Endurance Assurance Corp. ("Endurance Assurance," formerly Endurance Reinsurance Corporation of America), domiciled in Delaware;
Proportional reinsurance contracts accounted for approximately 21%, 21%, and 22% of the Company's gross premiums written during the years ended December 31, 2016, 2015, and 2014, respectively.
The following summarizes the Company's net proportional premium estimates within premiums receivable, net on the Company's Audited Consolidated Balance Sheets as of December 31, 2016 and 2015:
To the extent the Company determines that the amortized cost of the Company's fixed maturity or short-term investments classified as available for sale is likely to be recovered and related to non-credit factors (such as interest rates, market conditions, etc.) and not due to credit related factors, that remaining non-credit portion of the unrealized loss is recorded as a part of accumulated other comprehensive loss in the shareholders' equity section of the Company's balance sheet.
A decrease in gross premiums written in the agriculture line of business due to lower commodity prices and reduced policy counts from reunderwriting related to the Company's crop hail portfolio.
General and Administrative Expenses. The Company's general and administrative expense ratio in the Insurance segment for 2016 decreased compared to 2015 and 2014. The decrease in 2016 was due to increased ceding commission reimbursements received as a result of additional purchases of reinsurance during the current year. This benefit was partially offset by an increase in personnel costs associated with the addition of new underwriting teams over the past year.
An increase in gross premiums written in the casualty and professional lines of business compared to 2015 and 2014 due to new business written, including those acquired from Montpelier and increased premiums on renewal business, partially offset by non-renewal of policies that no longer met profitability targets.
The contractual maturity distribution for our fixed maturity portfolio held as of December 31, 2016 and 2015 was as follows:
Endurance Holdings is a holding company that does not have any significant operations or assets other than its ownership of the shares of its direct and indirect subsidiaries. Endurance Holdings relies primarily on dividends and other permitted distributions from its subsidiaries to pay its operating expenses, interest on debt and dividends, if any, on its ordinary shares and its 6.35% Non-Cumulative Preferred Shares, Series C ("Series C Preferred Shares"). There are restrictions on the payment of dividends by the Company's operating subsidiaries to Endurance Holdings, which are described in more detail below.
Credit Facilities. On March 23, 2016, the Company and certain designated subsidiaries of the Company entered into a $450.0 million five-year letter of credit facility with JPMorgan Chase Bank, N.A. ("JPMorgan") as administrative agent (the "Credit Facility"). Upon entering into the Credit Facility, the Company terminated its existing $700.0 million credit agreement, dated April 19, 2012, with JPMorgan as administrative agent. The Credit Facility does not provide for revolving or term loans.
Given that the Company's Senior Notes and the Credit Facility contain cross default provisions, the risk exists that the holders of the Senior Notes and the lenders under the Credit Facility may declare such debt due and payable, which could result in an acceleration of all debt due under both the Senior Notes and the Credit Facility. If this were to occur, the Company may not have funds sufficient to repay any or all of such indebtedness.
The Company believes that its operating subsidiaries have adequate capital resources in the aggregate, and the ability to produce sufficient cash flows to meet expected claims payments and operational expenses and to provide dividend payments to Endurance Holdings. In turn, we believe Endurance Holdings has at this time adequate capital resources, or the access to sufficient capital resources to meet its obligations, including but not limited to dividend payments to its ordinary and preferred shareholders, interest payments on its outstanding indebtedness and other liabilities as they come due.
The Company’s reserve for losses and loss expenses includes case reserves and reserves for losses incurred but not reported (referred to as "IBNR reserves"). Case reserves are established for losses that have been reported, but not yet paid. IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. Case reserves and IBNR reserves are established by management based on reports from reinsurance intermediaries, ceding companies and insureds, and consultations with independent legal counsel. In addition, reserves for IBNR losses and loss expenses are established by management based on reported losses and loss expenses, and actuarially determined estimates of ultimate losses and loss expenses.
Debt - To reflect Montpelier's existing senior notes and trust preferred securities at fair value using indicative market pricing obtained from third-party service providers;
Lloyd's syndicate capacity - the value of Lloyd's syndicate capacity, which represents Montpelier's authorized premium income limit to write insurance business in the Lloyd's marketplace;
VOBA - the expected future losses and expenses associated with the policies that were in-force as of the Closing Date of the transaction were estimated and compared to the future premium remaining expected to be earned. The difference between the risk-adjusted future loss and expenses, discounted to present value and the unearned premium reserve, was estimated to be the VOBA; and
For additional information on the Company's derivative financial instruments, see Note 9, Derivatives.
As of December 31, 2015, 1310 available for sale securities were in an unrealized loss position aggregating $72.6 million. Of those, 158 securities with aggregated unrealized losses of $12.7 million at December 31, 2015 had been in a continuous unrealized loss position for twelve months or greater.
As of December 31, 2016, Endurance Holdings and Endurance Bermuda together owned 33.3% of BCRH. BCRH is considered a VIE under U.S. GAAP and the Company has determined that it is BCRH's primary beneficiary. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its Consolidated Financial Statements. The interests in BCRH and its subsidiaries that the Company fully consolidates that are attributable to third-party investors are reported within the Company's Consolidated Financial Statements as non-controlling interests. BCRH's shareholder rights do not include redemption features within the control of the third party shareholders. The Company reassesses its VIE determination with respect to BCRH on an ongoing basis.
Equity securities - These securities are generally priced by pricing services or index providers. Depending on the type of underlying equity security or equity fund, the securities are priced by pricing services or index providers based on quoted market prices in active markets or through a discounted cash flow model that incorporates benchmark curves for treasury, swap and credit for like or similar securities. The Company generally classifies the fair values of its equity securities in Level 1 or 2.
Level 3 assets represented 3.0% and 2.2% of the Company's total available for sale and trading investments and derivative instruments at December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, Level 3 securities were primarily comprised of corporate securities and weather derivatives. There were no material changes in the Company's valuation techniques for the year ended December 31, 2016 and 2015.
Activity in the reserve for losses and loss expenses for the years ended December 31, 2016, 2015 and 2014 is summarized as follows:
During 2016, the Company's estimated ultimate losses for prior accident years were reduced by $221.6 million (2015 - $243.5 million; 2014 - $233.8 million) due to lower claims emergence than originally estimated by the Company. During 2016, the Company experienced favorable reserve development of $144.4 million across each line of business in the Reinsurance segment and $77.1 million of favorable development across each line of business in the Insurance segment. During 2015, the Company experienced favorable development of $161.5 million across each line of business in the Reinsurance segment and $82.0 million of favorable development across each line of business in the Insurance segment. During 2014, the Company experienced favorable development of $153.2 million across each line of business in the Reinsurance segment and $80.6 million of favorable development across each line of business in the Insurance segment.
The Company is party to certain uncommitted letter of credit reimbursement agreements ("LOC Agreements") that allow for the issuance of letters of credit in a variety of currencies, including U.S. dollars. The fees paid under the LOC Agreements depend on the amount of the outstanding letters of credit and vary from 0.30% to 0.45% on the principal amount of letters of credit outstanding to a fee negotiated at the time of issuance of the individual letters of credit. The total amount of letters of credit outstanding under the LOC Agreements at December 31, 2016 was $22.5 million (December 31, 2015 - $11.7 million).
For the years ended December 31, 2016, 2015 and 2014, compensation costs recognized in earnings for all options totaled $0.8 million, $1.6 million and $3.1 million, respectively. There were unrecognized stock-based compensation expenses of $0.2 million related to unvested stock options at December 31, 2016 (2015 - $1.0 million). This expense is expected to be recognized in 2017.
Of the 2016 current income tax expense, $1.8 million related to taxes incurred in the United States (2015 - $4.2 million; 2014 - $1.8 million), $4.2 million related to taxes incurred in the United Kingdom (2015 - $2.2 million; 2014 - nil) and $5.0 million related to taxes incurred in Switzerland (2015 - $0.1 million tax benefit; 2014 - nil). Of the deferred income tax benefit, $5.2 million related to deferred income tax benefit in the United States (2015 - $0.7 million; 2014 - $1.4 million), $1.7 million related to deferred income tax benefit in the United Kingdom (2015 - $0.2 million; 2014 - nil) and $4.2 million related to deferred income tax benefit in Bermuda including its branches (2015 - $1.0 million; 2014 - nil). The deferred income tax benefit in Bermuda related to amortization of intangible assets from the acquisition of Montpelier which the Company elected not to push down to Endurance at Lloyd's under current accounting guidance.
The Company's income before income taxes was distributed as follows for the years ended December 31, 2016, 2015 and 2014, respectively: