The transaction expenses related to costs incurred in connection with the Company’s proposed acquisition of Transatlantic Holdings, Inc. during 2011. Transaction expenses incurred during 2014 relate to the acquisition of Western World. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
The summary Consolidated Balance Sheet data as at December 31, 2014, 2013, 2012, and 2011 have been restated for the impact of the adoption of ASU 2015-02 “Consolidation.” For further details, refer to Note 2, "Basis of preparation and consolidation," in Part II, Item 8.
Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus, less intangible assets and goodwill, plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise). Tangible book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures."
The above summary consolidated financial information should be read together with the other information contained in this Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere herein.
The Company’s strategy is to concentrate primarily on short-tail risks, which has been an area where management believes prices and terms provide an attractive risk-adjusted return and the management team has proven expertise. The Company’s profitability in any given period is based upon premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. The diversified portfolio as measured by gross premium written, is comprised of 46% insurance and 54% reinsurance for the year ended December 31, 2015. Financial results in the insurance and reinsurance industry are influenced by the frequency and/or severity of claims and losses, including as a result of catastrophic events, changes in interest rates, financial markets and general economic conditions, the supply of insurance and reinsurance capacity and changes in legal, regulatory and judicial environments.
absence of significant catastrophes in recent years, the market supply of capital is greater than the demand and therefore we expect to see continued pressure on rates in the near term.
During the January 2016 renewal season, the Validus Re and AlphaCat segments underwrote $610.5 million in gross premiums written (excluding U.S. agriculture premiums and net of intercompany eliminations between Validus Re and AlphaCat), an increase of 12.9% from the prior year renewal period. This increase was primarily driven by an increase in AlphaCat AUM and new business in the casualty and specialty lines, offset by rate reductions in the property and marine lines. The U.S. property lines experienced rate declines in the low single-digits, while rate declines in the international property lines were more challenging, with rates down closer to 10%. The marine lines experienced rate declines in the mid-single digits due to the worldwide reduction in oil prices.
Business written by the Talbot and Western World segments is distributed evenly throughout the year. Through December 31, 2015, the Talbot segment experienced a whole account rate decrease of approximately 6.6% driven primarily by decreases in the aviation, marine hull and energy classes. The marine hull and energy rate decreases were due primarily to the worldwide reduction in oil prices. The Western World segment experienced a whole account rate increase of approximately 3.1% through December 31, 2015, however the increase was primarily driven by corrective pricing in some classes as the underlying run rate was essentially flat.
Book value per diluted common share is considered by management to be a measure of returns to common shareholders, as we believe growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid increased by $2.68, or 6.8%, from $39.65 at December 31, 2014 to $42.33 at December 31, 2015. Growth in book value per diluted common share inclusive of dividends for the years ended December 31, 2015 and 2014 was 10.0% and 8.7%, respectively. Book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.” All outstanding warrants expired on December 12, 2015 and no further warrants are anticipated to be issued.
Tangible book value per diluted common share is considered by management to be a measure of returns to common shareholders excluding intangible assets and goodwill, as we believe growth in tangible book value on a diluted basis ultimately translates into growth in the tangible value of the Company. Tangible book value per diluted common share increased by $2.44, or 6.7%, from $36.19 at December 31, 2014 to $38.63 at December 31, 2015. Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus, less intangible assets and goodwill, plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options and warrants outstanding (assuming their exercise). Tangible book value per diluted common share is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
Underwriting income measures the performance of the Company’s core underwriting function, excluding revenues and expenses such as net investment income, finance expenses, tax (expense) benefit, income (loss) from operating affiliates, (income) attributable to AlphaCat investors, net realized and change in net unrealized gains (losses) on investments, income (loss) from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and net (income) loss attributable to noncontrolling interest. The Company believes the reporting of underwriting income enhances the understanding of results by highlighting the underlying profitability of the Company’s core insurance and reinsurance operations. Underwriting income for the years ended December 31,
2015, 2014 and 2013 was $463.1 million, $529.6 million and $622.1 million, respectively. Underwriting income is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures."
Net operating income available to Validus is defined as net income (loss) excluding net realized and change in net unrealized gains (losses) on investments, income (loss) from investment affiliate, foreign exchange gains (losses), other income (loss), non-recurring items and operating income (loss) attributable to noncontrolling interest. This measure focuses on the underlying fundamentals of the Company's operations without the influence of gains (losses) from the sale of investments, translation of non-U.S. dollar currencies, non-recurring items and income (loss) attributable to noncontrolling interest. Net operating income available to Validus for the years ended December 31, 2015, 2014 and 2013 was $409.7 million, $480.8 million and $589.0 million, respectively. Net operating income available to Validus is a non-GAAP financial measure, which are described in the section entitled “Non-GAAP Financial Measures.”
The following table presents results of operations for the three months ended December 31, 2015 and 2014:
Gross premiums written for the three months ended December 31, 2015 were $309.6 million compared to $336.6 million for the three months ended December 31, 2014, a decrease of $27.0 million, or 8.0%. There has been overall pressure on premium rates in certain classes and in addition, non renewal of certain contracts in conjunction with general market conditions contributed to an overall decrease in gross premiums written.
Gross premiums written for the three months ended December 31, 2015 in the Validus Re segment were $14.3 million compared to $32.7 million for the three months ended December 31, 2014, a decrease of $18.4 million or 56.2%. This decrease was primarily driven by decreases in the marine and specialty lines of $15.9 million and $4.0 million, respectively. The decrease in the marine lines was primarily driven by an $11.0 million commutation of a Flagstone contract with a Lloyd's counterparty which occurred during the three months ended December 31, 2014. The decrease in the specialty lines was due primarily to a $15.0 million reduction in crop reinsurance premium estimates, partially offset by new casualty business of $7.1 million which was written during the three months ended December 31, 2015.
The decrease in gross premiums written for the three months ended December 31, 2015 was partially offset by an increase in gross premiums written in the Western World segment of $5.9 million primarily as a result of the addition of new property and flood products to their existing lines, partially offset by a reduction in premiums on other lines which did not meet the Company's risk profile.
Underwriting revenues for the three months ended December 31, 2015 were $544.3 million compared to $558.2 million for the three months ended December 31, 2014, a decrease of $13.9 million or 2.5% due to the decrease in gross premiums written described above and the subsequent impact on net premium earned.
Losses and loss expenses for the three months ended December 31, 2015 were $214.7 million compared to $223.7 million, a decrease of $9.0 million or 4.0% primarily as a result of no notable or non-notable losses incurred during the three months ended December 31, 2015.
Combined ratio for the three months ended December 31, 2015 was 78.3% which included $58.1 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 10.7 percentage points compared to a combined ratio for the three months ended December 31, 2014 of 75.6% which included $87.4 million of favorable loss reserve development on prior accident years, benefiting the loss ratio by 15.7 percentage points. The favorable development of $58.1 million for the three months ended December 31, 2015 was primarily from non-event reserves in the amount of $47.8
million. Favorable development on prior accident years from event specific reserves was $10.3 million. The terms event or event specific refer to aggregate notable and non-notable losses incurred in current or prior accident years.
The decrease in the loss ratio in the specialty lines of 11.5 percentage points was primarily due to a large number of losses below the non-notable loss threshold during the three months ended December 31, 2014, primarily in the Talbot segment's political risk class.
Annualized return on average equity of 7.6% and annualized net operating return on average equity of 11.6% for the three months ended December 31, 2015 compared to 13.8% and 13.4%, respectively, for the three months ended December 31, 2014.
The Company acquired Western World on October 2, 2014, therefore the results of Western World have been included in the Company's consolidated results from the date of acquisition. The following table presents results of operations for the years ended December 31, 2015, 2014 and 2013:
The increase in gross premiums written for the year ended December 31, 2015 was primarily due to the acquisition of Western World which resulted in an increase in gross written premiums of $213.3 million. Also contributing to this increase was an increase in the gross premiums written in the AlphaCat segment of $49.3 million for the year ended December 31, 2015 primarily due to the increase in assets under management. These increases were offset by a decrease in gross premiums written in the Talbot segment of $82.9 million primarily as a result of a decrease in the upstream energy and cargo lines due to ongoing market conditions and economic factors, including the worldwide reduction in oil prices, which have reduced new business and renewals. For further details of the movements in gross premiums written in the Company's segments, refer to the commentary below in the individual segment discussion.
The increase in losses and loss expenses of $212.8 million or 27.8% was primarily as a result of the acquisition of Western World which resulted in an increase of $120.8 million during the year ended December 31, 2015. Also contributing to this increase were notable losses incurred for the year ended December 31, 2015 which were $97.0 million compared to $34.9 million for the year ended December 31, 2014, an increase of $62.0 million.
The increase in policy acquisition costs during the year ended December 31, 2015 of $70.6 million or 20.8% was primarily as a result of the acquisition of Western World, contributing $38.2 million to this increase. Also contributing to this increase was an increase in the policy acquisition costs in the Validus Re segment of $24.7 million, primarily driven by profit commissions and a large proportional contract in the specialty lines that carries higher acquisition costs. For further details of the movements in policy acquisition costs in the Company's segments, refer to the commentary below in the individual segment discussion.
Net income available to Validus for the year ended December 31, 2015 was $374.9 million compared to $480.0 million for the year ended December 31, 2014, a decrease of $105.1 million, or 21.9%. The decrease in net income available to Validus was primarily due to an unfavorable movement in the change in unrealized losses of $29.6 million as a result of a rising interest rate environment as compared to the prior year.
Return on average equity of 10.3% and net operating return on average equity of 11.3% for the year ended December 31, 2015 compared to 13.0% and 13.1%, respectively, for the year ended December 31, 2014.
The change in net operating income available to Validus, excluding the impact of Western World, for the year ended December 31, 2015 compared to the year ended December, 31 2014 is described in the following table:
Other underwriting deductions consist of policy acquisition costs, general & administrative expenses and share compensation expenses.
Net operating income available to Validus for the year ended December 31, 2015 was $409.7 million compared to $480.8 million for the year ended December 31, 2014, a decrease of $71.0 million or 14.8%.
Net operating income available to Validus excluding the Western World segment for the year ended December 31, 2015 was $404.1 million compared to $473.0 million for the year ended December 31, 2014, a decrease of $68.8 million or 14.6%.
An increase in losses and loss expenses of $92.0 million, comprised of:
an increase in favorable prior period development of $35.2 million; and
An increase in policy acquisition costs of $32.4 million primarily due to new agricultural business written in the Validus Re segment; offset by,
Net operating income available to Validus for the year ended December 31, 2014 was $480.8 million compared to $589.0 million for the year ended December 31, 2013, a decrease of $108.2 million or 18.4%.
A decrease in losses and loss expenses of $62.8 million, comprised of:
an increase in favorable prior period development of $25.4 million; offset by,
Fourth Quarter 2015 Summarized Results of Operations - Validus Re Segment
The following table presents underwriting income for the three months ended December 31, 2015 and 2014:
The combined ratio for the three months ended December 31, 2015 was 69.3% compared to 51.3% for the three months ended December 31, 2014, an increase of 18.0 percentage points.
Underwriting income for the three months ended December 31, 2015 was $71.3 million compared to $113.1 million for the three months ended December 31, 2014, a decrease of $41.7 million, or 36.9%.
The decrease in gross premiums written in the property lines of $69.1 million was primarily due to a reduction in business written in the catastrophe excess of loss lines of $76.8 million. This decrease was driven by reductions in our participation on various programs due to current market conditions. The decrease in gross premiums written in the marine lines of $38.3 million was due to non-renewals as a result of current market conditions and business historically written in marine lines being renewed in specialty lines. Further contributing to the decrease was a gain on the commutation of a Flagstone contract with a Lloyd's counterparty which occurred in the three months ended December 31, 2014. The increase in gross premiums written in the specialty lines of $115.7 million was primarily due to a significant new agriculture deal, a significant increase in an existing agriculture deal and new casualty business of $7.1 million which was written during the three months ended December 31, 2015. These increases were offset by various non-renewals.
Reinsurance premiums ceded in the property lines decreased by $18.1 million primarily as a result of renewing the Company's main retrocession program at reduced rates. The increase in reinsurance premiums ceded in the specialty lines of $2.9 million was primarily due to a composite marine program being renewed in the specialty lines.
The changes in net premiums written and net retention ratios are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Losses and loss expenses from notable loss events were $72.5 million for the year ended December 31, 2015, which represented 7.3 percentage points of the loss ratio. Losses and loss expenses from Tianjin, a third quarter notable loss event, were $35.8 million. Net of $3.1 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $32.7 million. Losses and loss expenses from Pemex, a second quarter notable loss event, were $36.7 million for the year ended December 31, 2015. Net of $8.9 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $27.7 million.
Losses and loss expenses from a single notable loss event, Tripoli Airport, were $22.5 million for the year ended December 31, 2014, which represented 2.4 percentage points of the loss ratio. Net of $3.0 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $19.5 million.
Losses and loss expenses from non-notable loss events for the year ended December 31, 2015 were $17.6 million compared to $29.9 million for the year ended December 31, 2014. The non-notable loss event for the year ended December 31, 2015 was the Chilean earthquake.
During the year ended December 31, 2015, the property lines incurred $17.4 million of losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 4.0 percentage points of the property lines loss ratio. During the year ended December 31, 2014, the property lines incurred $29.9 million of losses and loss expenses from non-notable loss events, which represented 6.4 percentage points of the property lines loss ratio.
The property lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 8.2 percentage points as a result of higher attritional losses in the year, including $10.0 million of losses and loss expenses from flooding in Texas during the second quarter. The favorable development on prior accident years for the year ended December 31, 2015 of $70.3 million included favorable development on event specific reserves of $32.4 million. The remainder was primarily due to favorable development on attritional losses. The favorable development on prior accident years for the year ended December 31, 2014 of $76.1 million was primarily due to favorable development on attritional losses.
The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 17.1 percentage points as a result of higher attritional losses in the current year. The favorable development of $39.5 million on prior accident years for the year ended December 31, 2015 was primarily due to favorable development on attritional losses; whereas, the lower favorable development of $6.8 million on prior accident years for the year ended December 31, 2014 was primarily due to adverse development on Costa Concordia, partially offset by favorable development on the Gryphon Alpha mooring failure.
During the year ended December 31, 2015, the specialty lines incurred $1.7 million of losses and loss expenses from a second quarter notable loss event, Pemex, which represented 0.4 percentage points of the specialty lines loss ratio. During the year ended December 31, 2014, the specialty lines incurred $22.4 million of losses and loss expenses from a single notable loss event, Tripoli Airport, which represented 8.0 percentage points of the specialty lines loss ratio. Net of $3.0 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $19.4 million.
The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 4.7 percentage points, primarily due to a change in business mix to include more agriculture business and higher attritional losses in the current year. The favorable loss reserve development on prior accident years of $18.8 million during the year ended December 31, 2015 was due to favorable development on agricultural loss estimates and favorable development on attritional losses. The lower favorable development of $4.7 million on prior accident years in the year ended December 31, 2014 was primarily due to an increase in the loss estimate on agriculture losses.
The underwriting results of an insurance or reinsurance company are often measured by reference to its combined ratio, which is the sum of the losses and loss expense ratio and the expense ratio. The losses and loss expense ratio is calculated by dividing losses and loss expenses incurred (including estimates for incurred but not reported losses) by net premiums earned. The expense ratio is calculated by dividing acquisition costs combined with general and administrative expenses by net premiums earned. The following table presents the losses and loss expense ratio, policy acquisition cost ratio, general and administrative expense ratio, expense ratio and combined ratio for the years ended December 31, 2015, 2014 and 2013.
The decrease in the loss ratio excluding notable and non-notable losses and changes in prior accident years was primarily due to a large number of losses below the non-notable loss threshold during the three months ended December 31, 2014, primarily in the Talbot segment's political risk class.
The combined ratio for the three months ended December 31, 2015 was 82.5% compared to 96.8% for the three months ended December 31, 2014, a decrease of 14.3 percentage points.
Underwriting income for the three months ended December 31, 2015 was $36.1 million compared to $7.9 million for the three months ended December 31, 2014, an increase of $28.2 million.
The following table presents underwriting income for the years ended December 31, 2015, 2014 and 2013:
The decrease in gross premiums written in the property lines of $10.1 million was primarily due to a decrease in the property treaty lines of $9.3 million which related primarily to the Latin American business now being written directly through Validus Re Swiss. In addition, renewed business in the downstream energy and power international lines has decreased due to unfavorable market conditions. These decreases were partially offset by an increase in the construction lines as a result of new projects and amendments to existing contracts. The decrease in gross premiums written in the marine lines of $65.2 million was primarily driven by a decrease in the upstream energy and cargo lines due to ongoing market conditions and economic factors, including the worldwide reduction in oil prices, which have reduced new business and renewals. Also contributing to the decrease was a decrease in the marine hull lines primarily as a result of 18-month policies written during the year ended December 31, 2014 and not due for renewal in the current year. The decrease in gross premiums written in the specialty lines of $7.7 million was primarily driven by a decrease in the aviation treaty lines as a result of a higher level of reinstatement premiums and adjustments to prior year policies during the year ended December 31, 2014.
The decrease in reinsurance premiums ceded in the property lines of $8.3 million was due primarily to a decrease in the property treaty lines of $4.2 million due to lower quota share premiums as a result of certain underlying Latin American business now being written through Validus Re Swiss. This decrease was also due to a decrease in reinstatement premiums in the current year. The increase in the marine lines of $9.2 million was primarily due to the reinstatement premium impact of the second quarter notable loss event, Pemex. The increase in the specialty lines of $5.8 million was primarily due to reinstatement premiums across a number of classes.
The changes in the net premiums earned were consistent with the pattern of net premiums written influencing the earned premiums for the year ended December 31, 2015 compared to the year ended December 31, 2014 and are driven by factors highlighted above in respect of gross premiums written and reinsurance premiums ceded.
Losses and loss expenses from notable loss events were $24.5 million for the year ended December 31, 2015, which represented 2.9 percentage points of the loss ratio. Losses and loss expenses from Tianjin, a third quarter notable loss event, were $11.6 million. Net of reinstatement premiums of $0.8 million, the effect of this event on net operating income was a reduction of $10.8 million. Losses and loss expenses from Pemex, a second quarter notable loss event, were $12.9 million for the year ended December 31, 2015. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $24.0 million.
During the year ended December 31, 2015, the property lines incurred $4.2 million in losses and loss expenses from a single non-notable loss event, the Chilean earthquake, which represented 1.9 percentage points of the property lines loss ratio. During the year ended December 31, 2014, the property lines incurred $4.8 million in losses and loss expenses from non-notable loss events which represented 2.3 percentage points of the property lines loss ratio.
During the year ended December 31, 2015, the marine lines incurred $8.3 million of losses and loss expenses from a third quarter notable loss event, Tianjin, which represented 2.6 percentage points of the marine lines loss ratio. Net of $0.5 million of reinstatement premiums, the effect of this event on net operating income was a reduction of $7.8 million. In addition, losses and loss expenses from a second quarter notable loss event, Pemex were $12.5 million which represented 3.9 percentage points of the marine lines loss ratio. Including reinstatement premiums payable, the effect of this event on net operating income was a reduction of $23.6 million.
The marine lines current period loss ratio, excluding the impact of notable and non-notable loss events, increased by 2.8 percentage points primarily due to higher attritional losses in the current period. The favorable development of $63.9 million and $31.4 million on prior accident years for the years ended December 31, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.
The specialty lines current period loss ratio, excluding the impact of notable and non-notable loss events, decreased by 15.7 percentage points primarily due to a large number of losses below the non-notable loss threshold during the three months ended December 31, 2014, primarily in the political risk class and lower attritional losses in the current period. The favorable development of $30.0 million and $56.0 million on prior accident years for the years ended December 31, 2015 and 2014, respectively, was primarily due to favorable development on attritional losses.
The changes in underwriting income before general and administrative and share compensation expenses are driven by factors highlighted above in respect of gross premiums written, reinsurance premiums ceded, losses and loss expenses and policy acquisition costs.
Fourth Quarter 2015 Summarized Results of Operations - Western World Segment
Gross premiums written for the three months ended December 31, 2015 were $71.1 million compared to $65.2 million for the three months ended December 31, 2014, an increase of $5.9 million, or 9.0%. Gross premiums written for the three months ended December 31, 2015 included $13.9 million of property premiums and $57.2 million of liability premiums, compared to $10.0 million of property premiums and $55.3 million of liability premiums for the three months ended December 31, 2014.
The loss ratio for the three months ended December 31, 2015 was 54.7% compared to 69.9% for the three months ended December 31, 2014, a decrease of 15.2 percentage points. The loss ratio for the three months ended December 31, 2015 included favorable loss reserve development on prior accident years on non-event reserves in the amount of $7.3 million, benefiting the loss ratio by 11.9 percentage points. Of this, $2.3 million or 3.8 percentage points arose from the amortization of the risk premium adjustment accounted for at the time of the acquisition of Western World. The risk premium adjustment during the three months ended December 31, 2015 represents the last risk premium adjustment related to the acquisition. The loss ratio for the three months ended December 31, 2014 included favorable loss reserve development on prior accident years of $11.2 million, benefiting the loss ratio by 15.4 percentage points. Of this, $4.6 million or 6.3 percentage points arose from the amortization of the risk premium adjustment accounted for at the time of the acquisition of Western World.
Underwriting income for the three months ended December 31, 2015 was $3.8 million compared to $7.8 million for the three months ended December 31, 2014, a decrease of $4.0 million, or 51.8%.
The Company acquired Western World on October 2, 2014, therefore, the results of Western World have been included in the Company's consolidated results from the date of acquisition.
The following table presents underwriting income for the years ended December 31, 2015 and 2014:
The Western World reinsurance program includes various treaties, including a binding authority excess of loss, brokerage casualty, brokerage professional, property per risk excess of loss and property catastrophe excess of loss.
There were no notable or non-notable loss events for the years ended December 31, 2015 or 2014.
Upon closing the acquisition, an adjustment of $409 was made to decrease net reserves to reflect fair value. This adjustment was fully amortized to income through an increase in losses and loss expenses of $288 during the year ended December 31, 2015 (2014: $121), increasing the loss ratio by 0.7 percentage points (2014: 1.1 percentage points).
Upon closing the acquisition, an adjustment of $15,995 was made to increase net reserves to reflect fair value. This adjustment was fully amortized to income through a reduction in losses and loss expenses of $11,267 during the year ended December 31, 2015 (2014: $4,728), benefiting the loss ratio by 5.3 percentage points (2014: 7.7 percentage points).
The property acquisition cost ratio for the year ended December 31, 2015 was 15.8% and the liability acquisition cost ratio for the year ended December 31, 2015 was 16.1%. The impact of the acquisition fair value adjustments on the policy acquisition cost ratio as noted in the table footnote above.
The following table presents Validus' share of the AlphaCat segment income on an asset manager basis for the three months ended December 31, 2015 and 2014:
AlphaCat's assets under management were $2,386.2 million as at January 1, 2016, compared to $2,238.6 million as at October 1, 2015. Third party assets under management were $2,059.5 million as at January 1, 2016, compared to $1,877.4 million as at October 1, 2015. During the three months ended December 31, 2015, a total of $662.7 million of capital was raised, of which $629.2 million was raised from third parties, while $470.3 million was returned to PaCRe investors, including $423.3 million to third parties, as this entity was off risk as of January 1, 2016.
Management fees earned for the three months ended December 31, 2015 were $6.3 million, of which $1.3 million were earned from related parties, compared to $5.9 million for the three months ended December 31, 2014, of which $1.4 million were earned from related parties. The increase of $0.4 million in management fees between periods was driven by an increase in assets under management.
Validus' share of PaCRe's net loss for the three months ended December 31, 2015 was $1.7 million, compared to $7.1 million for the three months ended December 31, 2014, a decrease of $5.4 million. As at December 31, 2015, PaCRe was off-risk and being wound down. The underlying investment in the Paulson hedge funds were liquidated effective November 30, 2015.
The following table presents Validus' share of the AlphaCat segment income on an asset manager basis for the years ended December 31, 2015, 2014 and 2013:
In presenting the Company’s results, management has included and discussed the results of AlphaCat, which are presented on an asset manager basis. Validus' share of AlphaCat income is a non-GAAP measure and is not calculated under standards or rules that comprise U.S. GAAP. Such measures are referred to as non-GAAP. Non-GAAP measures may be defined or calculated differently by other companies. These measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP. Further discussion of these measures is presented in the section entitled “Non-GAAP Financial Measures.”
The increase in management fees earned from third parties of $1.0 million was driven by an increase in third party assets under management. The decrease in management fees earned from related parties of $2.2 million was driven by a decrease in related party assets under management.
The Company’s assets under management are represented by investments made by related parties and third parties in the feeder funds and on a direct basis.
Lower risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of less than 7%, whereas higher risk AlphaCat ILS funds have a maximum permitted portfolio expected loss of greater than 7%. Expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
These items exclude the components which are included in the Company's share of AlphaCat and amounts which are consolidated from VIEs.
Net realized losses on investments for the three months ended December 31, 2015 were $3.4 million compared to gains of $6.2 million for the three months ended December 31, 2014, a decrease of $9.6 million.
The Company acquired Western World on October 2, 2014, therefore the results of Western World have been included in the Company's consolidated results from the date of acquisition. The transaction expenses relate to costs incurred in connection with the acquisition of Western World and are primarily comprised of legal, financial advisory, and audit related services.
The Company's managed yield-bearing portfolio had an effective yield of 1.91% for the year ended December 31, 2015 (2014: 1.51%). Investment yield is calculated by dividing total managed net investment income by the average balance of the yield bearing assets managed by the Company's portfolio managers. Average assets for the year ended is the average of the beginning, ending and intervening quarter end asset balances.
Finance expenses, excluding the Company's share of AlphaCat finance expenses from consolidated VIEs, for the year ended December 31, 2015 were $61.1 million compared to $60.3 million for the year ended December 31, 2014, an increase of $0.8 million or 1.3%.
Tax expenses for the year ended December 31, 2015, were $6.4 million compared to $0.2 million for the year ended December 31, 2014, an increase of $6.2 million. This increase was primarily driven by the Company's ongoing expansion in the U.S.
For further information about income taxes refer to Note 21, "Income taxes," to the Consolidated Financial Statements in Part II, Item 8.
Net Realized and Change in Net Unrealized (Losses) Gains on Investments
Net realized gains on managed investments for the year ended December 31, 2015 were $1.7 million compared to $12.2 million for the year ended December 31, 2014, an unfavorable movement of $10.5 million. The realized gains primarily resulted from the sale of managed fixed maturities.
The income from investment affiliate relates to the income earned from the Company's investment in the Aquiline Financial Services Fund II L.P. which is recorded on a three-month lag and therefore reflects the underlying performance of that fund for the twelve months ended September 30, 2015, 2014 and 2013. For further details, refer to Note 10, "Investments in affiliates," to the Consolidated Financial Statements in Part II, Item 8.
Foreign exchange losses for the year ended December 31, 2015 were $8.2 million compared to losses of $10.7 million for the year ended December 31, 2014, a favorable movement of $2.5 million, or 23.6%, due primarily to the U.S. dollar strengthening against the Australian, Canadian, and New Zealand dollars, the Euro, the British Pound sterling and the South African Rand.
Other loss for the years ended December 31, 2015 and 2014 of $1.0 million and $2.2 million, respectively, primarily resulted from adjustments related to assets acquired in the purchase of Flagstone.
Transaction expenses for the year ended December 31, 2015 were $nil compared to $8.1 million for the year ended December 31, 2014. The transaction expenses relate to costs incurred in connection with the acquisition of Western World and are primarily comprised of legal, financial advisory, and audit related services. The Company acquired Western World on October 2, 2014, therefore the results of Western World have been included in the Company's consolidated results from the date of acquisition.
The results of operations for Western World are consolidated from the October 2, 2014 date of acquisition.
The Company excludes the U.S. GAAP measures noted above, in particular net realized and change in net unrealized gains and losses on investments, from its calculation of net operating income available to Validus because the amount of these gains and losses is heavily influenced by, and fluctuates in part, according to availability of investment market opportunities. The Company believes these amounts are largely independent of its core underwriting activities and including them distorts the analysis of trends in its operations. In addition to presenting net income available to Validus determined in accordance with U.S. GAAP, the Company believes that showing underwriting income and net operating income available to Validus provides investors with a valuable measure of profitability and enables investors, analysts, rating agencies and other users of its financial information to more easily analyze the Company’s results in a manner similar to how management analyzes the Company’s underlying business performance.
Underwriting income and net operating income available to Validus should not be viewed as a substitute for U.S. GAAP net income available to Validus as there are inherent material limitations associated with the use of underwriting income and net operating income available to Validus as compared to using net income available to Validus, which is the most directly comparable U.S. GAAP financial measure. The most significant limitation is the ability of users of the financial information to make comparable assessments of underwriting income and operating income with other companies, particularly as these measures may be defined or calculated differently by other companies. Therefore, the Company provides prominence in this filing to the use of the most comparable U.S. GAAP financial measure, net income available to Validus, which includes the reconciling items in the table above. The Company compensates for these limitations by providing both clear and transparent disclosure of net income available to Validus and reconciliation of underwriting income and net operating income available to Validus to net income available to Validus.
In presenting the Company's results, management has also included and discussed certain schedules containing book value and tangible book value per diluted common share and book value per diluted common share plus accumulated dividends that are not calculated in accordance with U.S. GAAP.
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.00 years. At December 31, 2015, the average duration of the Company’s managed investment portfolio was 2.15 years (December 31, 2014: 1.96 years). This duration is reviewed regularly based on changes in the duration of the Company's liabilities and in general market conditions.