Atrium - Net earnings attributable to the Atrium segment were $5.4 million in 2017, compared to $6.4 million in 2016. The combined ratio in 2017 was 99.9%, compared to 94.3% in 2016, and the increase was primarily driven by a higher loss ratio. The underwriting performance was impacted by the large losses in the third quarter of 2017, primarily hurricanes Harvey, Irma and Maria, partially offset by favorable prior year loss reserve development. Excluding the impact of hurricanes Harvey, Irma and Maria, the combined ratios was 86.7% for 2017;
party run-off management engagement. The remaining increase is derived from additional fees earned from existing third-party clients. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group. These internal fees are eliminated upon consolidation of our results of operations.
2016 versus 2015: Our management companies in the Non-life Run-off segment earned fees and commission income of $17.4 million and $22.3 million in 2016 and 2015, respectively, this decrease being a result of lower fee income earned from our third-party clients. While our consulting subsidiaries continue to provide management and consultancy services, claims inspection services and reinsurance collection services to third-party clients in limited circumstances, the core focus of these subsidiaries is providing in-house services to companies within the Enstar group. These internal fees are eliminated upon consolidation of our results of operations.
2016 versus 2015: Interest expense was $22.3 million in 2016, compared to $33.6 million in 2015, a decrease of $11.3 million, primarily attributable to a reduction in intra-group loan balances in 2016.
The following table provides gross premiums written by line of business for the Atrium segment for the years ended December 31, 2017, 2016 and 2015:
2017 versus 2016: We recorded an income tax benefit of $1.0 million in 2017, compared to an income tax expense of $3.7 million in 2016, a change of $4.7 million. The income tax benefit in 2017 was primarily due to the recognition of deferred tax assets in the U.S. resulting from changes to our U.S. reinsurance program following U.S. tax reform. The income tax expense in 2016 primarily related to corporation tax in our U.S. entities, offset by lower U.K corporation tax due to group relief with the Atrium segment.
2017 versus 2016: Net earnings attributable to noncontrolling interest were $1.9 million in 2017, compared to $17.5 million in 2016, a change of $15.7 million, primarily due to the large catastrophe events in the third quarter of 2017, hurricanes Harvey, Irma, and Maria, which resulted in lower net earnings in 2017, compared to net earnings in 2016.
2017 versus 2016: Fee and commission expense was $1.2 million in 2017, which is broadly consistent with an expense of $1.4 million in 2016.
2017 versus 2016: Corporate expenses were $37.0 million in 2017, compared to $61.5 million in 2016, a decrease of $24.5 million. The decrease is primarily due to a $15.8 million decrease in stock compensation expense which was higher in 2016 due to the valuation of stock appreciation right awards due to an increase in the share price.
impairment charges, including other-than-temporary impairments on investment securities classified as available-for-sale, and impairments on goodwill, intangible assets and deferred charges;
The acquisition method is used to account for all business acquisitions. This method requires that we record the acquired assets and liabilities at their estimated fair value. The fair values of each of the acquired reinsurance assets and liabilities are derived from probability-weighted ranges of the associated projected cash flows, based on actuarially prepared information and management’s run-off strategy. Our run-off strategy, as well as that of other run-off market participants, is expected to be different from the seller's as generally sellers are not specialized in running off insurance and reinsurance liabilities whereas we and other market participants do specialize in such run-offs.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance on the classification and measurement of financial instruments. Although the ASU retains many of the current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities, and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The ASU is effective for interim and annual reporting periods beginning after December 15, 2017.
In May 2014, the FASB issued ASU 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB ASC including ASC 944 - Insurance. However, while contracts within the scope of ASC 944 are excluded from the scope of the ASU, certain insurance-related contracts should be accounted for under the ASU, for example contracts under which service providers charge their customers fixed fees in exchange for an agreement to provide services for an uncertain future event. Certain of the ASU’s provisions also apply to transfers of non-financial assets and include guidance on recognition and measurement.
On December 29, 2017, the Company completed the previously announced sale of its subsidiary, Pavonia Holdings (US), Inc. (“Pavonia”), to Southland National Holdings, Inc. (“Southland”), a Delaware corporation and a subsidiary of Global Bankers Insurance Group, LLC. The aggregate purchase price was $120.0 million. The Company used the proceeds to make repayments under its revolving credit facility.
Fixed income hedge funds invest in a diversified portfolio of debt securities. The hedge funds have imposed lock-up periods of up to three years from the time of initial investment. Once eligible, redemptions will be permitted quarterly with 90 days’ notice. Approximately half of our portfolio of fixed income hedge funds are eligible for redemption.
Equity funds invest in a diversified portfolio of U.S. and international publicly-traded equity securities. The funds have liquidity terms that vary from daily up to 6 days' notice.
The following table presents the fair values of assets and liabilities underlying the funds held - directly managed account as at December 31, 2017 and 2016:
Net realized gains (losses) and change in fair value for the year ended December 31, 2017 and 2016 are summarized as follows:
result in higher or lower fair value estimates for direct investments in CLO equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
The securities transferred from Level 2 to Level 3 were transferred due to insufficient market observable inputs for the valuation of the specific assets. The transfers from Level 3 to Level 2 were based upon us obtaining market observable information regarding the valuations of the specific assets.
Six of the top ten external reinsurers, as at December 31, 2017 and 2016, were all rated A- or better. The remaining four non-rated reinsurers, from which $687.6 million was recoverable as at December 31, 2017 (December 31, 2016: $512.2 million recoverable from four non-rated reinsurers), including KayleRe Ltd., have provided security in the form of pledged assets in trust, letters of credit issued to us, or funds withheld in the full amount of the recoverable. As at December 31, 2017, reinsurance balances recoverable of $357.4 million related to KaylaRe Ltd. (December 31, 2016: $242.1 million) and $320.0 million related to Hannover Ruck SE (December 31, 2016: $67.3 million), both of which represent 10% or more of total reinsurance balances recoverable. KaylaRe Ltd. is not rated but is an affiliated company partly owned by Enstar, as described in Note 21 - "Related Party Transactions", and security is provided in the form of funds withheld. Hannover Ruck SE is rated AA- by Standard & Poor's and A+ by A.M. Best.
The loss development disclosures for our Atrium segment have not been disaggregated further by line of business as the segment comprised only 3% of our total consolidated liability for losses and LAE as at December 31, 2017 and was, therefore, not considered material for further disaggregation.
The marine, aviation and transit and construction defect lines of business, which each comprised approximately 3% of our total net liabilities for losses and LAE, before reconciling items, within our Non-Life Run-off segment, as at December 31, 2017 were each not considered material for separate disclosure; and
The impact of this exchange rate conversion is to show the change between periods exclusive of the effect of exchange rate fluctuations, which would otherwise distort the change in incurred losses and the cash flow patterns associated with those incurred losses shown within the loss development tables disclosed below. The change in incurred losses shown within the loss development tables below will, however, differ from other U.S. GAAP disclosures of incurred current and prior period reserve development amounts, which include the effect of exchange rate fluctuations.
The loss development tables disclosed below are presented retrospectively with respect to the acquisitions and retroactive reinsurance agreements that we have completed, where it is practicable to do so. However, where it is not practicable, a prospective approach has been adopted in the presentation of the loss development tables disclosed below as follows:
Non-Life Run-off - The claim frequency information for the exposures included within our general casualty, workers’ compensation and professional indemnity lines of business includes direct and assumed open and closed claims by accident year at the claimant level. Reported claims that are closed without a payment are included within our cumulative number of reported claims because we typically incur claim adjustment expenses on them prior to their closure. The claim count numbers exclude counts related to claims within policy deductibles where the insured is
The table below provides a reconciliation of the beginning and ending reserves for losses and LAE for the years ended December 31, 2017, 2016 and 2015 for the Non-life Run-off segment:
The reduction in estimates of net ultimate losses relating to prior periods of $259.1 million comprised reductions in IBNR reserves of $349.7 million partially offset by net incurred loss development of $90.6 million, which includes amortization of deferred charges of $168.8 million. The decrease in the estimate of net IBNR reserves of $349.7 million (compared to $377.7 million during the year ended December 31, 2015), was comprised of an increase of $39.4 million relating to asbestos liabilities (compared to a decrease of $32.0 million in 2015), an increase of $35.5 million relating to environmental liabilities (compared to a decrease of $1.6 million in 2015), a decrease of $0.8 million relating to general casualty liabilities (compared to $3.0 million in 2015), a decrease of $333.2 million relating to workers' compensation liabilities (compared to $243.4 million in 2015) and a decrease of $90.6 million relating to all other remaining liabilities (compared to $97.7 million in 2015).
The table below provides a summary of IBNR reserves assumed through retroactive reinsurance transactions which are presented on a prospective basis within the incurred losses table above from the year in which the transactions occurred:
The following table includes the carrying amount of the liability for unpaid losses and LAE, net of reinsurance reported at fair value, the discount rates used to discount the liabilities and the related aggregate amount of the discount as at December 31, 2017 and the interest accretion for the year ended December 31, 2017, recorded within net incurred losses and LAE in our consolidated statements of earnings:
The following tables set forth information about incurred and paid loss development, total IBNR reserves and cumulative loss frequency related to all the individual lines of business within the StarStone segment as at December 31, 2017. The information related to incurred and paid loss development for the years ended December 31, 2014 through 2016 is presented as supplementary information and is therefore unaudited. The information within the tables below is presented on a prospective basis from the date of our acquisition of StarStone on April 1, 2014 since providing pre-acquisition incurred and paid losses by accident year for years prior to 2014 was determined to be impracticable due to significant data limitations.
The following tables provide a summary of net premiums written and earned for the years ended December 31, 2017, 2016 and 2015:
The gross carrying value, accumulated amortization and net carrying value of intangible assets by type and deferred charge at December 31, 2017 and 2016 were as follows:
We incurred costs of $2.9 million in issuing the Notes. These costs included underwriters’ fees, legal and accounting fees, and other fees, and are capitalized and presented as a direct deduction from the principal amount of debt obligations in the consolidated balance sheets. These costs are amortized over the term of the Notes and are included in interest expense in our consolidated statements of earnings.
Refer to Note 2 - "Significant Accounting Policies", Note 21 - "Related Party Transactions" and Note 23 - "Commitments and Contingencies" for additional information regarding RNCI.
As at December 31, 2017, we had investments in 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 funds was $255.9 million and $232.1 million as of December 31, 2017 and December 31, 2016, respectively. The fair value of our investment in the registered investment company was $22.1 million and $20.9 million as at December 31, 2017 and December 31, 2016, respectively. For the years ended December 31, 2017 and 2016, we recognized net unrealized gains of $22.3 million and $17.2 million, respectively, in respect of the fund investments, and net unrealized gains of $2.9 million and net realized and unrealized losses of $0.4 million, respectively, in respect of the registered investment company investment. For the years ended December 31, 2017 and 2016, we recognized interest income of $2.5 million and $3.1 million, respectively, in respect of the registered investment company.
Sound Point Capital has acted as collateral manager for certain of our direct investments in CLO equity securities. The fair value of these investments was $17.8 million and $20.3 million as at December 31, 2017 and December 31, 2016, respectively. For the years ended December 31, 2017 and 2016, we recognized net unrealized losses of $2.5 million and net unrealized gains of $2.1 million, respectively. For the years ended December 31, 2017 and 2016, we recognized interest income of $4.3 million and $6.7 million, respectively, in respect of these investments.
There were no significant restrictions on the Parent Company's ability to pay dividends from retained earnings as at December 31, 2017. Bermuda law permits the payment of dividends if (i) we are not, or would not be after payment, unable to pay our liabilities as they become due and (ii) the realizable value of our assets is in excess of our liabilities after taking such payment into account. Enstar has not historically declared a dividend. Our strategy is to retain earnings and invest distributions from our subsidiaries back into the company. We do not currently expect to pay any dividends on our ordinary shares.
We lease office space under operating leases expiring in various years through 2028. The leases are renewable at our option under certain circumstances. The following is a schedule of future minimum rental payments on non-cancelable leases as of December 31, 2017:
The Non-life Run-off segment comprises the operations and financial results of those insurance and reinsurance companies and portfolios in run-off that have been acquired by us.