Return on average equity is calculated by dividing the net (loss) income (attributable) available to Validus common shareholders for the period by the average of the beginning, ending and intervening quarter end shareholders’ equity available to Validus common shareholders balances.
The Merger is expected to close in mid-2018, subject to the approval of the Company’s shareholders, regulatory approvals and other customary closing conditions. The Merger Agreement permits the Company to pay out regular quarterly cash dividends not to exceed $0.38 per common share, with its quarterly dividend for the second fiscal quarter for 2018 to be paid prior to the closing of the Merger even if such closing occurs prior to the regular record or payment date of such dividend.
Net premiums earned for the three months ended December 31, 2017 were $250.6 million compared to $234.2 million for the three months ended December 31, 2016, an increase of $16.4 million, or 7.0%. The increase was primarily driven by ongoing growth in the specialty - other lines of business over the last two years.
Losses and loss expenses for the three months ended December 31, 2017 were $135.8 million compared to $93.5 million for the three months ended December 31, 2016, an increase of $42.3 million or 45.2% and included the following:
Losses and loss expenses incurred during the three months ended December 31, 2017 from non-notable loss events were $9.4 million, or 3.7 percentage points of the loss ratio. The non-notable losses were driven by adverse development on the third quarter 2017 Mexico City Earthquake loss event due to the reallocation of retrocession recoveries and related primarily to the property lines. Including the impact of net reinstatement premiums ceded of $0.7 million, the net loss attributable to the Reinsurance segment was $10.1 million.
There were no non-notable loss events occurring during the three months ended December 31, 2016.
Attritional losses of $132.9 million, or 53.1 percentage points of the loss ratio during the three months ended December 31, 2017 compared to $109.8 million, or 46.9 percentage points of the loss ratio during the three months ended December 31, 2016. The increase was primarily due to a single mid-size loss which did not meet the non-notable loss threshold.
The favorable development on events in 2017 primarily related to favorable development on the 2015 Pemex oil refinery explosion. The favorable development on events in 2016 primarily related to favorable development on the 2015 Chilean Earthquake non-notable loss event and the 2015 Tianjin port explosion notable loss event and was partially offset by adverse development established following the receipt of a loss advice on an individual marine policy that incepted during the second half of 2015. The favorable development on events in 2015 primarily related to favorable development on Superstorm Sandy.
Losses and loss expenses incurred during the year ended December 31, 2017 from notable loss events were $103.0 million, or 8.2 percentage points of the loss ratio. Including reinstatement premiums ceded of $22.9 million, the net loss attributable to the Insurance segment from 2017 notable loss events was $125.9 million as follows:
Net losses and loss expenses from the 2017 notable loss events by line of business were as follows:
Policy acquisition cost ratio for the years ended December 31, 2017 and 2016 was 19.2% and 23.2%, respectively, a decrease of 4.0 percentage points. The decrease was primarily driven by new agriculture business written during the year ended December 31, 2017 which carries lower acquisition costs.
Property premiums of $371.2 million during the year ended December 31, 2016, compared to $334.4 million during the year ended December 31, 2015, an increase of $36.9 million or 11.0%, primarily driven by an increase of $46.6 million in the direct property classes as a result of the continued build out of the Company’s U.S. underwriting platform. The increase was partially offset by a decrease in the downstream energy and power class as a result of the non-renewal of various programs due to an unfavorable rate environment and the timing of renewals;
General and administrative expenses for the years ended December 31, 2016 and 2015 were $165.5 million and $177.9 million, respectively, a decrease of $12.4 million or 7.0%. The decrease was primarily due to a reduction in the performance bonus accrual and was partially offset by an increase in staff costs associated with the opening of new offices in the U.S.
Total fee revenues earned for the year ended December 31, 2016 were $22.1 million compared to $25.0 million during the year ended December 31, 2015, a decrease of $2.9 million or 11.5%. Third party fee revenues earned during the year ended December 31, 2016 were $18.8 million compared to $19.7 million, a decrease of $0.9 million or 4.5%. The decrease in third party fee revenues was primarily attributable to a decrease in performance fees earned as a result of the 2016 notable and non-notable loss events.
Foreign exchange gains for the year ended December 31, 2016 were $10.8 million compared to (losses) of $(8.2) million for the year ended December 31, 2015, a favorable movement of $19.0 million, or 231.9%, primarily attributable to the U.S. dollar strengthening against the British pound sterling during the year ended December 31, 2016.
The Company’s IPS also requires certain minimum credit quality standards for its managed fixed maturity portfolio, including a minimum weighted average portfolio rating of A+ for securities with ratings. Further limits on asset classes and security types are also mandated. In addition, the Company stress-tests the downside risks within its asset portfolio using internal and external inputs and stochastic modeling processes to help define and limit asset risks to acceptable levels that are consistent with our overall ERM framework. At December 31, 2017, the Company’s rated managed fixed maturity portfolio had an average credit quality rating of AA- (December 31, 2016: AA-). Refer to Note 7(a) to the Consolidated Financial Statements, “Investments,” in Part II, Item 8 for further details related to the investment ratings of the Company’s fixed maturity portfolio.