The Company evaluates reserves for losses and loss expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.
Results of Operations for the Years Ended December 31, 2016 and 2015
Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $126 million in 2015 compared with $255 million in 2014. In 2015, realized gains were related primarily to the sale of some shares of a publicly traded common stock held by one the Company's investment funds. In 2014, realized gains included an $86 million gain from the sale of a commercial office building in London, England and a $39 million gain resulting from the initial public offering of the above public company.
Reinsurance - The loss ratio of 58.4% in 2015 was 3.6 points lower than the loss ratio of 62.0% in 2014. Catastrophe losses were $3 million in 2015 compared with $2 million in 2014, an increase of 0.2 loss ratio points. Favorable prior year reserve development was $11 million in 2015 compared with $16 million in 2014, a difference of 0.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 4.4 points to 59.7% in 2015 from 64.1% in 2014.
Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Minimum rental income is recognized on a straight-line basis over the lease term. Income and expenses from real estate are reported as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property.
(1) Gross unrealized losses for mortgage-backed securities include $818,691 and $1,269,491, as of December 31, 2016 and 2015, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.
The following tables summarize all securities in an unrealized loss position at December 31, 2016 and 2015 by the length of time those securities have been continuously in an unrealized loss position.
For the year ended December 31, 2016, there were no OTTI recognized in earnings for fixed maturity securities. For the year ended December 31, 2015, OTTI for fixed maturity securities were $9.0 million, all of which was considered due to credit factors.
The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non-admitted assets” are charged against surplus. The Commissioner of Insurance of the State of Delaware has allowed BIC to discount non-tabular workers' compensation loss reserves, which is a permitted practice that differs from SAP. The effect of using this permitted practice was an increase to BIC’s statutory capital and surplus by $231 million at December 31, 2016.
The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Future minimum lease payments, without provision for sublease income, are: $45,305,000 in 2017; $40,634,000 in 2018; $35,805,000 in 2019; $33,575,000 in 2020; $29,374,000 in 2021 and $100,704,000 thereafter. Rental expense was $47,453,000, $46,271,000 and $45,198,000 for 2016, 2015 and 2014, respectively.