The Company and its subsidiaries occupy office space in Australia, Bermuda, Canada, Chile, Singapore, Switzerland, United Arab Emirates, United Kingdom and the United States. We renew and enter into leases in the ordinary course of business as required. We believe our current facilities and the leaseholds with respect thereto are sufficient for us to conduct our operations. The main operating locations of the Company and its primary leaseholders are as follows:
Transaction expenses incurred during 2014 and 2017 relate to the acquisitions of Western World and CRS, respectively. Transaction expenses are primarily comprised of legal, financial advisory and audit related services.
The following table sets forth summarized balance sheet data as at December 31st for the last five years:
Tangible book value per diluted common share is calculated based on total shareholders’ equity available to Validus common shareholders, less goodwill and other intangible assets, plus the assumed proceeds from the exercise of outstanding options and warrants, divided by the sum of common shares, unvested restricted shares and options outstanding and warrants (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 Company conducts its operations worldwide through three reportable segments which have been determined under U.S. GAAP segment reporting to be Reinsurance, Insurance, and Asset Management.
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 a function of net earned premium and investment revenues, less net losses and loss expenses, acquisition expenses and operating expenses. Financial results in the (re)insurance 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 (re)insurance capacity and changes in legal, regulatory and judicial environments.
Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $68.00 in cash. Each of the Company’s issued and outstanding Series A and Series B Preferred Shares will remain issued and outstanding as a “Series A Preferred Share” and “Series B Preferred Share,” respectively, of the Surviving Company.
We underwrite global property (re)insurance and have large aggregate exposures to natural and man-made disasters. The occurrence of claims from catastrophic events results in substantial volatility, and can have material adverse effects on the Company’s financial condition and results and its ability to write new business. This volatility affects results for the period in which the loss occurs because U.S. GAAP does not permit (re)insurers to reserve for such catastrophic events until they occur. Catastrophic events of significant magnitude historically have been relatively infrequent, although management believes the property catastrophe reinsurance market has experienced a higher level of worldwide catastrophic losses in terms of both frequency and severity in the period from 1992 to the present. We also expect that increases in the values and concentrations of insured property will increase the severity of such occurrences in the future. The Company seeks to reflect these types of trends when pricing contracts.
Following the significant catastrophic events of 2017: Hurricanes Harvey, Irma and Maria and the Northern and Southern California Wildfires, the Company expects the industry to see rate increases across all loss affected classes, some of which are noted in the renewal commentary below. However, the Company expects rate changes to be driven by the retrocession market, with reinsurers and insurers following accordingly; therefore, the full extent of rate increases will not likely be realized until mid-year 2018.
An increase in the specialty - other lines of $72.2 million, or 159.2% as a result of the continued build out of the Company’s casualty portfolio and the timing of renewals; and
An increase in U.S. property renewals of $39.8 million, or 37.1% driven by rate increases and significant premium growth on a few lines where the Company participated with large gross positions and managed its net exposure through strategic retrocession purchases.
The Asset Management segment underwrote $274.4 million in gross premiums written during the January 2018 renewal season, an increase of $111.2 million, or 68.1% from the 2017 renewal season. The increase was primarily driven by significant rate increases in the retrocession component of the portfolio and an increase in assets under management.
In addition to presenting book value per common share determined in accordance with U.S. GAAP, the Company believes that the key financial indicator for evaluating our performance and measuring the overall growth in value generated for shareholders is book value per diluted common share plus accumulated dividends, a non-GAAP financial measure.
Per share amounts are calculated by dividing the equity amount by the common shares.
Using the "as-if-converted" method, assuming all proceeds received upon exercise of stock options will be retained by the Company and the resulting common shares from exercise remain outstanding.
At December 31, 2017, the weighted average exercise price for those stock options that had an exercise price lower than book value per share was $nil (December 31, 2016: $23.48).
Book value per common share, a GAAP financial measure, decreased by $2.55, or 5.5%, from $46.61 at December 31, 2016 to $44.06 at December 31, 2017.
Book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders, as the Company believes growth in book value on a diluted basis ultimately translates into growth in stock price. Book value per diluted common share after dividends paid decreased by $2.26, or 5.0%, from $44.97 at December 31, 2016 to $42.71 at December 31, 2017.
The change in book value per diluted common share inclusive of dividends paid was (1.6)% and 9.5% for the years ended December 31, 2017 and 2016, respectively.
Tangible book value per diluted common share, a non-GAAP financial measure, is considered by management to be a measure of returns to common shareholders excluding goodwill and other intangible assets, as the Company believes 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 decreased by $3.35, or 8.1%, from $41.16 at December 31, 2016 to $37.81 at December 31, 2017.
In addition to presenting net (loss) income (attributable) available to Validus common shareholders determined in accordance with U.S. GAAP, the Company believes that showing net operating income (loss) available (attributable) to Validus common shareholders, a non-GAAP financial measure, 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.
Represents the tax expense or benefit associated with the specific country to which the pre-tax adjustment relates to. The tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize tax losses carried forward.
For further discussion of the components driving the Company’s financial indicators refer to the “Results of Operations” sections.
Reinsurance premiums ceded for the three months ended December 31, 2017 were $96.4 million compared to $40.6 million for the three months ended December 31, 2016, an increase of $55.8 million, or 137.3%. The increase was primarily driven by increases in the Reinsurance and Insurance segments.
The Company defines a notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $30.0 million. The Company defines a non-notable loss event as an event whereby consolidated net losses and loss expenses aggregate to a threshold greater than or equal to $15.0 million but less than $30.0 million.
There were no non-notable loss events occurring during the three months ended December 31, 2017. However, as a result of loss events occurring in the fourth quarter, the Company reallocated retrocession recoveries between all 2017 loss events. As such, the Company increased its net loss estimate on the third quarter 2017 Mexico City Earthquake which caused this event to exceed the $15.0 million threshold and become a non-notable loss event. Net losses and loss expenses incurred from the Mexico City Earthquake non-notable loss event were $9.7 million, or 1.5 percentage points of the loss ratio during the three months ended December 31, 2017 and $13.5 million, or 1.9 percentage points of the loss ratio during the three months ended September 30, 2017.
The favorable development for the three months ended December 31, 2017 and 2016 was primarily driven by favorable development on attritional losses.
Loss ratios by line of business for the three months ended December 31, 2017 and 2016 were as follows:
General and administrative (“G&A”) expenses for the three months ended December 31, 2017 were $97.5 million compared to $78.0 million for the three months ended December 31, 2016, an increase of $19.6 million or 25.1%. The increase was primarily driven by an increase in the Insurance and Reinsurance segments.
Combined ratio for the three months ended December 31, 2017 and 2016 was 109.7% and 89.6%, respectively, an increase of 20.1 percentage points.
Gross premiums written for the three months ended December 31, 2017 were $52.0 million compared to $41.8 million for the three months ended December 31, 2016, an increase of $10.1 million, or 24.3% and included the following:
Specialty - short-tail premiums of $13.0 million during the three months ended December 31, 2017, compared to $(8.8) million during the three months ended December 31, 2016, an increase of $21.8 million, or 248.3%. The increase was primarily driven by favorable premium adjustments on Agriculture business during the three months ended December 31, 2017 compared to unfavorable adjustments during the same period in 2016; and
Specialty - other premiums of $20.8 million during the three months ended December 31, 2017, compared to $42.1 million during the three months ended December 31, 2016, a decrease of $21.3 million, or 50.5%. The decrease was primarily driven by the timing of renewals in the casualty class of business.
Reinsurance premiums ceded for the three months ended December 31, 2017 were $40.7 million compared to $7.8 million for the three months ended December 31, 2016, an increase of $32.9 million. The increase was primarily driven by an increase in the property lines of $33.5 million as a result of new retrocession cover purchased from Tailwind Re, the first Validus-sponsored catastrophe bond.
Losses and loss expenses incurred during the three months ended December 31, 2017 from notable loss events were $14.7 million, or 5.9 percentage points of the loss ratio and included losses from fourth quarter 2017 notable loss events of $23.9 million, or 9.5 percentage points of the loss ratio, partially offset by favorable development on third quarter 2017 notable loss events of $9.2 million or 3.6 percentage points of the loss ratio. Net of reinstatement premiums and the acceleration of unearned premiums of $1.2 million, the net loss attributable to the Reinsurance segment from 2017 notable loss events during the three months ended December 31, 2017 was $13.5 million and was incurred by event as follows:
Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Losses and loss expenses incurred during the three months ended December 31, 2016 from notable loss events were $18.6 million, or 7.9 percentage points of the loss ratio. Including the impact of net reinstatement premiums ceded of $0.7 million, the net loss attributable to the Reinsurance segment from 2016 notable loss events during the three months ended December 31, 2016 was $19.3 million and was incurred by event as follows:
Loss ratio for the three months ended December 31, 2017 and 2016 was 54.2% and 39.9%, respectively, an increase of 14.3 percentage points.
Policy acquisition cost ratio for the three months ended December 31, 2017 was 23.2% compared to 23.6% for the three months ended December 31, 2016, a decrease of 0.4 percentage points.
General and administrative expenses for the three months ended December 31, 2017 were $23.6 million compared to $21.2 million for the three months ended December 31, 2016, an increase of $2.4 million or 11.1%. The increase in general and administrative expenses was primarily driven by a higher allocation of costs to the segment during the three months ended December 31, 2017.
Combined ratio for the three months ended December 31, 2017 and 2016 was 87.8% and 73.8%, respectively, an increase of 14.0 percentage points.
Underwriting income for the three months ended December 31, 2017 was $30.7 million compared to $61.3 million for the three months ended December 31, 2016, a decrease of $30.5 million or 49.8%.
Reinsurance premiums ceded for the three months ended December 31, 2017 were $56.4 million compared to $32.9 million for the three months ended December 31, 2016, an increase of $23.5 million, or 71.6%, primarily driven by increases in the property and specialty - short-tail lines of $12.9 million and $8.6 million, respectively. The increase in the property lines was primarily driven by the growth in gross premiums written as noted above and new reinsurance cover purchased from Tailwind Re. The increase in the specialty - short-tail lines was due to an increase in ceded agriculture premiums relating to new business written through CRS.
The net favorable development for the three months ended December 31, 2017 and 2016 was primarily driven by favorable development on attritional losses.
Combined ratio for the three months ended December 31, 2017 and 2016 was 112.2% and 108.1%, respectively, an increase of 4.1 percentage points.
Underwriting (loss) for the three months ended December 31, 2017 was $(36.8) million compared to $(19.1) million for the three months ended December 31, 2016, an increase of $17.6 million or 92.1%.
The investment income (loss) from funds and sidecars is based on equity accounting.
Asset Management segment (loss) for the three months ended December 31, 2017 was $(1.1) million compared to income of $6.3 million during the three months ended December 31, 2016, a decrease of $7.4 million.
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the three months ended December 31, 2017 and 2016:
Managed net investment income for the three months ended December 31, 2017 was $41.6 million compared to $35.9 million for the three months ended December 31, 2016, an increase of $5.7 million, or 16.0%. The increase was primarily driven by increased returns on the Company’s portfolio of managed fixed maturities and other investments.
Annualized effective yield on managed investments for the three months ended December 31, 2017 was 2.44%, compared to 2.25% for the three months ended December 31, 2016, an increase of 19 basis points.
Net realized gains on managed investments for the three months ended December 31, 2017 were $7.2 million compared to $9.2 million for the three months ended December 31, 2016.
Change in net unrealized (losses) on managed investments for the three months ended December 31, 2017 was $(24.9) million compared to $(67.7) million for the three months ended December 31, 2016. Changes in unrealized (losses) on managed investments during the three months ended December 31, 2017 were primarily driven by the impact of interest rate increases on the Company’s managed fixed maturity portfolio.
General and administrative expenses for the three months ended December 31, 2017 were $5.6 million compared to $20.0 million for the three months ended December 31, 2016, a decrease of $14.4 million, or 72.1%. The decrease was primarily driven by a lower bonus accrual and a higher allocation of costs to reportable segments during the three months ended December 31, 2017.
Share compensation expenses for the three months ended December 31, 2017 were $4.1 million compared to $3.9 million for the three months ended December 31, 2016, an increase of $0.3 million, or 7.5%.
Finance expenses for the three months ended December 31, 2017 were $15.7 million compared to $14.5 million for the three months ended December 31, 2016, an increase of $1.2 million, or 8.2%. The increase was primarily driven by interest expenses relating to short-term borrowings which were repaid in full during the three months ended December 31, 2017.
Dividends paid on preferred shares for the three months ended December 31, 2017 were $5.8 million compared to $2.2 million for the three months ended December 31, 2016, an increase of $3.6 million, or 164.5% due to $250.0 million of new Series B preferred shares issued during the second quarter of 2017.
Tax (benefit) for the three months ended December 31, 2017 was $(0.4) million compared to $(21.2) million for the three months ended December 31, 2016. The tax benefit during the three months ended December 31, 2017 mainly related to operating losses in the Insurance segment and was partially offset by the re-measurement of net deferred taxes following the recently enacted 2017 Tax Act. The tax benefit during the three months ended December 31, 2016 related to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Company’s acquisition of Flagstone. The release was due to the Company believing it is more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over three years beginning in 2017 and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million during the fourth quarter of 2016.
Full Year 2017, 2016 and 2015 Results of Operations - Consolidated
Gross premiums written for the years ended December 31, 2017, 2016 and 2015 were $2,950.9 million, $2,648.7 million and $2,557.5 million, respectively. The increase in gross premiums written during the year ended December 31, 2017 as compared to 2016 of $302.2 million, or 11.4% was primarily driven by an increase in the Insurance and Asset Management segments. The increase in gross premiums written of $91.2 million, or 3.6% during the year ended December 31, 2016 as compared to 2015 was primarily driven by an increase in the Asset Management segment.
Net premiums earned for the years ended December 31, 2017, 2016 and 2015 were $2,581.1 million, $2,249.2 million, and $2,246.9 million, respectively.
Losses and loss expenses for the years ended December 31, 2017, 2016 and 2015 were $2,300.2 million, $1,065.1 million and $977.8 million, respectively and included the following:
Losses and loss expenses incurred during the year ended December 31, 2017 from notable loss events were $1,046.9 million, or 40.6 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $603.4 million and the net impact of reinstatement premiums and acceleration of unearned premiums of $31.3 million, the net loss attributable to Validus from 2017 notable loss events was $412.2 million and was incurred by event as follows:
Losses and loss expenses incurred during the year ended December 31, 2016 from notable loss events were $90.2 million, or 4.0 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $21.7 million and reinstatement premiums of $4.3 million, the net loss attributable to Validus from 2016 notable loss events was $64.2 million and was incurred by event as follows:
Losses and loss expenses incurred during the year ended December 31, 2015 from notable loss events were $97.0 million, or 4.3 percentage points of the loss ratio. Net of reinstatement premiums of $1.8 million, the net loss attributable to Validus from 2015 non-notable loss events was $95.2 million and was incurred by event as follows:
Losses and loss expenses incurred during the year ended December 31, 2016 from non-notable loss events were $70.2 million, or 3.1 percentage points of the loss ratio. Net of losses attributable to AlphaCat investors and noncontrolling interests of $5.6 million and reinstatement premiums of $12.6 million, the net loss attributable to Validus from 2016 non-notable loss events was $52.0 million and was incurred by event as follows:
Loss reserve development for the years ended December 31, 2017, 2016 and 2015 was as follows:
Loss ratio for the years ended December 31, 2017, 2016 and 2015 was 89.1%, 47.4% and 43.5%, respectively.
Policy acquisition cost ratio for the years ended December 31, 2017, 2016 and 2015 was 18.3%, 20.0% and 18.3%, respectively.
General and administrative expenses for the years ended December 31, 2017, 2016 and 2015 were $352.1 million, $336.3 million and $363.7 million, respectively.
Highlights for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were as follows:
Property premiums of $549.0 million during the year ended December 31, 2017, compared to $497.3 million during the year ended December 31, 2016, an increase of $51.7 million or 10.4%. The increase was primarily driven by $65.3 million of reinstatement premiums on 2017 notable and non-notable loss events and was partially offset by reductions in participation and the non-renewal of various catastrophe excess of loss and proportional programs due to unfavorable market conditions;
Specialty - short-tail premiums of $505.1 million during the year ended December 31, 2017, compared to $555.5 million during the year ended December 31, 2016, a decrease of $50.4 million or 9.1% primarily driven by a reduction in proportional agriculture business following the CRS acquisition; and
Specialty - other premiums of $141.1 million during the year ended December 31, 2017, compared to $132.1 million during the year ended December 31, 2016, an increase of $9.0 million or 6.8% primarily due to new business written and was partially offset by the timing of renewals in the casualty class of business.
(a)Net impact on premiums earned includes reinstatement premiums assumed and the net impact of accelerating unearned premiums assumed and ceded.
Losses and loss expenses incurred during the year ended December 31, 2016 from non-notable loss events were $46.7 million, or 4.7 percentage points of the loss ratio. Net of reinstatement premiums of $11.5 million, the net loss attributable to the Reinsurance segment from 2016 non-notable loss events was $35.2 million and was incurred by event as follows:
Loss reserve development for the years ended December 31, 2017 and 2016 was as follows:
The favorable development on events in the property lines for the year ended December 31, 2017 primarily related to favorable development on multiple loss events. The favorable development on events in the specialty - short-tail lines for the year ended December 31, 2017 primarily related to favorable development on the 2015 Pemex oil refinery explosion notable loss event.
Loss ratio for the years ended December 31, 2017 and 2016 was 67.7% and 41.7%, respectively, an increase of 26.0 percentage points.
General and administrative expenses for the years ended December 31, 2017 and 2016 were $80.2 million and $85.0 million, respectively, a decrease of $4.8 million or 5.7%. The decrease was primarily driven by a reduction in the bonus accrual during the year ended December 31, 2017 and was partially offset by a higher allocation of costs to the segment during the year ended December 31, 2017.
Underwriting income for the year ended December 31, 2017 was $40.0 million compared to $294.2 million for the year ended December 31, 2016, a decrease of $254.2 million or 86.4%.
Gross premiums written for the year ended December 31, 2016 were $1,184.9 million compared to $1,194.6 million for the year ended December 31, 2015, a decrease of $9.7 million, or 0.8% and included the following:
Property premiums of $497.3 million during the year ended December 31, 2016, compared to $571.6 million during the year ended December 31, 2015, a decrease of $74.3 million or 13.0%, primarily driven by reductions in our participation on various catastrophe excess of loss programs due to an unfavorable rate environment;
Net premiums earned for the year ended December 31, 2016 were $996.1 million compared to $1,048.0 million for the year ended December 31, 2015, a decrease of $51.8 million or 4.9%. The decrease was driven by decreases in the property and specialty - short-tail lines of $33.0 million and $61.0 million, respectively, as a result of lower gross premiums written during the year ended December 31, 2016, offset by the earned impact of the reduction in reinsurance premiums ceded and was partially offset by an increase in net premiums earned in the specialty lines of $42.3 million, primarily due to the increase in gross premiums written as noted above, the impact of reinstatement premiums and adjustments to existing business.
Net losses and loss expenses from the 2015 notable loss events by line of business were as follows:
Losses and loss expenses incurred during the year ended December 31, 2015 from a single non-notable loss event, the 2015 Chilean Earthquake, were $18.5 million, or 1.8 percentage points of the loss ratio and related primarily to the property lines. Net of reinstatement premiums of $2.2 million, the net loss attributable to the Reinsurance segment was $16.3 million.
Attritional losses during the year ended December 31, 2016 were $459.2 million, or 46.1 percentage points of the loss ratio compared to $516.2 million, or 49.2 percentage points of the loss ratio during the year ended December 31, 2015.
Policy acquisition cost ratio for the years ended December 31, 2016 and 2015 was 19.1% and 16.6%, respectively, an increase of 2.5 percentage points.
Underwriting income for the year ended December 31, 2016 was $294.2 million compared to $303.2 million for the year ended December 31, 2015, a decrease of $9.0 million or 3.0%.
Specialty - short-tail premiums of $581.0 million during the year ended December 31, 2017, compared to $397.6 million during the year ended December 31, 2016, an increase of $183.4 million or 46.1%. The increase was primarily driven by new agriculture business written through CRS and was partially offset by decreases in the marine, accident and health and contingency classes as a result of the non-renewal of various programs due to the current rate environment and premium adjustments on prior period policies; and
Net losses and loss expenses from the 2016 notable loss events by line of business were as follows:
Loss ratio for the years ended December 31, 2017 and 2016 was 74.4% and 60.3%, respectively, an increase of 14.1 percentage points.
General and administrative expenses for the years ended December 31, 2017 and 2016 were $207.2 million and $165.5 million, respectively, an increase of $41.7 million or 25.2%. General and administrative expenses for the year ended December 31, 2017 included $30.6 million of CRS expenses, of which $4.7 million related to the amortization of intangible assets acquired. The remaining increase in general and administrative expenses was primarily driven by the continued build out of the Company’s U.S. underwriting platform and a higher allocation of costs to the segment during the year ended December 31, 2017.
Underwriting (loss) for the year ended December 31, 2017 was $(132.2) million compared to $(13.7) million for the year ended December 31, 2016, an increase of $118.5 million.
Gross premiums written for the year ended December 31, 2016 were $1,194.1 million compared to $1,191.2 million for the year ended December 31, 2015, an increase of $2.9 million, or 0.2% and included the following:
Specialty - short-tail premiums of $397.6 million during the year ended December 31, 2016, compared to $440.7 million during the year ended December 31, 2015, a decrease of $43.1 million or 9.8%, primarily driven by decreases in the marine and aviation classes as a result of reductions in our participation and non-renewals on various programs due to continued pressure on rates. Partially offsetting these decreases was an increase in the contingency class of business as a result of premium adjustments on prior period policies; and
Reinsurance premiums ceded for the year ended December 31, 2016 were $162.7 million compared to $170.1 million for the year ended December 31, 2015, a decrease of $7.4 million or 4.4%. The decrease was primarily driven by a reduction in quota share premiums ceded in our property lines of business.
Losses and loss expenses incurred during the year ended December 31, 2015 from a single non-notable loss event, the 2015 Chilean Earthquake, were $3.7 million, or 0.4 percentage points of the loss ratio and related primarily to the property lines.
Attritional losses during the year ended December 31, 2016 were $644.5 million, or 64.3 percentage points of the loss ratio compared to $639.7 million, or 61.6 percentage points of the loss ratio during the year ended December 31, 2015.
Policy acquisition cost ratio for the years ended December 31, 2016 and 2015 was 23.2% and 21.2%, respectively, an increase of 2.0 percentage points.
Underwriting (loss) for the year ended December 31, 2016 was $(13.7) million compared to income of $119.7 million for the year ended December 31, 2015, an unfavorable movement of $133.5 million.
Full Year 2017, 2016 and 2015 Results of Operations - Asset Management Segment
The following table presents the Asset Management segment (loss) income on an asset manager basis for the years ended December 31, 2017, 2016 and 2015:
The investment (loss) income from funds and sidecars is based on equity accounting.
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 7% or greater. The maximum permitted portfolio expected loss represents the average annual loss over the set of simulation scenarios divided by the total limit.
Total fee revenues earned for the year ended December 31, 2017 were $22.5 million compared to $22.1 million during the year ended December 31, 2016, an increase of $0.4 million or 1.8%. Third party fee revenues earned during the year ended December 31, 2017 were $20.3 million compared to $18.8 million, an increase of $1.6 million or 8.4%. The increase in third party fee revenues was primarily driven by an increase in management fees as a result of an increase in assets under management over the last twelve months.
Asset management segment (loss) for the year ended December 31, 2017 was $(16.1) million compared to income of $31.1 million during the year ended December 31, 2016, a decrease of $47.2 million.
Validus’ share of investment income from funds and sidecars excluding PaCRe which was off-risk effective January 1, 2016, for the year ended December 31, 2016 was $20.6 million compared to $23.1 million during the year ended December 31, 2015, a decrease of $2.5 million, or 11.0%. The decrease of $2.5 million during the year ended December 31, 2016 as compared to 2015 was driven by the 2016 notable and non-notable loss events.
Asset management segment income for the year ended December 31, 2016 was $31.1 million compared to $22.2 million during the year ended December 31, 2015, an increase of $9.0 million or 40.6%.
During the twelve months ended January 1, 2018, a total of $1,700.5 million of capital was raised, of which $1,674.3 million was raised from third parties. During the twelve months ended January 1, 2018, $700.9 million was returned to investors, of which $631.0 million was returned to third party investors.
Full Year 2017, 2016 and 2015 Results - Corporate and Investments
The following table presents the Corporate and Investment function’s income and expense items on a consolidated basis for the years ended December 31, 2017, 2016 and 2015:
These items exclude the components which are included in the Asset Management segment income (loss) and amounts which are consolidated from VIEs.
Effective yield on managed investments for the year ended December 31, 2017 was 2.32%, compared to 2.24% for the year ended December 31, 2016, an increase of 8 basis points.
Net realized gains on managed investments for the year ended December 31, 2017 were $7.4 million compared to $14.7 million for the year ended December 31, 2016. The net realized gains for the year ended December 31, 2016 primarily resulted from the sale of managed fixed maturities and gains realized on the termination of two interest rate swap contracts which were entered into in the third quarter of 2016 to partially offset the impact of interest rate increases on the Company’s fixed maturity portfolio.
Managed net investment income for the year ended December 31, 2016 was $141.7 million compared to $121.2 million for the year ended December 31, 2015, an increase of $20.6 million, or 17.0%. The increase was primarily driven by returns on the Company’s portfolio of structured securities, of which $16.7 million was generated from a single fixed income fund.
Finance expenses for the year ended December 31, 2017 were $58.2 million compared to $57.2 million for the year ended December 31, 2016, an increase of $1.0 million, or 1.8%. The increase was primarily driven by interest expenses relating to short-term borrowings which were repaid in full during the year ended December 31, 2017.
Dividends paid on preferred shares for the year ended December 31, 2017 were $15.9 million compared to $4.5 million for the year ended December 31, 2016, an increase of $11.4 million, or 256.0%. The increase was due to $250.0 million of new Series B preferred shares issued during the second quarter of 2017 and a full year of dividends paid on the Company’s Series A preferred shares issued in June 2016.
Tax (benefit) for the year ended December 31, 2017 was $(7.6) million compared to $(19.8) million for the year ended December 31, 2016. The tax benefit during the year ended December 31, 2017 mainly related to operating losses in the Insurance segment and was partially offset by the re-measurement of net deferred taxes following the recently enacted 2017 Tax Act. The tax benefit during the year ended December 31, 2016 was primarily due to a partial release of a valuation allowance which had been applied against a deferred tax asset related to net operating losses acquired as part of the Company’s acquisition of Flagstone. The release was due to the Company believing it is more-likely-than-not that it will have sufficient future taxable income to realize a portion of that deferred tax asset over three years beginning in 2017 and in accordance with U.S. GAAP, the Company was required to record a tax benefit of $18.4 million during the fourth quarter of 2016.
Highlights for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were as follows:
General and administrative expenses for the year ended December 31, 2016 were $72.2 million compared to $75.7 million for the year ended December 31, 2015, a decrease of $3.5 million, or 4.6%. The decrease was primarily driven by a reduction in the performance bonus accrual.
Finance expenses for the year ended December 31, 2016 were $57.2 million compared to $61.1 million for the year ended December 31, 2015, a decrease of $3.9 million, or 6.4%, primarily due to reduced credit facility expenses.
Dividends paid on preferred shares for the year ended December 31, 2016 were $4.5 million compared to $nil for the year ended December 31, 2015. The Company issued $150.0 million of preferred shares in June 2016.
Tax (benefit) for the year ended December 31, 2016 was $(19.8) million compared to tax expense of $6.4 million for the year ended December 31, 2015. The favorable movement of $26.2 million during the year ended December 31, 2016 as compared to 2015 was driven by the partial release of a valuation allowance which had been applied against a deferred tax asset during the fourth quarter of 2016 as noted above.
The fair value of the Company’s investments, cash and cash equivalents and restricted cash as at December 31, 2017 and December 31, 2016 was as follows:
The Company’s IPS requires managed investments to have an average duration in the range of 0.75 years to 3.25 years. At December 31, 2017, the average duration of the Company’s managed investment portfolio was 2.17 years (December 31, 2016: 2.17 years). This duration is reviewed regularly based on changes in the duration of the Company’s liabilities and general market conditions.