As a result of the number of transactions we have completed over the years, we have a complex organizational structure consisting of numerous licensed entities across many jurisdictions. In managing our group, we look for opportunities to simplify our legal structure by way of company amalgamations and mergers, reinsurance, or other transactions in order to improve capital efficiency and decrease ongoing compliance and operational costs over time. In addition, we seek to pool risk in areas where we maintain the expertise to manage such risk to achieve operational efficiencies, which will allow us to most efficiently manage our assets and to achieve capital diversification benefits.
Net earnings from Non-life Run-off and Life and Annuities segments of $173.2 million and $16.9 million, respectively
Change in Net Realized and Unrealized Gains (Losses) - For the year ended December 31, 2015, net realized and unrealized losses amounted to $41.3 million, as compared to net realized and unrealized gains of $62.6 million for 2014. The net realized and unrealized losses in 2015 were primarily attributable to an increase in treasury yields on our fixed maturity securities, widening corporate credit spreads and a decrease in liquidity in fixed income markets; and
Acquisition costs for the Non-life Run-off segment were $8.9 million for the year ended December 31, 2015, while we reported acquisition costs of $8.4 million for the year ended 2014. Acquisition costs for the year ended December 31, 2015 primarily related to net premiums earned on the portion of Sussex business that was placed into run-off. For the same period in 2014, acquisition costs primarily related to the portion of StarStone business that was placed into run-off. The $14.4 million in acquisition costs in 2013 primarily related to SeaBright.
an increase in salaries and benefits of $17.5 million primarily attributable to an increase in headcount associated with acquisitions including Sussex; and
an increase in stock compensation costs of approximately $4.7 million due to new equity-based awards made during the year to our employees; and
2014 versus 2013: We recorded income tax expense (benefit) for our Non-life-Run-off segment of $(0.6) million and $34.2 million for the years ended December 31, 2014 and 2013, respectively. The effective tax rate was (0.3)% for the year ended December 31, 2014 compared with 13.9% for the year ended December 31, 2013 due to having proportionately lower net income in our tax paying subsidiaries in 2014 than in 2013 as well as a decrease in the valuation allowance on our deferred tax assets in the U.S.
The following is a discussion and analysis of the results of operations for our Atrium segment for the years ended December 31, 2015, 2014 and for the periods from the dates of acquisition of Atrium and Arden to December 31, 2013, which are summarized below.
(2) The 2013 results represent pre-acquisition costs of StarStone Holdings. We have not compared 2014 to 2013 because we did not acquire StarStone until 2014.
The combined ratio improved by 2.2% for 2015 as compared with 2014, primarily due to an improvement in the other operating expense ratio of 3.0% as a result of expense management initiatives.
Schedules other than those listed above are omitted as they are not applicable or the information has been included in the consolidated financial statements, notes thereto, or elsewhere herein.
The total consideration for the transaction was €32.8 million (approximately $35.2 million).
We have not completed the process of determining the fair value of the liabilities acquired in this acquisition. The valuation will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value recorded is a provisional estimate and may be subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed.
Upon the closing of the transaction, StarStone Holdings, Kenmare and Trident entered into a Shareholders’ Agreement (the "StarStone Holdings Shareholders’ Agreement"), which was subsequently amended, as described in "Changes in Ownership Interests relating to Holding Companies for our Active Underwriting Businesses" below.
On November 25, 2013, Kenmare and Trident completed the acquisition of Atrium through Northshore.
On May 27, 2015, we entered into two 100% reinsurance agreements and related administration services agreements with a subsidiary of Voya, pursuant to which we reinsured all of the run-off workers' compensation and occupational accident assumed reinsurance business of the Voya subsidiary and that of its Canadian branch. Pursuant to the transaction, the Voya subsidiary transferred assets into two reinsurance collateral trusts securing our obligations under the reinsurance agreements. We assumed reinsurance reserves of $572.4 million, received total assets of $307.0 million and recorded a deferred charge of $265.4 million, included in other assets. We transferred approximately $67.2 million of additional funds to the trusts to further support our obligations under the reinsurance agreements. We provided a limited parental guarantee, subject to a maximum cap with respect to the reinsurance liabilities. As of December 31, 2015, the amount of the parental guarantee was $58.0 million.
On January 1, 2013, we entered into an RITC of the 2009 underwriting year of account of a Lloyd’s syndicate and a 100% quota share reinsurance agreement with another Lloyd’s syndicate in respect of its 2010 underwriting year of account, under which we assumed total gross insurance reserves of approximately £33.8 million (approximately $51.4 million) for cash consideration of an equal amount.
The valuation of our other investments is described in Note 6 - "Fair Value Measurements." Due to a lag in the valuations of certain funds reported by the managers, we may record changes in valuation with up to a three-month lag. We regularly review and discuss fund performance with the fund managers to corroborate the reasonableness of the reported net asset values and to assess whether any events have occurred within the lag period that would affect the valuation of the investments. The following is a description of the nature of each of these investment categories:
The fair value of investments in life settlement contracts, in the table above, is determined using a discounted cash flow methodology that utilizes unobservable inputs. Due to the individual nature of each investment in life settlement contracts and the illiquidity of the existing market, significant inputs to the fair value include our estimates of premiums necessary to keep the policies in-force, and our assumptions for mortality and discount rates. Our mortality assumptions are based on a combination of medical underwriting information obtained from a third-party underwriter for each referenced life and internal proprietary mortality studies of older aged U.S. insured lives. These assumptions are used to develop an estimate of future net cash flows that, after discounting, are intended to be reflective of the asset's value in the life settlement market.
Net Incurred losses and LAE in the Atrium segment for the years ended December 31, 2015, 2014 and 2013 were as follows:
StarStone was acquired in the second quarter of 2014. The table below provides a reconciliation of the beginning and ending liability for losses and LAE for the years ended December 31, 2015 and 2014:
This 5-year revolving credit facility, originated on September 16, 2014, and amended on February 27, 2015 and February 15, 2016, is among the Parent Company and certain of its subsidiaries, as borrowers and as guarantors, and various financial institutions.
Redeemable noncontrolling interest ("RNCI") as of December 31, 2015 comprises the ownership interest held by Trident (39.32%) and Dowling (1.71%) in North Bay Holdings Limited ("North Bay"). On December 23, 2015, we completed a corporate reorganization of certain of our subsidiary holding companies. Following the reorganization, StarStone Holdings and Northshore are owned by a common parent, North Bay. Northshore owns 100% of Atrium and Arden. StarStone Holdings owns 100% of StarStone and all of the interests in a segregated cell of one of our non-life run-off subsidiaries that reinsured all of StarStone’s non-life run-off reserves with effect from January 1, 2014.
The following is a reconciliation of the beginning and ending carrying amount of the equity attributable to the RNCI for the years ended December 31, 2015 and 2014:
The Series A shares were issued and held in treasury, but were not outstanding.
Following several private transactions occurring from May 2012 to July 2012, Trident acquired 1,350,000 of our Voting Ordinary Shares (which now constitutes approximately 8.4% of our outstanding Voting Ordinary Shares). On November 6, 2013, we appointed James D. Carey to our Board of Directors. Mr. Carey is the sole member of an entity that is one of four general partners of the entities serving as general partners for Trident, is a member of the investment committees of such general partners, and is a member and senior principal of Stone Point Capital LLC ("Stone Point"), the manager of the Trident funds.
As at December 31, 2015, we have investments in four funds (carried within other investments) and a registered investment company affiliated with entities owned by Trident or otherwise affiliated with Stone Point. The fair value of the investments in the four funds was $237.9 million and $202.6 million as of December 31, 2015 and December 31, 2014, respectively, while the fair value of our investment in the registered investment company was $21.0 million and $25.6 million as at December 31, 2015 and December 31, 2014, respectively. For the years ended December 31, 2015 and 2014, we recognized net realized and unrealized losses of $0.1 million and $0.7 million respectively, in respect of the fund investments and net realized and unrealized losses of $4.7 million and $1.2 million, respectively, in respect of the registered investment company investment. For the years ended December 31, 2015 and 2014, we recognized interest income of $2.8 million and $0.7 million in respect of the registered investment company.
During 2015, a Goldman Sachs affiliate began providing investment management services to one of our subsidiaries. Our interests are held in accounts managed by affiliates of Goldman Sachs, with a balance of $695.8 million as at December 31, 2015, with respect to which we incurred approximately $0.6 million in management fees for the year ended December 31, 2015.