8 million and $127.8 million as at December 31, 2015 and 2014, respectively, managed by Eagle Point Credit Management and PRIMA Capital Advisors, which are affiliates of entities owned by Trident, with respect to which we incurred approximately $0.4 million and $0.1 million in management fees for the year ended December 31, 2015 and 2014, respectively.
Affiliates of Goldman Sachs own approximately 4.1% of our Voting Ordinary Shares and 100% of our Series C Non-Voting Ordinary Shares. Sumit Rajpal, a managing director of Goldman Sachs, was appointed to the Board of Directors in connection with Goldman Sachs’ investment in Enstar. As of December 31, 2015 and December 31, 2014, we had investments in two funds (carried within other investments) affiliated with entities owned by Goldman Sachs, which had a fair value of $39.6 million and $36.3 million, respectively. As of December 31, 2015 and December 31, 2014, we had an indirect investment in non-voting interests of two companies affiliated with Hastings Insurance Group Limited which had a fair value of $44.6 million and $25.1 million, respectively. Goldman Sachs affiliates have an approximately 38% interest in the Hastings companies, and Mr. Rajpal serves as a director of the entities in which we have invested. For the years ended December 31, 2015 and 2014, we recognized net realized and unrealized gains of $24.1 million and $7.0 million, respectively, in respect of the Goldman Sachs-affiliated investments.
Fees charged pursuant to investments with affiliates of Goldman Sachs were on an arm's-length basis.
Canada Pension Plan Investment Board ("CPPIB"), together with management of Wilton Re, own 100% of the common stock of Wilton Re. Subsequent to the closing of our transaction with Wilton Re (described in Note 2 - "Acquisitions"), on June 3, 2015, CPPIB purchased voting and non-voting shares in Enstar from FR XI Offshore AIV, L.P., First Reserve Fund XII, L.P., FR XII-A Parallel Vehicle L.P. and FR Torus Co-Investment, L.P. (collectively, "First Reserve", and the transaction, the "CPPIB-First Reserve Transaction"). These shares constitute a 9.3% voting interest and a 9.9% aggregate economic interest in Enstar. On September 29, 2015, CPPIB exercised its acquired right to appoint a representative to our Board of Directors. CPPIB has also signed a definitive agreement to acquire additional voting shares that would increase its ownership in Enstar to a 13.9% voting interest and a 13.8% aggregate economic interest, subject to regulatory approval.
We also have a pre-existing reinsurance recoverable from a company later acquired by Wilton Re, which was carried on our balance sheet at $12.2 million as of December 31, 2015.
Our ability to pay dividends to our shareholders is dependent upon the ability of our insurance and reinsurance subsidiaries to distribute capital and pay dividends to us. Our insurance and reinsurance subsidiaries are subject to certain regulatory restrictions on the distribution of capital and payment of dividends in the jurisdictions in which they operate as more fully described below. The restrictions are generally based on net income or levels of capital and surplus as determined in accordance with the relevant statutory accounting practices. Failure of these subsidiaries to meet their applicable regulatory requirements could result in restrictions on any distributions of capital or retained earnings and/or stricter regulatory oversight of the subsidiaries. In addition, our ability to pay dividends and make other forms of distributions is further limited by repayment obligations and financial covenants in our outstanding loan facility agreements.
As at December 31, 2015, the amount of consolidated retained earnings that was free of restrictions and therefore potentially available to be distributed to ordinary shareholders was $1.58 billion (2014: $1.40 billion). This amount is held primarily within our insurance and reinsurance subsidiaries and represents retained earnings held in those companies in excess of their minimum regulatory requirements. Although these amounts are in excess of statutory minimums, regulators may nonetheless further restrict distributions, and therefore actual amounts available for distribution to shareholders are likely to be significantly less. In addition, we do not intend to pay dividends on our ordinary shares, as we intend to reinvest any distributions from our subsidiaries back into the business, primarily to fund future acquisitions.
The Insurance Act requires that our Bermuda-based insurance and reinsurance subsidiaries maintain certain solvency and liquidity standards. The minimum liquidity ratio requires that the value of relevant assets must not be less than 75% of the amount of relevant liabilities. The minimum solvency margin, which varies depending on the class of the insurer, is determined as a percentage of either net reserves for losses and LAE or premiums or pursuant to a risk-based capital measure. Our Bermuda subsidiaries with commercial insurance licenses are required to maintain a minimum statutory capital and surplus (Enhanced Capital Requirement or "ECR") at least equal to the greater of a minimum solvency margin or the Bermuda Solvency Capital Requirement ("BSCR"). The BSCR is calculated based on a standard risk-based capital model developed by the BMA.
The BMA also acts as group supervisor to Enstar. On an annual basis, we are required to file group statutory financial statements, a group statutory financial return, a group capital and solvency return, audited group financial statements and a Group Solvency Self-Assessment ("GSSA") with the BMA. The GSSA is designed to document our perspective on the capital resources necessary to achieve our business strategies and remain solvent, and to provide the BMA with insights on our risk management, governance procedures and documentation related to this process.
Our U.K. based insurance subsidiaries are regulated by the U.K. Prudential Regulatory Authority (the "PRA") and the Financial Conduct Authority (the "FCA"), which together replaced the Financial Services Authority effective April 1, 2013 (the PRA and FCA collectively, the "U.K. Regulator").
In addition, until January 1, 2016, the U.K. Regulator’s Individual Capital Adequacy Standards framework ("ICAS framework"), required insurance companies to carry out various capital modeling and risk management exercises in order to calculate a company-specific Individual Capital Assessment amount ("ICA amount"), which was the company’s internal calculation of its capital requirements under the ICAS framework. For companies in run-off, the U.K. Regulator typically required specific loadings to be applied to a company’s ICA (as stipulated by the U.K. Regulator) in order to calculate a company’s Individual Capital Guidance (ICG), which represents the amount of capital a company was required to hold at all times such that there would be no material risk that its policyholder liabilities could not be met as they fell due.
The Solvency II framework directive took effect on January 1, 2016, although our U.K. subsidiaries had been preparing for compliance in the years leading up to its effectiveness. Solvency II sets out new E.U.-wide requirements on capital adequacy and risk management for insurers with the aim of further increasing policyholder protection, instilling greater risk awareness and improving the international competitiveness of E.U. insurers. In place of the ICAS framework, insurers must now comply with a Solvency Capital Requirement ("SCR"), which is calculated using either the Solvency II standard formula or a bespoke internal model. Our non-Lloyd's U.K. companies intend to use the standard formula.
The U.K. Regulator’s rules require our U.K. insurance subsidiaries to obtain regulatory approval for any proposed or actual payment of a dividend. Until January 1, 2016, the U.K. Regulator used the ICG and the estimated SCR when assessing requests to make distributions. From January 1, 2016, the U.K. Regulator uses the SCR, among other tests, when assessing requests to make distributions.
As of December 31, 2015, we participated in the Lloyd’s market through our interests in: (i) Atrium’s Syndicate 609, which is managed by Atrium Underwriters Limited, a Lloyd's managing agent, and the Atrium corporate member; (ii) StarStone’s Syndicate 1301, which is managed by StarStone Underwriting Limited ("SUL"), a Lloyd’s managing agent, and the StarStone corporate member; and (iii) Syndicate 2008, a wholly aligned syndicate that has permission to underwrite RITC business and other run-off or discontinued business type transactions with other Lloyd’s syndicates, and its corporate member. During 2015, SUL assumed the role of managing agent for Syndicate 2008 in place of Shelbourne Syndicate Services Limited as we streamlined our organizational structure and combined Shelbourne and StarStone resources into one agency.
An insurer must obtain APRA’s written consent prior to making any capital releases, including any payment of dividends in excess of current year earnings. Our insurance subsidiary must provide APRA a valuation prepared by an appointed actuary that demonstrates that the tangible assets of the insurer, after the proposed capital reduction, are sufficient to cover its insurance liabilities to a 99.5% level of sufficiency of capital before APRA will consent to a capital release or dividend. As of December 31, 2015 and 2014, our Australian-based insurance subsidiary exceeded the required 99.5% level of sufficiency by $29.2 million and $5.7 million, respectively.
The U.S. subsidiaries are required to file annual statements with insurance regulatory authorities prepared on a statutory basis prescribed or permitted by such authorities. Statutory accounting principles differ from U.S. GAAP in the treatment of various items, including treatment of deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes. For all of our U.S. insurance and reinsurance subsidiaries, with the exception of one subsidiary which has a permitted accounting practice to treat an adverse development cover reinsurance agreement as prospective reinsurance, there are no prescribed or permitted statutory accounting practices that differ significantly from the statutory accounting principles established by the National Association of Insurance Commissioners ("NAIC"). The U.S. insurance and reinsurance subsidiaries are also required to maintain minimum levels of solvency and liquidity as determined by law, and to comply with risk-based capital requirements and licensing rules.
Our Liechtenstein insurance subsidiary (StarStone Insurance Europe AG) is regulated by the Liechtenstein Financial Market Authority ("FMA") pursuant to the Liechtenstein Insurance Supervisory Act. This subsidiary is obligated
Our life and annuities subsidiaries file financial statements with state insurance regulatory authorities and the NAIC in the United States and the Office of Superintendent of Financial Institutions ("OSFI") in Canada (as a result of one of our subsidiaries having a Canadian branch operation). Such statements are prepared in accordance with Statutory Accounting Principles ("SAP") prescribed or permitted by such authorities which may vary materially from U.S. GAAP. SAP includes the Accounting Practices and Procedures Manual of the NAIC as well as other laws, regulations and administrative rules promulgated by the state insurance departments. SAP encompasses all accounting practices not so prescribed. The principal differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP are that statutory financial statements do not reflect deferred acquisition costs, some bond portfolios may be carried at amortized cost, assets and liabilities are presented net of reinsurance, contract holder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted. Accordingly, statutory operating results and statutory capital and surplus may differ substantially from amounts reported in the U.S. GAAP basis financial statements for comparable items.
Our life and annuity companies are subject to certain Risk-Based Capital ("RBC") requirements as specified by the NAIC and OSFI. RBC is used to evaluate the adequacy of capital and surplus maintained by our life and annuities companies in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate risk and (iv) business risk.
In addition, this subsidiary files audited regulatory returns with the Central Bank of Ireland. The returns are prepared in accordance with the European Communities (Life Assurance) Framework Regulations, 1994. This subsidiary has exceeded the minimum required solvency margin as at December 31, 2015 and 2014 by $17.1 million and $13.3 million, respectively. The subsidiary cannot make any distributions without the prior approval of the Central Bank of Ireland, and any such payments must be paid within six months of the most recent actuarial investigation, the purpose of which is to ensure that the subsidiary’s insurance policyholders are not negatively affected.
As at December 31, 2015, the total amount of net assets of our consolidated subsidiaries that were restricted was $1.24 billion (2014: $1.23 billion).
Credit risk exists in relation to our reinsurance balances recoverable. We remain liable to the extent that retrocessionaires do not meet their contractual obligations and, therefore, we evaluate and monitor concentration of credit risk among our reinsurers. These amounts are discussed in Note 8 - "Reinsurance Balances Recoverable."
We limit the amount of credit exposure to any one counterparty and none of our counterparty credit exposures, excluding U.S. Government instruments, exceeded 10% of shareholders’ equity as of December 31, 2015.
We lease office space under operating leases expiring in various years through 2024. The leases are renewable at our option under certain circumstances. The following is a schedule of future minimum rental payments on non-cancelable leases as of December 31, 2015:
As at December 31, 2015 and 2014, parental guarantees supporting subsidiaries' insurance obligations were $334.2 million and $238.6 million, respectively. The increase relates to new transactions during 2015 as described in Note 3 - "Acquisitions" and Note 4 - "Significant New Business."
On February 17, 2016, we entered into a reinsurance agreement with Allianz. The agreement is described in Note 4 - "Significant New Business."
We have the right to purchase the RNCI interests from the RNCI holders at certain times in the future (each such right, a "call right") and the RNCI holders have the right to sell their RNCI interests to us at certain times in the future (each such right, a "put right"). The RNCI rights held by Trident are described in Note 19 - "Related Party Transactions." Dowling has a right to participate if Trident exercises its put right.
The following tables set forth selected and consolidated statement of earnings results by segment for the years ended December 31, 2015, 2014, 2013:
In our Atrium segment, excluding net premiums earned, revenues included fees and commissions earned primarily in the United Kingdom, although Atrium also has offices in the United States, Canada and Singapore.
Invested assets are managed on a subsidiary by subsidiary basis, and investment income and realized and unrealized gains on investments are recognized in each segment as earned. Our total assets as at December 31, 2015 and 2014 by segment were as follows (the elimination items include the elimination of intersegment assets):
As at December 31, 2015 and 2014, parental guarantees supporting subsidiaries' insurance obligations were $334.2 million and $238.6 million, respectively.
Prior period amounts have been reclassified to conform to the current period presentation. The current period presentation includes a new line for other income. For the years ended December 31, 2014 and 2013, we have reclassified $14.1 million and $2.2 million, respectively, from net investment income to other income in relation to our property/casualty insurance operations. These reclassifications had no impact on net earnings.