The net loss ratio is calculated by dividing losses and loss expenses by net premiums earned.
The Company's revenues also include income generated from its investment portfolio. The Company's investment portfolio is comprised of fixed maturity investments, short-term investments and equity securities that are held as either trading or available for sale and other investments, comprised of alternative and specialty funds that are accounted for under the equity
As a result of recognizing the estimated gross premium written at the inception of the policy and collecting that premium over an extended period, we include a premiums receivable asset on our balance sheet. We actively monitor our premiums receivable asset to consider whether we need an allowance for doubtful accounts. As part of this process, we consider the credit quality of our cedants and monitor premium receipts versus expectations. At December 31, 2015, the Company has an allowance for estimated uncollectible premiums receivable of $7.4 million (2014 - $2.6 million).
The information gathered by the Company and the actuarial analyses performed on the gathered information is used to develop individual point estimates of carried loss and loss expense reserves for each of the Company's business segments and underlying lines of business. These individual point estimates are then aggregated along with the case reserves for actual losses reported to reach the total reserve for losses and loss expenses carried on the Company's consolidated financial statements. All of the Company's loss reserving is currently performed on a point estimate basis. The Company does not utilize range estimation in its loss reserving process.
Increases in gross premiums written for 2015 versus 2014 and 2013 were driven by the following factors:
An increase in gross premiums written in the casualty line of business from 2014 in the Reinsurance segment due to new business written and increased premiums on renewal business, partially offset by non-renewal of policies that no longer met profitability targets;
Net premiums written in 2015 increased $16.3 million, or 0.8%, compared to 2014 and decreased $98.5 million, or 4.8% compared to 2013. The change in net premiums written from 2013 compared to 2015 and 2014 was driven primarily by an increase in ceded premiums written by the Company for the years ended December 31, 2015 and 2014 across both the Insurance and Reinsurance segments. Ceded premiums written increased across all lines of business in the Insurance segment primarily due to a whole account quota share treaty providing protection for all of the Insurance segment's book of business for 2014, which was increased during 2015. In addition, the Company purchased additional quota share, facultative and excess of loss reinsurance across most lines of business in the Insurance segment, and increased quota share coverage on the agriculture line of business. In the Reinsurance segment, ceded premium written increased as the Company purchased increased levels of protection, including additional proportional and excess of loss retrocessional coverage within the catastrophe line of business, and additional proportional coverage on the specialty line of business.
The Company's reported net losses and loss expenses are significantly impacted by the occurrence or absence of catastrophic events and subsequent loss emergence related to such events. The following table shows the net losses after adjustment for reinstatement premiums and other loss sensitive accruals recorded by the Company in connection with catastrophes for the years ended December 31, 2015, 2014 and 2013.
The Company's acquisition expense ratio in 2015 was higher than 2014 and 2013. The increase from 2013 and 2014 to 2015 was primarily due to the decrease in net premiums earned in the agriculture line of business in the Insurance segment, which incurs lower than average acquisition expenses, and the increase in premiums earned in other lines of business, including the specialty and professional lines of business in the Reinsurance segment, which incur a higher than average net acquisition expense rate. This increase was partially offset by the addition of $225.9 million of earned premiums from the Company's acquisition of Montpelier, which had no associated acquisition costs as these were written off upon the closing of the acquisition in accordance with applicable accounting guidance.
A decline in gross premiums written in the catastrophe and property lines of business due to targeted non-renewals and line size reductions of policies that no longer met profitability targets, increased ceding company retentions and rate declines, partially offset by new business.
Preferred Shares. On June 1, 2011, Endurance Holdings issued 9,200,000 shares of its Series B Preferred Shares at a price to the public of $25.00 per share. On November 24, 2015, Endurance Holdings issued 9,200 shares of its Series C Preferred Shares (equivalent to 9,200,000 Depositary Shares), each of which represents a 1/1,000th interest in a Series C Preferred Share, $1.00 par value and $25,000.00 liquidation preference per share (equivalent to $25.00 per Depositary Share).The Series B Preferred Shares and Series C Preferred Shares sold were registered under the Securities Act of 1933, as amended, and are traded on the New York Stock Exchange.
The following table represents the development of the U.S. GAAP balance sheet reserve for losses and loss expenses, net of reinsurance recoverable on unpaid losses, for 2005 through December 31, 2015. This table does not present accident or policy year development data. The top line of the table shows the gross and net reserve for losses and loss expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of gross and net losses and loss expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy" represents the aggregate change to date from the original estimate at the historical foreign exchange rate which was in effect at that year end. Development in each column is shown relative to the GAAP reserves held at the original year end with all subsequent loss amounts (reserves for losses and loss expenses and paid losses) converted to the foreign exchange rate which was in effect at that original year end. The table also shows the cumulative paid amounts as of successive years with respect to the reserve liability. These amounts are shown in U.S. dollars at the foreign exchange rate that was in effect at that original year end. Therefore, information presented herein may differ materially from that reported in the Company’s financial statements due to differences in foreign currency exchange rates.
Each of the impacts set forth in the tables above is estimated individually, without consideration for any correlation among key assumptions or among lines of business. Therefore, it would be inappropriate to take each of the amounts set forth above and add them together in an attempt to estimate volatility for the Company's loss and loss expense reserves in total. The Company believes the assumed variations in loss and loss expense reserves set forth in the tables above represents a reasonable estimate of possible loss and loss expense reserve variations that may occur in the future. It is important to note that the variations set forth in the tables above are not meant to be a "best-case" or "worst-case" series of scenarios, and therefore, it is possible that future variations may be more or less than the amounts set forth above.
The following table summarizes the results of Montpelier since July 31, 2015 that have been included in the Company's Consolidated Statement of Income and Comprehensive Income for the year ended December 31, 2015:
Balances include amounts related to collateralized debt obligations held with total fair values of $38.5 million at December 31, 2015.
The Credit Facility also contains customary event of default provisions, including failure to pay principal or interest under the Credit Facility, insolvency of the Company, a change in control of the Company, a breach of the Company's representations or covenants in the Credit Facility or a default by the Company under its other indebtedness. Upon the occurrence of an event of default under the Credit Facility, the lenders can terminate their commitments under the Credit Facility, require repayment of any outstanding revolving loans, give notice of termination of any outstanding letters of credit in accordance with their terms, require the delivery of cash collateral for outstanding letters of credit and foreclose on any security held by the lenders under the Credit Facility.
The BCGR Credit Agreement contains covenants that limit BCGR's ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. In addition, an uncured default by the Company of the covenants contained in the Credit Facility would result in a default under the BCGR Credit Agreement. If BCGR or the Company were to fail to comply with any of the applicable covenants, the lender could revoke the facility and exercise remedies against BCGR or the Company. The Company was in compliance with all covenants applicable to the Company in the BCGR Credit Agreement as of December 31, 2015.
Total expenses related to this plan for the year ended December 31, 2015 was approximately $298,000 (2014 - $234,000; 2013 - $167,000).
As a Bermuda holding company, Endurance Holdings is subject to the Bermuda Companies Act 1981, which limits the Company's ability to pay dividends and make distributions to its shareholders. The Company's retained earnings are unrestricted; however, the Company is not permitted to declare or pay a dividend, or make a distribution out of contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they come due, or if the realizable value of its assets would be less than its liabilities. Endurance Holdings had, as of December 31, 2015, $2.7 billion in retained earnings and an additional $2.2 billion in contributed surplus available to declare or pay a dividend, or make a distribution out of contributed surplus, so long as Endurance Holdings remained in compliance with the Bermuda Companies Act 1981 following such dividend or distribution. Endurance Holdings relies on dividends from Endurance Bermuda to provide cash flow required for debt service and dividends to shareholders.