Throughout this annual report, we include certain non-generally accepted accounting principles (“non-GAAP”) financial measures. Management believes that these non-GAAP measures better explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America (GAAP). In addition, our definitions of these items may not be comparable to the definitions used by other companies.
We do not reserve for natural or man-made catastrophes until an event has occurred. Shortly after such occurrence, we review insured locations exposed to the event and industry loss estimates of the event. We also consider our knowledge of frequency and severity from early claim reports to determine an appropriate reserve for the catastrophe. These reserves are
Net earnings for 2016 totaled $114.9 million, down from the two previous years due largely to a decline in underwriting earnings. Results for each of these years reflected a combination of positive underwriting results for the current accident year and favorable loss reserve development on prior accident years. While favorable overall, development on prior years’ reserves was smaller in 2016 relative to amounts experienced in 2015 and 2014. Results for 2016 included $42.0 million in favorable development in prior accident years’ reserves, compared to favorable development of $65.4 million in 2015 and $64.8 million in 2014. Further discussion of reserve development can be found in note 6 to the consolidated financial statements within Item 8, Financial Statements and Supplementary Data. Catastrophe activity also impacted underwriting results. While losses were slightly higher in 2016, catastrophe activity was relatively light in each period. For 2016, catastrophe losses totaled $16.3 million, split evenly between amounts related to spring storms and losses from Hurricane Matthew. In 2015 and 2014 catastrophe losses totaled $12.1 million and $7.2 million, respectively, and were related to spring and winter storm activity. In total, underwriting income was $76.1 million in 2016, compared to $108.6 million in 2015 and $107.0 million in 2014. These results translate to combined ratios of 89.5 for 2016 and 84.5 for both 2015 and 2014. Our ability to continue to produce underwriting income, at margins which have consistently outperformed the broader industry, is a testament to our underwriters’ discipline throughout the insurance cycle and our continued commitment to underwriting for a profit. We believe our underwriting discipline can differentiate us from the broader insurance market by ensuring appropriate risk selection and pricing of both new and renewal business and can serve to slow the pace of deterioration in our underwriting results.
Underwriting income for the casualty segment was $36.3 million in 2016, which translates into a combined ratio of 92.0. Favorable development on prior accident years’ loss reserves benefited underwriting earnings in each of the past three years, though the benefit in 2016 was smaller than the two previous years. The total benefit from favorable development on prior years’ reserves was $32.4 million for 2016, with the bulk of the development attributable to accident years 2010 through 2015. Products which generated the majority of the favorable development included general liability, executive products, small commercial and umbrella. The reduced benefit for 2016 was driven mainly by adverse commercial auto loss trends in our transportation line. As a result, this product experienced adverse development on prior years’ reserves during the year after experiencing favorable development in both 2015 and 2014. From a comparative standpoint, overall results for the casualty segment in 2015 included favorable development of $45.7 million. The bulk of this development related to accident years 2006 through 2014, with more recent years representing a larger portion of the release. Most product lines within the segment experienced favorable development. Similarly, in 2014, favorable development occurred across multiple products, and overall segment results included favorable development of $52.8 million.
(as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach.
On February 5, 2014, we invested $5.3 million for a 20 percent equity ownership interest in Prime Holdings Insurance Services, Inc. (Prime). On March 4, 2015, we invested an additional $1.7 million, increasing our total equity ownership to 27 percent. Prime writes business through two Illinois domiciled insurance carriers, Prime Insurance Company, an excess and surplus lines company, and Prime Property and Casualty Insurance Inc., an admitted insurance company. Our investment in Prime was $9.6 million at December 31, 2016 and $8.1 million at December 31, 2015. In 2016, we recorded $1.1 million in investee earnings for Prime, compared to $1.0 million in 2015 and $0.3 million in 2014. Additionally, we entered into a 25 percent quota share reinsurance treaty with Prime, effective January 1, 2014, which contributed $13.4 million of gross premiums written and $11.4 million of net premiums earned during 2016, compared to $11.3 million of gross premiums
In addition, the following table is a schedule of amortized costs and estimated fair values of investments in fixed income and equity securities as of December 31, 2016 and 2015:
We incurred $7.4 million of interest expense on our senior notes in each of the last three years. The average rate on debt was 4.91 percent in 2016, 2015 and 2014.
risk factors, the Loss Reserve Committee, a panel of management including the lead reserving actuary, chief executive officer, chief operating officer, chief financial officer and other executives, confirms the appropriateness of the reserve balances.
On February 29, 2016, we acquired the assets of Associations Liability Insurance Agency, Inc. for $1.2 million, which includes $0.9 million of cash paid at acquisition and $0.3 million associated with the present value of a contingent earn-out agreement. The earn-out is subject to the achievement of certain targets and may be adjusted in future periods based on actual performance achieved. Separately identifiable definite-lived assets of the agency totaling $1.2 million and relating to acquired software, trade name and agency relationships were recognized.