On March 2, 2015, RenaissanceRe acquired Platinum pursuant to a definitive merger agreement entered into on November 23, 2014. As a result of the acquisition of Platinum, Platinum and its operating subsidiaries became wholly owned subsidiaries of RenaissanceRe. In connection with an intercompany restructuring, effective July 1, 2015, Platinum was merged with RenaissanceRe, with RenaissanceRe continuing as the surviving company. Refer to “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Summary Results of Operations and Liquidity and Capital Resources, Impact of Platinum Acquisition on Liquidity and Capital Resources” and “Note 3. Acquisition of Platinum” in the notes to our consolidated financial statements for additional information with respect to the acquisition of Platinum.
Our reserving techniques, assumptions and processes differ between our Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments. Following is a discussion of the risks we insure and reinsure, the reserving techniques, assumptions and processes we follow to estimate our claims and claim expense reserves, our current estimates versus our initial estimates of our claims reserves, and the sensitivity analysis we apply with respect to our key reserving judgments for each of our segments.
For smaller events including localized severe weather events such as windstorms, hail, ice, snow, flooding, freezing and tornadoes, which are not necessarily prominent, public occurrences, we initially place greater reliance on catastrophe bulletins published by statistical reporting agencies to assist us in determining what events occurred during the reporting period than we do for large events. This includes reviewing catastrophe bulletins published by Property Claim Services (“PCS”) for U.S. catastrophes. We set our initial estimates of reserves for claims and claim expenses for these smaller events based on a combination of
The favorable development of prior accident years net claims and claim expenses within our Specialty Reinsurance segment in 2015 of $91.9 million was comprised of $90.2 million and $1.8 million related to attritional net claims and claim expenses and large catastrophe events, respectively. Included in the favorable development of prior accident years net claims and claim expenses of $91.9 million in 2015 was $94.9 million related to attritional net claims and claim expenses reported coming in lower than expected on prior accident years events and $8.1 million related to reductions in estimated ultimate losses related to the Deepwater Horizon explosion and oil spill in 2010, partially offset by adverse development of $8.5 million related to the sub-prime related casualty losses from 2007 driven by reported claims from a number of cedants and adverse development of $4.8 million associated with actuarial assumption changes.
Level 3 inputs are based all or in part on significant unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In these cases, significant management assumptions can be used to establish management’s best estimate of the assumptions used by other market participants in determining the fair value of the asset or liability.
On March 2, 2015 we acquired Platinum and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values, including Platinum’s investments of $2.7 billion, which included fixed maturity investments trading of $1.8 billion and short term investments of $883.5 million. These assets are subject to the same fair value measurement methodology outlined herein.
shareholders’ equity of Platinum at March 2, 2015 as summarized in “Note 3. Acquisition of Platinum in our Notes to the Consolidated Financial Statements”. Intangible assets with definite lives will be amortized over their estimated useful lives. In addition, we recognized goodwill of $191.7 million primarily attributable to Platinum’s workforce and synergies expected to result upon the integration of Platinum into our operations. There were no other adjustments to carried goodwill during the period ended December 31, 2015 reflected on our consolidated balance sheet at December 31, 2015. Goodwill resulting from the acquisition of Platinum will not be amortized but instead will be tested for impairment at least annually, as outlined below (more frequently if certain indicators are present).
Lower Underwriting Results - our underwriting income of $529.4 million in 2014 decreased $97.4 million from $626.7 million in 2013. The decrease in underwriting income was primarily driven by a $52.2 million decrease in net premiums earned due to a combination of lower gross premiums written during
Lloyd’s Underwriting Results - Our Lloyd’s segment incurred an underwriting loss of $9.7 million and a combined ratio of 104.2% in 2015, compared to generating underwriting income of $5.8 million and a combined ratio of 97.3%, respectively, in 2014. Impacting the underwriting loss in the Lloyd’s segment was a $16.6 million decrease in favorable development on prior accident years net claims and claim expenses and a $12.1 million increase in underwriting expenses, partially offset by an $11.4 million increase in net premiums earned.
a decrease in net unrealized gains on equity investments trading of $31.8 million, and a decrease in net realized gains on equity investments trading of $15.7 million in 2014, compared to 2013, principally driven by weaker returns in the public equity markets during 2014, compared to 2013. Also impacting net unrealized and realized gains on investments was our investment in Essent, which resulted in net realized and unrealized gains of $6.7 million during 2014, compared to $35.5 million of unrealized gains during 2013.
Equity in earnings of other ventures primarily represents our pro-rata share of the net income from our investments in the Tower Hill Companies and Top Layer Re, and, except for Top Layer Re, is recorded one quarter in arrears.
net fair value adjustments of $10.7 million, included in the other category in the table above, which reduced our interest expense and were recognized in connection with the acquisition of Platinum and its $250.0 million Series B 7.50% Notes due June 1, 2017. See “Note 3. Acquisition of Platinum in our Notes to the Consolidated Financial Statements” for additional information with respect to the acquisition of Platinum and the related fair value adjustments.
During 2015, our cash and cash equivalents decreased $18.7 million, to $506.9 million at December 31, 2015, compared to $525.6 million at December 31, 2014.
an increase in unearned premiums of $144.0 million due to an increase in our gross premiums written; and
a decrease in premiums receivable of $34.1 million due to the decrease in gross premiums written and a decrease in reinsurance balances recoverable of $34.3 million driven principally by cash receipts of certain recoverables;
Moody’s and Fitch. These ratings represent independent opinions of an insurer’s financial strength, operating performance and ability to meet policyholder obligations, and are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold any of our securities.
Changes in the overall interest rate environment can expose us to “prepayment risk” on our mortgage-backed investments. When interest rates decline, consumers will generally make prepayments on their mortgages and, as a result, our investments in mortgage-backed securities will be repaid to us more quickly than we might have originally anticipated. When we receive these prepayments, our opportunities to reinvest these proceeds back into the investment markets will likely be at reduced interest rates. Conversely, when interest rates increase, consumers will generally make fewer prepayments on their mortgages and, as a result, our investments in mortgage-backed securities will be repaid to us less quickly than we might have originally anticipated. This will increase the duration of our portfolio, which is disadvantageous to us in a rising interest rate environment.
We account for our other investments at fair value in accordance with FASB ASC Topic Financial Instruments. The fair value of certain of our fund investments, which principally include private equity funds, a senior secured bank loan fund and hedge funds, is recorded on our balance sheet in other investments, and is generally established on the basis of the net valuation criteria established by the managers of such investments, if applicable. The net valuation criteria established by the managers of such investments is established in accordance with the governing documents of such investments. Many of our fund investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate these investments in the short term. Certain of our fund managers, fund administrators, or both, are unable to provide final fund valuations as of our current reporting date. The typical reporting lag experienced by us to receive a final net asset value report is one month for hedge funds and senior secured bank loan funds and three months for private equity funds, although, in the past, in respect of certain of our private equity funds, we have on occasion experienced delays of up to six months at year end, as the private equity funds typically complete their respective year-end audits before releasing their final net asset value statements.
Although our in-force book of business remains attractive to us, with our continuing focus on underwriting discipline, absent changed conditions, we do not expect to maintain the size of our aggregate book of property-exposed reinsurance business; and while we will strive to maintain a high level of net portfolio quality, we cannot assure you we will succeed in doing so. In addition, we believe that many of the key markets we serve are increasingly characterized by large, increasingly sophisticated cedants who are able to manage large retentions, can access risk transfer capital in expanding forms, and may seek to focus their reinsurance relationships on a core group of well-capitalized, highly-rated reinsurers who can provide a complete product suite as well as value added service. In addition to pricing, market conditions are increasingly impacted by an erosion of terms and conditions, for which we believe the reinsurance market is being undercompensated or in some instances uncompensated. It is possible that an increasing portion of the business ceded to the reinsurance market will be priced below levels, or will be characterized by contractual terms and conditions, we do not find to be acceptable, absent the advent of significant new developments. As a result of these developments, our Catastrophe Reinsurance segment gross premiums written for the year ended December 31, 2015 decreased by $65.3 million, or 7.0%, compared to the year ended December 31, 2014. Moreover, our net in-force property reinsurance portfolio declined as of January 1, 2016, and we currently expect this trend to continue through the coming 2016 renewals. While we believe we are well positioned to compete for business we find attractive, these dynamics may introduce or exacerbate challenges in our markets. We may also purchase additional retrocessional protection to maintain an appropriate risk adjusted level of exposure, although we cannot assure you we will do so. In recent periods, we believe that the supply of attractively priced catastrophe-exposed retrocessional coverage has declined. Accordingly, we may find fewer opportunities to cede risk on attractive terms, or pursue alternative opportunities to purchase forms of protection with different structures.
strongly positioned to compete for business we do find attractive, with strong ratings, an expanded product offering, and an expanded U.S. market presence. However, we intend to seek to maintain strong underwriting discipline and in light of prevailing market conditions cannot provide assurance we will succeed in growing or maintaining our current combined in-force book of business.
The sustained and continuing environment of low interest rates, as compared to past periods, has lowered the yields at which we invest our assets. At this time we expect these developments, combined with the current composition of our investment portfolio and other factors, to continue to constrain investment income growth for the near term. In addition to impacting our reported net income, potential future losses on our investment portfolio, including potential future mark-to-market results, would adversely impact our equity capital. Moreover, as we invest cash from new premiums written or reinvest the proceeds of invested assets that mature or that we choose to sell, the yield on our portfolio is impacted by the prevailing environment of comparably low yields. While the decline in current prevailing interest rates can contribute to higher realized and unrealized gains in the near term, as we re-invest our assets or invest new cash proceeds at lower rates our future yields can be adversely impacted. While it is possible yields will improve in future periods, we currently expect the uncertain economic conditions to generally persist and we are unable to predict with certainty when conditions will substantially improve, or the pace of any such improvement.