Of the total loan notes issued by our consolidated variable interest entities, at fair value, of $86.6 million as at December 31, 2017, $44.2 million were classified as long term liabilities and $42.4 million were classified as current liabilities due and payable in less than one year. For more information, refer to Note 7, “Variable Interest Entities” of our consolidated financial statements.
Actuarial Methodologies. The main projection methodologies that are used by our actuaries are as follows:
Selection of Reported Gross Reserves. Management, through its Reserve Committees, reviews the actuarial stochastic distribution and any other evidence before selecting its management best estimate of reserves for each line of business. Management selects the “management best estimate” by considering all the information provided to them and by considering the risks and uncertainties within the actuarial mean best estimate. Management has to date selected its best estimate above that of the actuarial mean best estimate and within the range of the actuarial stochastic distribution. This provides the basis for the recommendation to the Audit Committee and the Board made by management regarding the reserve amounts and related disclosures to be recorded in our financial statements.
Overall gross written premiums in 2016 increased by 5.0% compared to 2015 due primarily to our specialty reinsurance and casualty reinsurance business lines. The increase in our specialty reinsurance business was largely due to growth in agriculture business written following our acquisition of AgriLogic in January 2016 (which was subsequently sold in December 2017) and growth in specialty marine business. The increase in casualty reinsurance lines of business was largely due to growth in our U.S. casualty treaty and international casualty business lines. Premiums from our insurance segments reduced slightly due to reductions in our property and casualty and marine, aviation and energy business lines offset by growth in financial and professional lines insurance.
Losses and loss adjustment expenses. The loss ratio for 2017 of 86.5% increased by 26.7 percentage points compared to 2016. Losses and loss adjustment expenses increased from $1,576.1 million in 2016 to $1,994.7 million in 2017. The increase in the loss ratio was largely due to a $409.6 million increase in catastrophe losses, a $59.7 million increase in large losses, a $23.9 million decrease in prior year reserve releases and a decrease in net earned premiums, as above. In 2017, net losses from major catastrophes increased by $409.6 million to $576.0 million compared with $166.4 million in 2016. Large losses in 2017 included $64.0 million of fire-related losses, a $12.6 million surety loss, an $11.1 million loss related to cyber and terrorism and a $4.8 million loss from a refinery explosion.
The reduction in the policy acquisition expense ratio, gross of the effect of reinsurance, to 18.9% in 2016 from 19.0% in 2015 was due to FET refunds and changes in business mix toward agriculture and specialty marine business lines which have lower average commission rates.
As the foreign exchange contracts settle, the realized gain or loss is reclassified from other comprehensive income into general, administration and corporate expenses of the statement of operations and other comprehensive income. For the twelve months ended December 31, 2017, the amount recognized within general, administration and corporate expenses for settled foreign exchange contracts was a realized gain of $4.4 million (December 31, 2016 - loss of $8.7 million recognized within general, administration and corporate expenses).
As of December 31, 2017, our investments consisted of a diversified portfolio of fixed income securities including U.S. Dollar BBB Emerging Market Debt, global equities and money market funds. Our overall portfolio strategy remains focused on high quality fixed income investments. In the third quarter of 2017, we took advantage of rising equity markets and sold $208.1 million of our equity portfolio. Proceeds from the sales were reinvested into a core fixed income strategy. As at December 31, 2017, we had a 5.8% (2016 -6.8%) position in equities, a 4.0% (2016 - 3.8%) position in U.S. Dollar BBB Emerging Market Debt and 0.2% (2016 -0.2%) in risk asset portfolio cash. As at December 31, 2017, approximately 10% of our total cash and investments, excluding catastrophe bonds and funds held by variable interest entities (the “Managed Portfolio”), was invested in equities and U.S. Dollar BBB Emerging Market Debt (2016 - 10.8%).
The gross reserves may be further analyzed between outstanding claims and IBNR as at December 31, 2017 and 2016 as follows:
In addition to the senior notes issued by Aspen Holdings, we have also reported $86.6 million of debt issued by Silverton. For further information relating to Silverton, refer to Note 7 of our consolidated financial statements, “Variable Interest Entities.”
Average equity, a non-U.S. GAAP financial measure, is used in calculating ordinary shareholders return on average equity. Average equity is calculated by taking the arithmetic average of total shareholders’ equity on a monthly basis for the stated periods excluding (i) the average share of equity due to non-controlling interests and (ii) the average value of preference shares less issue expenses.